We have covered the recent change in investment policy by the Norwegian oil fund towards real estate but it seems that managers have more changes in mind. It is being reported that plans are afoot to increase property operations staff from 104 up to 200 by 2017. This will accompany an additional $16 billion worth of investment in real estate taking the total exposure up to a phenomenal $41.5 billion.
This change in investment policy came about because of a lacklustre performance last year and the obvious dependence upon the oil price.
Why real estate?
Fund managers have targeted a number of major cities around the world as they look to add quality real estate to the portfolio. The idea is that by maintaining a high quality real estate, with very little speculative investment, this will eventually create a long-term income stream which can fund other areas of the investment fund. The increase in operational staff will obviously have an impact upon running costs but while the fund may have been late to the real estate investment party, it certainly looks as though plans are afoot for a period of catch-up.
While there will be no specific focus on any one individual market, with a greater focus on prominent cities around the world, there will be significant investment in the US, Europe and the Far East (with China offering an interesting long-term investment opportunity after recent falls). Fund managers will be looking towards good rental yields and potential for long-term capital appreciation which should help to flatten out short term volatility in performance – caused by exposure to more volatile investments.
When you bear a mind that last year the fund saw a 10% return on its real estate investments, compared to just 3.8% on equities, perhaps a period of rebalancing was always on the cards?
Is this a sign of things to come?
It is very interesting to see managers of the Norwegian oil fund talking so openly about their plans to increase investment in real estate. In many ways this is recognition that mistakes have been made in the past with regards to real estate exposure. Sometimes it is easy to be wise after the event but in reality who could have predicted such a drop in the oil price as well as a worldwide recession which is fast approaching a decade in duration?
What is becoming obvious is that investment funds around the world will control more and more of the world’s real estate including residential, retail and office space. As fund managers invest on a long-term basis we are likely to see competition for the more sought-after real estate investments on the market.
For some time now the managers of the Norwegian oil fund have been talking about increasing their real estate exposure. However, the amount of additional physical and monetary investment in real estate planned for the future has certainly taken many people by surprise. It will be interesting to see whether this renewed appetite for real estate, also prevalent amongst other large sovereign funds, creates a demand which squeezes prices higher.