Strategy 28: Real estate

The Ministry of Finance included unlisted real estate in the fund’s investment universe in 2010. Whether, how, and how much the fund invests in real estate are delegated to Norges Bank within the limits of the management mandate. We have built a large unlisted real estate portfolio and have ownership stakes in many of the largest listed real estate companies. 

Why the fund invests in real estate

Real estate is not part of the benchmark index defined by the Ministry and is part of the fund’s active management. The purpose of active management is to exploit the fund’s defining characteristics and advantages to achieve excess returns over time.

We will invest in 3-7 percent of the fund in real estate to maximise fund returns after costs. We believe that achieving this goal also improves the long-term trade-off between return and risk in the fund, and that the fund’s characteristics and advantages position us to achieve our goal.

• Scale and reputation: As one of the world's largest real estate investors, we can access investment opportunities unavailable to smaller investors, negotiate favourable terms, and maintain meaningful influence when investing indirectly. Our reputation provides access to premier partners.
• A long-term capital base: A long investment horizon and limited short-term liquidity needs provide certainty of capital when other investors face financing constraints. We can optimise holding periods based on value creation rather than predetermined timelines and be patient through market cycles.

Adapting to new circumstances

The real estate market has undergone fundamental changes since we began investing in 2010. Traditional sectors like office and retail face structural headwinds from remote work and e-commerce, while requiring more operational management than in the past. Simultaneously, sectors such as residential, data centres, and life sciences have become investable for large institutional investors.

Our peers have successfully adapted to these changes, with increased allocations to emerging sectors. To enable the transition to more operational sectors, the industry has moved towards more indirect structures. Our peers are increasingly combining direct investments with platforms[1] and funds to access specialised expertise and operational capacity more efficiently.

Our previous strategy was narrowly focussed on a limited number of sectors, geographies, and forms of investing. Broadening our scope should enable us to better exploit the fund’s defining characteristics to get access to the best opportunities across sectors, geographies, and investment approaches.

Integrated investment strategy

Research confirms that return differences between listed and unlisted real estate fade over time. Our long investment horizon makes us well-suited to handle higher short-term volatility from the listed real estate portfolio. We will evolve from a combined strategy to a fully integrated strategy. This means that we, for any desired exposure, will systematically evaluate whether listed or unlisted real estate provide the most attractive risk-adjusted return after considering liquidity, resource requirements, and costs.

Portfolio composition

Real estate has experienced structural sectoral shifts in the last years, and sector diversification has proven important. We will gradually shift to a more balanced total real estate portfolio over time. This should position us to benefit from sectoral rotation while reducing concentration risk in any single area.

• Office: 15-35%
• Retail: 15-35%
• Logistics: 15-35%
• Living: 15-35%
• Other emerging sectors: 10-25%

Investment decisions will primarily be driven by asset and sector fundamentals. Location remains critical for successful real estate investments, but with the strategic shift we emphasise that the definition of a good location depends on the sector and can change over time.

• North America: 30-70%
• Europe: 20-60%
• Asia Pacific: 0-15%
• Emerging markets: 0-10%

Investment approaches

Direct investments will remain our primary approach, emphasising partnerships with high-quality local and sector specialists. We will expand beyond traditional joint ventures to include separately managed accounts (SMAs) that provide scalable access to multiple assets within pre-agreed strategies.

Platform investments will provide resource-efficient access to specialised strategies and operational capacity that would be impractical to develop internally for a lean organisation as ours. Platforms are particularly valuable for sectors requiring intensive operational management. Fund investments will offer selective access to best-in-class managers with specialised expertise, enhanced market intelligence, and potential co-investment opportunities. Our scale and reputation should enable us to negotiate favourable terms and maintain meaningful strategic influence when investing more indirectly.

We acknowledge that expanding our investment approaches introduces new risks, and in particular more delegation of investment sourcing and investment management. We will mitigate these risks through enhanced due diligence processes and governance frameworks with agreements ensuring transparency, cost efficiency, and alignment with our responsible investment standards. We will primarily use indirect investment approaches in new sectors in the unlisted portfolio, such as Living. To mitigate potential new risks, we remain highly focussed on partner quality and reputation.

A granular funding framework

As part of the work on the revised real estate strategy, we have also assessed how real estate should be funded going forward. In the mandate, real estate is regulated as other active strategies, within the limit for expected relative volatility. The limit for relative volatility restricts the expected deviations between the return on the portfolio and the benchmark index. When we invest in assets outside the benchmark index, we must also sell equities and bonds in the benchmark index to fund the investments.

The framework for funding real estate has since 2017, with minor exceptions, had the same equity share in the funding regardless of the asset type and risk characteristics. Going forward, we will to a greater extent seek to reflect the underlying risk of each individual real estate investment, while adjusting for leverage. As today, we will organise the management of our real estate investments with the aim of avoiding currency risk. The new framework will clarify the relationship between the risk and funding cost for each investment.

The change in the framework for funding real estate will have limited impact on the fund’s overall risk and return characteristics in normal market conditions. However, a somewhat lower average equity share in the funding may increase the market risk in the fund marginally.

Responsible investments

Investments in real estate shall be managed in a responsible and environmentally sustainable manner in accordance with the Executive Board’s principles for responsible investment management and the Guidelines for Observation and Exclusion from the Government Pension Fund Global.

Climate risk represents financial risk that directly impacts our real estate portfolio. We maintain our commitment to net zero by 2050 for the properties we own, with an interim target of 40% reduction in operational carbon intensity by 2030 against a 2019 baseline. For direct investments, we emphasise flood risk assessments and require actual energy composition data to measure progress. As we expand into indirect structures, we will:

• Integrate sustainability criteria into manager selection processes
• Require climate risk data quality matching our direct investment standards
• Mandate quarterly energy usage reporting and annual CRREM alignment reporting to demonstrate a credible decarbonisation strategy
• Leverage our scale to influence partner sustainability practices

For our listed portfolio, we will continue engagement-led action supporting portfolio companies' transition to net zero emissions, increasingly utilising AI to track progress effectively.

[1] A real estate platform consists of an operating company focused on acquisitions, development, and ownership, and a property company that holds and manages the assets.