10 Years On, Norges Still Hearts London Real Estate

Last week it emerged that Norwegian sovereign wealth fund Norges Bank Investment Management had agreed a deal to buy the Sixty London office building in Holborn for around £325M. It was a significant deal for a lot of reasons.

The deal would bring Norges Bank's portfolio to £3B in London, and more than £5B in the U.K. But more importantly it would take its spending in London past £1B since the U.K. voted to leave the EU. The £1.2B it has spent across nine deals since June 2016, according to data from Real Capital Analytics, make it one of the most prolific post-Brexit investors in the capital.

Its confidence in London is highlighted by the fact that as well as the cumulative post-Brexit spend, it is also investing in larger assets and moving beyond the West End, where all but one of its previous deals have been struck.

Sixty London will be Norges Bank’s largest deal in London since it paid £583M for Bank of America Merrill Lynch’s London HQ in the City in September 2014. Norges was also one of the underbidders for Goldman Sachs’ new HQ building, which sold to the National Pension Service of Korea for £1.2B in August.

Norges Bank’s move into real estate began in London. The fund sought a mandate to begin investing in the asset class in 2008, but did not strike a deal until 2011, when it bought a 25% stake in Regent Street from the Crown Estate for £750M.

It has since undertaken 16 more deals in London, 17 more with Sixty London, having spent a total of £2.9B if the latest deal goes through.

It was one of the first global investors to buy in London after Brexit, buying the Sedley Place retail and office block on Oxford Street from Aberdeen Standard Investments for £125M in July 2016, just weeks after the Brexit vote.

Aberdeen was having to liquidate assets to meet redemptions from one of its property funds, and the fact that Norges Bank was willing to invest in London was one of the first indications that global capital would continue to buy in the city.

In June this year it bought 30 Warwick St., the U.K. HQ of JLL, for £115M.

The 236K SF Sixty London was completed in 2013, and in 2014 Amazon took a 15-year lease on the building at a rent of around £55/SF. It was bought by Hines and a German pension fund in 2014 for £245M.

The price paid by Norges for Sixty London would represent a yield of around 3.9%, and is an indication of the competition that exists for prime London office buildings — it was put on the market for £310M, but bidding pushed the price up.

Real estate was Norges Bank’s best-performing asset class in the first half of 2018, its 4.4% return easily beating the 0.4% provided by equities and the -0.4% returned by bonds.

And it wants to put more into the sector, having appointed two chief investment officers in autumn last year with a mandate to spend $5B a year over the next five years, to take its real estate allocation from 2.6% to 5%.

That would bring its real estate portfolio from the current £21B level to around £40B. A deal for Sixty London would see London leapfrog Paris as the fund’s second-largest investment destination, although it would still be some way behind Manhattan, where it has bought £5.4B of assets.