EUROPE NEWS: Government funds pile into Europe

Norway Government Pension Fund Global’s debut purchase in London capped a busy few months for similar government-backed investors buying in Europe’s major cities. PERE Magazine, December 2010, January 2011 issue.

If you could chose one deal in 2010 that summed up a number of themes all at one time, what would it be? A clear choice could be The Norway Government Pension Fund Global’s recent purchase of a stake in London’s Regent Street from The Crown Estate, which owns acres of national land from prime property in London to beef farms in the north of the country.

In November, the pension fund – which is sometimes considered a sovereign wealth fund because it manages Norway’s oil revenues – bought a 150-year lease on a 25 percent stake in the famous shopping street in London for £448 million (€523 million; $719 million).

The deal encapsulates the following themes: that sovereign wealth funds and large government-backed pension funds are big purchasers of real estate at the moment; that they are invariably opting to invest directly rather than indirectly via property funds; that they like capital cities; and that they want property that offers core characteristics with some value creation upside, if possible.

As far as private equity real estate is concerned, Norway’s first-ever real estate transaction therefore has been as disappointing as it has been predictable.

Earlier this year, when the fund received the go-ahead from the Norway government to invest up to five percent of its assets in property for the first time, it said unlisted real estate would be high up on the agenda. Unfortunately, that has not turned out to mean investing in real estate funds (at least, not yet).

For its debut deal, Norway bid in an auction and beat competitors such as Australia’s Future Fund to buy into Regent Street, which is owned privately by The Crown Estate and has been under a refurbishment programme since 2002.

Norway, via its adviser Norges Bank Investment Management, gets a stake in the street, but it also shares the costs of improving blocks that need capital. For example, there are projects in the pipeline such as Quadrant 1, where a five-star hotel will be developed as part of a mixed-use scheme.

Norway’s deal is nothing new, however. It is simply representative of the way government-owned capital is flowing plentifully in Europe’s capital cities directly. The trend began exactly 12 months ago when the Canada Pension Fund Investment Board and British property company Hammerson bought Silvernburn, a one million-square-foot shopping centre in Scotland for £297 million.

Since then, activity has only picked up. In November, the Canada Pension Plan Investment Board teamed with LaSalle Investment Management to buy a German shopping mall for €157.3 million. In October, sovereign wealth funds China Investment Corporation and the Qatar Investment Authority backed a £500 million London office project nicknamed the ‘Walkie Talkie’. In August and March, respectively, the National Pension Service of Korea acquired a stake in the O’Parinor shopping centre near Paris for €223 million and Berlin’s famous Sony Centre from Morgan Stanley for a reported €570 million.

More often than not, the capital is looking for core property. However, such a tactic is not universally celebrated.

In a research paper published in September, Swiss investment adviser Partners Group said: “We think the ‘herd’ mentality will cause many investors to invest in core, trophy properties. The demand for core assets is somewhat surprising given the relatively weak forward-looking real estate fundamentals. GDP estimates are somewhat positive, but clearly risk exists on the downside as the drivers of an economic recovery in the developed markets of North America and Europe remain weak.”

The Partners Group paper, entitled “Waiting for the Tide to Come in,” went on to conclude: “Our view is that more sophisticated investors will search for those opportunities which remain capital constrained, including investments in secondaries, debt recapitalisations and emerging markets real estate.”