Norges Bank Investment Management (NBIM) has issued a request for proposal (RFP) for a feasibility analysis of the European real estate debt landscape which would pace the way for the world’s largest sovereign wealth fund to enter senior debt lending.
NBIM, which manages Norway’s 4.14trn kroner (circa £477bn, €551bn)Government Pension Fund Global, known as the Norwegian oil fund, was given a mandate three years ago to increase its allocation to global real estate up to 5%, which on the fund’s current value equates to around £23.85bn (€27.55bn).
The Norwegian sovereign wealth fund is seeking to appoint an adviser to conduct a comprehensive analysis of the historic and current real estate lending markets, with a focus on the UK, Germany, France as well as other selective European markets.
The RFP also comprises a risk-focused analysis of the historic market, the size of the lending market as well as who the current active lenders are, margin spreads across differing real estate yield profiles as well as an analysis of the relative risk-returns from senior debt across the core European markets.
Furthermore, NBIM is seeking some strategic advice over how its should enter core European senior lending, that is, through a separate account mandate – awarded to either an investment bank, insurance lender or senior debt fund – or through establishing their own platform and team of originators to run an in-house programme.
NBIM, historically a semi-permanent direct real estate owner, has also asked for an analysis on whether the sovereign wealth fund should floating rate or fixed rated debt should be offered.
The investment proposition for NBIM to expand its real estate footprint into senior debt is compelling one, given its considerable and ever-increasing source of pension fund capital which needs to be liability-matched.
If NBIM decided to enter real estate senior debt at the end of this feasibility study, they have the capacity to become a considerable player. The projected total fund size for Norway’s oil fund by 2020 is 6.262 trn kronner (€832bn), for which the total allocation to real estate would then be as much as €41.6bn.
One month ago Debtwire reported that NBIM was exploring the possibility of a senior debt fund, citing two anonymous sources.
Given the tightening margins for super prime assets in London and Germany’s major cities, the relative risk-return dynamic against other asset class is weakening slightly for the highest quality real estate, which could prompt new lenders, such as potentially NBIM, to consider lending slightly up the risk-curve, as AXA Real Estate has begun to do.
This would see lending capacity improve in secondary markets which will aid the transaction volumes, albeit fractionally and slowly.
In the three years since NBIM has undertaken a considerable global direct real estate spending spree, including a 50% stake in the Meadowhall shopping centre in Sheffield for £750m including liability for the securitised debt, a 50% stake in a pan-European 195-strong logistics portfolio for €1.2bn and a 49.9% stake in five US offices, together worth $1.2bn.
NBIM declined to comment.