Norway's SWF Seeks Real Estate, Flees Bonds

(March 20, 2011) — In a move to combat rising inflation, Norway’s Government Pension Fund Global, valued at $548 billion at the end of last year, is slashing its bond holdings and shifting to real estate.

The move reflects efforts by Norway’s government-run oil fund, the world’s second-largest sovereign-wealth fund, to increasingly invest in real estate, infrastructure and other assets that have been viewed as hedges against inflation. The decision also reflects the improvement of real estate since the financial downturn.

“We had about a 40% drop in property valuations from its peak in 2007 to the bottom of the cycle which occurred in the beginning of 2010,” Mercer’s Allison Yager told aiCIO. “Since then, investors have returned to the real estate market and made sizable commitments, but there’s no way to know if we’ll ever return to the pre-crisis peak.”

While the Norwegian fund has traditionally had 60% of its assets in stocks and 40% in bonds, it now seeks a roughly 5% allocation to real estate and plans on lowering its fixed-income exposure by the same percentage. The fund’s first real estate investment was announced in November 2010.

The sovereign wealth fund aims to initially concentrate its real estate portfolio on Europe. “It’s quite possible that we will increase real estate as a portion of the fund when we reach the 5% target,” Yngve Slyngstad, chief executive of Norges Bank Investment Management, the unit of Norway’s central bank that manages the fund, told The Wall Street Journal. Furthermore, Slyngstad indicated that the fund is eyeing infrastructure.

A recent report by Preqin further illuminates the growing attractiveness of real estate among institutional investors. According to a report issued by the firm earlier this month, there has been an increase in the proportion of sovereign wealth funds investing in real estate and private equity – 51% to 56%, and 55% to 59% respectively. Separate findings by Credit Suisse reveal that bond investors should expect less robust returns in the years ahead. According to its report, bond investors can’t expect bonds to outperform forever. The authors found that bond investors should not expect returns for the next 11 years to be as strong as those of the previous 11 years, largely as a result of rising inflation.

Last week, the Norwegian fund revealed in its annual report that it returned 9.6% in 2010, fueled by gains in global stock and bond markets. Its equity holdings achieved a return of 13.3% last year, while bonds gained 4.1%. The positive returns marked the fund’s fifth best performing year ever.