Norway's $700-billion (U.S.) oil fund made its first property purchase in the United States on Monday and plans to spend billions more this year enlarging its portfolio, its real estate chief said.
The fund, the world's biggest sovereign wealth fund, bought a minority stake in a portfolio of five properties for around $600-million from U.S. asset manager TIAA-CREF and is looking for more, it said in a statement.
The deal is part of the fund's commitment to diversify, gradually moving its focus away from Europe and widening the types of assets it holds as it invests Norway's surplus oil income.
While the first deal with TIAA-CREF includes smaller U.S. office buildings, it is likely the first step in a partnership that will allow Norges Bank Investment Management (NBIM), manager of the Norwegian Government Pension Fund Global, and TIAA-CREF to pool their resources to buy large very pricey office properties that are expected to hit the market over the next couple of years.
"It will help us to diversify our current portfolio as well as to diversify going forward and buy some of the larger CBD (Central Business District) office properties that require significant investments in cities like New York," said Suzan Amato, TIAA-CREF managing director and head of global real estate strategic joint ventures.
TIAA-CREF chiefly invests in real estate for the long-term. It is one of the largest real estate managers in the world with $19-billion in direct equity investments in real estate. TIAA-CREF provides retirement benefits for academics, researchers and others, and has total assets under management of $502-billion.
The Norwegian fund is the most recent foreign fund to enter the U.S. market with deep pockets.
"I think when you've got the 800-pound gorilla like the Norwegians and Middle East and China, they're going to stay in, for the foreseeable future, those gateway cities," said Lawrence Longua, clinical associate professor at New York University Schack Institute of Real Estate.
Those markets offer investors stability, where prices, even in the most dire downturn, rebound, he said.
The United States could eventually represent a substantial chunk of the Norwegian fund's real estate investments.
"Having roughly one-third of the portfolio in the U.S. is a good target. Of course, that could mean 25 per cent or 40 per cent and we can debate that over time," Karsten Kallevig, the fund's real estate chief told Reuters.
The fund can hold 5 per cent of its portfolio in real estate, or around $35-billion, indicating that it could build a U.S. portfolio in excess of $11.5-billion.
Its properties are still worth less than 1 per cent of the fund so it has close to $30-billion left to spend before reaching its limit.
The fund is initially looking for low risk transactions as building the portfolio puts a burden on its management capacity.
"We are in the build-up phase so it makes sense to probably start out with more core assets and not move too fast up the risk curve too early," Mr. Kallevig said.
"We have started at the lower risk end of the spectrum and higher risk very often means more complex, more difficult transactions," he said.
On Monday it purchased a 49.9-per-cent stake in a portfolio of five office buildings totaling 1.9 million square feet of property that TIAA-CREF already owns. The properties include:
– 33 Arch St., a newly built, 32-storey office building in Boston's financial district.
– 470 Park Ave. S., comprised of two towers, one 12 storeys, the other 18, in the tech-popular Midtown South market of Manhattan.
– 475 Fifth Ave., a 24-story building, built in 1925, across from the New York Public Library main building. The property is being upgraded to a top quality office building.
– The Evening Star Building at 1101 Pennsylvania Ave. in Washington, D.C. It is one of only 13 privately owned office buildings between the White House and the U.S. Capitol on Pennsylvania Avenue in Washington, D.C.
– Franklin Square, a 12-storey office building at 1300 I St. in Washington, D.C.
The Norwegian fund this year will focus on Europe and the major east-coast U.S. cities, then turn its attention to Asia and the rest of the Americas "some time in the future," said Mr. Kallevig.
"If you were a betting guy, you'd look at the biggest and most liquid markets. In Asia, there are for to six countries that are meaningful … Japan, Australia, Hong Kong, Singapore, China and Korea," he said.
"In the Americas, there's Canada, Mexico, Brazil and Argentina," Mr. Kallevig said, adding that this was a list of places for potential investment and not a commitment.
The fund, managed by Norway's central bank, started buying property in 2011 with high-end sites in Paris and London. It made a $1.6-billion investment in a portfolio of European warehouses in December.
It generally buys property in partnership with a more experienced property investor or alone, if the property has a long-term secured tenant.