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Norway’s sovereign wealth fund could look to add $86 billion in real estate

The world's largest sovereign wealth fund says the optimal level of property investments might mean putting another $86 billion into real estate, singling out Asia as a hot spot for growth.

Norway's $860 billion Government Pension Fund Global, Oslo, whose mandate is set by the government, was in 2010 allowed to invest 5% in the property market and is now studying whether it should add more to its portfolio. It has snapped up properties in New York, Paris, London and Berlin, among other cities, and is targeting Tokyo and Singapore.

“The vast majority of academic studies come to the conclusion that adding real estate does improve the risk-return profile of a mixed-asset portfolio,” the fund said in a discussion note based on research released Friday. “Estimates of optimal allocations to real estate vary strongly. The median range of the suggested allocations to real estate in the 30 studies reviewed was 15%.”

Norges Bank Investment Management, which oversees the sovereign wealth fund from within the central bank, held about 3% of its assets in real estate at the end of the third quarter. Norges aims to build that share to 5% by investing about 50 billion kroner ($5.9 billion) each year in property. Norges has a strategy to focus on 10 to 15 cities globally.

The sovereign wealth fund said nominal returns on real estate have averaged about 7% to 9% from 2000 to 2013 but have seen a “declining trend in recent years.” Emerging markets might be the best place to invest, the fund also said in a separate note assessing global trends and their effect on real estate.

“A considerable population growth, combined with positive wealth effects and urbanization, appears to favor emerging markets, particularly Asia,” the fund said.

The fund lost 273 billion kroner in the third quarter, or 4.9%, amid a drop in global stocks. Its stock holdings declined 8.6%, while it posted a 0.9% gain on bonds and a 3% return on real estate. It was the first back-to-back quarterly loss in six years.