The differentiating characteristics of unlisted and listed real estate diminish over time according to new research by Norges Bank Investment Management, supporting the sovereign wealth funds’ unique combined strategy for real estate that sees both private and listed sit in the same team. Amanda White spoke to Norges’ CIO of real assets and global head of research.
For the past three years Norges Bank Investment Management, which manages the $1.43 trillion Government Pension Fund Global, has managed its listed and unlisted real estate teams under one umbrella. It was part of a re-organisation to bring the teams closer together following the 2019 shift to manage the real estate exposure in one combined strategy.
The combined strategy is underpinned by the belief that listed and private real estate perform more or less the same over the long term, chief investment officer of real assets Mie Caroline Holstad
told Top1000funds.com in an interview. And now the fund’s research department, led by global head Fredrik Willumsen, have research that supports that strategy.
“In the short- to mid-term there could be major differences, but that changes over the long term,” Holstad explains.
“It’s important to note we have a much longer time perspective than what other institutional investors typically have. And being as large as we are without liquidity constraints, we can sit through the cycles so long as we believe in the underlying fundamentals.”
The success of the combined strategy in real estate is underpinned by these characteristics of the fund – long-term and without liquidity constraints – which in turn means it can approach the listed markets in a fundamentally different way than most other investors.
“We are never a forced seller so we can behave differently in the listed world than others can,” Holstad says. “We are using listed the same way as many investors use private investments, which is clearly very different.”
This shows up in the length of holding and the position size of the listed investments.
“In listed real estate we don’t do small positions, we do large positions which goes with our comparative advantages,” Holstad says.
“And we sit through cycles like this because we believe in underlying economics and fundamentals of those companies. It makes our strategy quite different on the listed side, because most investors use it more tactically.”
For a combined strategy to make sense, positions need to be sizable and Norges can hold up to 30 per cent of companies on the listed side.
On the private side the fund underwrites assets for a minimum 10-year horizon, and the same is true for the listed holdings.
“When we invest in companies, we have extremely good fundamental research, more similar to private equity investment in listed entities,” Holstad says.
“We don’t use the listed part as being tactical in the market, we see them more together as one portfolio. In the long term they behave more or less the same and we are agnostic to how we invest. So, we can enter the market in the way we think makes the most sense for the fund and is efficient.”
Across all its investments Norges takes a very considered, research-driven approach and combining the listed and unlisted teams has resulted in better knowledge sharing.
“Private markets are more out there and have different sources of information, for example they speak to tenant’s ad service providers at assets. When you make that information flow from different geographies as well, and couple it all together we have a massive database of information. It’s been a very interesting journey, and I think we are in a much better place now than we were some years ago.”
Some notable examples of how this has played out in the combined approach include investments in Prologis and Alexandria.
“Investing in logistics real estate for over a decade alongside Prologis has given us a lot of insights into the logistics sector. Our push into logistics on the listed side over the past few years is very much based on our shared conviction and the research carried out by the unlisted team,” Holstad says. “We’ve been among the top shareholders in Alexandria for several years and our listed team has developed a good relationship with senior management there which was instrumental when we made our unlisted life science investment two years ago when we bought into 50-60 Binney Street in East Cambridge.”
Information and knowledge sharing between the teams has been additional to the benefits of cost efficiency. Norges can be agnostic to how it achieves real estate exposures, and the plan is this will lead to more opportunities and bundled deals for the combined team in the future.
Research to back the strategy
The recent research released under a NBIM discussion notes, Drivers of listed and unlisted real estate returns, shows the differences between listed and unlisted real estate appear to reduce over the longer term, and the correlation of their returns increases with horizon. It also showed the correlations with the broader equity market are lower at longer horizons for both real estate segments. These correlation patterns suggest that differences between listed and unlisted real estate returns are short-term and largely driven by transitory factors.
When applied to the Norges portfolio the short-term returns year on year look very different between listed and unlisted, according to Fredrik Willumsen. For example, in 2022 the listed portfolio was down 30 per cent and the unlisted was around zero. 2023 looks so far to be the opposite directionally.
“The idea of expanding the horizon makes total sense,” he says. “Listed and unlisted real estate invest in the same thing, bricks and mortar, so it stands to reason in the long term it doesn’t really matter. It speaks to the strategy we have.”
A combined strategy is also an advantage when markets are in turmoil as is the case now.
“Having this combined strategy and the toolbox to both private and listed means we can talk to companies and do more bundled deals,” Holstad says.
“Sometimes we are invested in listed and unlisted with companies and it makes the dialogue even better when it comes to information flow and opportunity set.”
Efficiency in sector allocations
Efficiency can mean a lot of things including cost, and the listed markets are often a more cost-efficient way to investigate certain sectors before committing to larger stakes.
Historically the allocations to private and public have also varied by sector. One example is that residential property was more likely to be accessed via the listed markets, and logistics is a large private allocation.
Traditionally the fund focused on four core sectors: residential, retail, office and logistics alongside a city strategy that saw eight cities as the geographical focus. But with the structural changes taking place in the real estate market the focus going forward has shifted somewhat.
“We used to say that office was the backbone of the portfolio, now we have moved away from that. We still believe in office, but we are seeing the major bifurcation in quality and location that everyone is seeing so we are more selective on office investments,” the CIO says.
In addition, as more niche sectors like self-storage, healthcare, senior housing , data centres, etc. emerged the fund could diversify even more through its listed exposures.
“As an investor with our mandate we look at how we access each sector in the best possible way, it’s more than just cost efficiency it’s also the quality of the companies and the size.”
The fund looked at how to exploit the expanded real estate sectors but also started tilting the combined portfolio to themes such as AI and climate.
“These are big themes, and we are looking at whether we can be at the forefront of these massive trends. It’s the same with logistics and retail, you only need to look at your neighbours and friends and how they do their shopping. It’s about those mega trends and how we can participate in those. We haven’t moved away from looking at the eight cities, but we are broader when it comes to geography, and more flexible when it comes to sectors. The combined strategy gives us flexibility in a cost-efficient way.”
On the private side efficiency also extends to the choice of partner in the joint venture and their ability to have skin in the game.
“One of the most important things is for our partners to have very good local knowledge and also be a long-term investor, we don’t want people flipping assets. It’s about alignment of values and having a good reputation in the market.”
Holstad says given the specific investing environment combining local knowledge with macroeconomic themes is important.
“ We have been building up exposure in sectors like life sciences, logistics and residential where we have strong conviction about attractive long-term structural outlook and are actively monitoring and adapting to new themes emerging”