Norway’s $2.1 Trillion Wealth Fund Shuns Data Centers
Summarize this article with:
Data centers are notably absent from the shopping list for the world’s largest sovereign wealth fund as it unveils a new strategy following a period of disappointing real estate results.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Data centers are notably absent from the shopping list for the world’s largest sovereign wealth fund as it unveils a new strategy following a period of disappointing real estate results. Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.Norges Bank Investment Management, Norway’s $2.1 trillion fund, is shaking up its property division as part of its next three-year strategy, published on Wednesday. However, data centers — one of the most hyped areas in real estate — won’t form a major part of the new approach, Alexander Knapp, head of global real estate, said in an interview with Bloomberg. Currently the fund has about 3.3% of its assets in real estate, with a roughly even split between public companies and unlisted exposure, Knapp said. NBIM plans to increase this share to “somewhere between 3.5% and 7%” of the fund’s value by the end of 2028, he added. An increase of one percentage point would equate to roughly $20 billion. Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.NBIM is already exposed to data centers through its stake in Digital Realty Trust Inc., a US technology-focused real estate manager.
The team is comfortable investing in a liquid public company while keeping clear of private holdings in this fast-evolving space, Knapp said. “I just think that when things are moving really quickly, you can either jump into the stream or you can just watch the fish go by,” he said. “And I think we’re happy to watch the fish for a minute and see what happens.”Knapp’s comments come as the world’s biggest private equity real estate investors are racing to develop new data centers to support the AI boom, betting long term capital will be queuing up to acquire the facilities once they are built and leased. But the sheer scale of capital expenditure required means there is an extremely limited pool of potential buyers, while the rapid pace of technological change raises the risk that the facilities could become obsolete. That’s raising questions as to how alternative money managers investing funds with a limited lifespan will ultimately exit their mammoth bets.A single facility being developed by Blackstone Inc. in Northumberland, England, could entail total capital expenditure of as much as £10 billion ($13.3 billion), Bloomberg News has reported.NBIM currently owns property in 15 countries in Europe and the US, and recently closed its its Tokyo office. Underperformance in property was one reason the fund failed to beat its benchmark last year, according to its annual report. In a letter published in October, NBIM said that its real estate portfolio had been “vulnerable” to market changes and promised to overhaul its strategy. The shake-up will combine the public and private markets teams, and instead divide the unit by sectors such as office, retail and housing with an eye on “big picture themes,” according to Knapp. “So you look at the sector first, or the underlying real estate you want to own, and then you look at the capital wrapper in a second step.”“We’re not aiming for deployment for deployment’s sake. We’re aiming to create return for the fund and that’s a very very clear mandate we have, which is to generate excess return above our funding costs,” said Knapp, 48, who joined NBIM in June. The changes are an attempt to adjust to “the world we live in today and also, frankly, to the evolution of the fund, which is about twice the size it was five years ago,” Knapp said. The fund is adding housing as new area for its unlisted investments as it gradually shifts “to a more balanced total real estate portfolio over time.” Overall, offices, retail properties, logistics and housing each will be between 15% and 35% of its real estate portfolio.NBIM also said it aims to broaden its portfolio of renewable energy infrastructure assets, including through investments in “indirect structures.” Of the fund’s 12 investments in the space to date, two are renewable energy funds.Real estate and renewable energy infrastructure are part of its active management where it seeks excess returns over time. The bulk of the wealth fund — more than 70% — is invested in stocks, and another 27% in bonds, in line with bespoke indexes.Finding the right partners will be a key part of the new strategy on real estate. The fund will target partners with in-depth skills, rather than generalists, said Knapp. “We need to be working with people that are really good in their sectors, and our job is to pick the partners rather than picking the deals, if that makes sense,” he added. Buying into platforms is also an option, though the fund will not be the sole owners of operating businesses “but we will be minority owners in some instances.” The fund will also be able to push into new markets following the overhaul. NBIM’s real estate “cities list,” established in 2010, will be broadened to encompass the whole of Western Europe and North America. Southern Europe is also on the cards, said Knapp, adding that “for instance Spain and Italy are investible for us.”Explainer: What Next for Norway’s Sovereign Wealth Fund?—With assistance from Stephen Treloar and Kari Lundgren.(Updates with more details on new strategy from 11th paragraph)Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.