The NKr2009bn (€254bn) Norwegian Government Pension Fund – Global has finally been given the all clear to start taking on property. It may be the first asset class outside of equities and bonds that the Norwegian giant – Europe’s largest pension fund – will allocate to, but it by no means signifies an end to the fund’s diversification.

The ministry of finance, which is the owner of the fund and sets its investment guidelines, has confirmed it will consider taking on additional asset classes. One proposed change is to widen the investment universe for equities and include certain kinds of private equity.

“We will also look into other possible asset classes, such as some commodity types and infrastructure,” says Pål Haugerud, deputy director-general at the ministry of finance’s asset management department.

Until now, the ministry of finance has been preoccupied with the fund’s property and equity allocations.

“The decision last year to increase equities from 40 per cent to 60 per cent of assets was about taking on more risk. We have so far invested in relatively liquid markets, but are now looking to get a better risk/return relationship,” says Martin Skancke, director-general at the ministry of finance’s asset management department.

According to finance minister Kristin Halvorsen, property is expected to do just that, and she believes investing a portion of the fund in real estate will improve risk diversification and enhance returns. It will also make the fund’s investments more in line with its international peers.

However, the new guidelines, which are set by the ministry of finance, will only allow up to 5 per cent invested in property and will not include any allocation to infrastructure. The ministry of finance decided, for the time being, to reject proposals to include infrastructure in the mandate, despite Norges Bank Investment Management (NBIM), the manager of the fund, wanting otherwise.

“While all advice presented to us has unanimously indicated that we should start investing a part of our assets in property, the recommendations we received about infrastructure wasn’t as clear-cut. The market was viewed as smaller and less mature than property,” says Mr Haugerud.

NBIM also wanted a cap of 10 per cent on assets invested in property, which has been mentioned as a long-term target, but the ministry of finance only opted for 5 per cent. Nevertheless, even 5 per cent of the fund’s assets equates to a hefty €12.7bn and with more Norwegian oil money being ploughed into the fund, the property investments will add up to considerably more than that over the next years. Since the fund was set up in 1996, its growth has been rapid and NKr1756bn has been added.

“Although our aim is to start investing in property at the end of this year, it could also be at a later stage. We are aware of the potential impact that a fund of our size could have on the market, so we’re in no hurry. Making the investments will take as long as is required,” says Mr Haugerud.

In fact, Mr Skancke admits that even 5 per cent is an ambitious target and will take several years to reach.

The ministry of finance will now set up the property mandate and decide the guidelines for the investments, which will be in listed or unlisted property as well as in funds and joint ventures.

“It will be a global portfolio, diversified across different property types, including offices and shopping centres. We have, for example, not yet decided if there should be requirements on an absolute return target or returns linked to an index,” says Mr Haugerud.

In brief

• The Norwegian Government Pension Fund – Global will aim to make its first allocation to property this year. In its annual report to parliament, the ministry of finance revealed a target of 5 per cent invested in property at the expense of the fixed income portfolio.
  
  
• The same thorough ethical guidelines that apply for the fund’s other investments will also apply for property investments. Energy consumption, waste disposal and water consumption will be some of the criteria taken into account.
  
  
• Taking on property will be a demanding task and require both the ministry of finance and Norges Bank Investment Management to build up their competencies from scratch.
  
  
• The ministry of finance also decided to expand the benchmark portfolio for emerging market equities from 5 per cent to 10 per cent of equities.

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