Norway urged against creation of standalone real estate vehicle

NORWAY – A strong argument can be made against a potential split of the Norwegian Pension Fund Global, according to Franklin Templeton Investments.

The NOK4.4trn (€550bn) fund has been the subject of debate in the now-concluded Norwegian general election, with prime minister Jens Stoltenberg last night conceding defeat to a coalition led by the Conservative Party and presumptive prime minister Erna Solberg.

According to David Smart, global head of sovereign funds and supranationals at Franklin Templeton, the Conservative Party’s proposal to split the fund would jeopardise the economies of scale enjoyed by Norges Bank Investment Management (NBIM).

“The economy of scale argument is a very important one, given that you have to accept it’s impossible to run some of it on a very active basis – and it’s therefore market-cap, index-based for a substantial chunk,” Smart told IPE.

He also warned against recommendations from the Centre Party – outgoing junior partner in the three-party coalition led by Stoltenberg – that NBIM should consider an increased, separate allocation to real estate, reportedly mulled as high as 10% of total assets.

The fund has been slowly building up an exposure to real estate since the government allowed 5% of assets to be invested first in European property, then later US property.

However, Smart was uncertain if the split to a separate fund would be beneficial given that, three years after real estate was introduced as an asset class, the fund has yet to exceed 1% exposure.

“The problem [of never meeting the allocation] would absolutely occur, and there would be a significant temptation for that real estate-only vehicle to be forced into buying too much real estate all in one go, and therefore potentially end up paying too much,” he said.

“You can make a relatively strong argument that it is better for the fund to be holistically managed by one entity.”

Otherwise, establishing a clear and required cash flow for investment could prove difficult, particularly in the less liquid alternatives sector, he said.