The shift in strategy is happening as a result of last year's change to the fund's mandate by Norway's Finance Ministry, which removed unlisted real estate from the oil fund's benchmark and replaced the previous allocation target for the real estate — listed and unlisted — of 5 percent of the fund with a limit of 7 percent, an academic source tells FW Asset Management.

Yngve Slyngstad, Chief Executive of Norges Bank Investment Management (NBIM), which manages the oil fund, or Government Pension Fund Global (GPFG) as it is formally called, told a parliamentary hearing last week that there had been something of a pause in the increase in unlisted real estate investment last year.

In 2016, he said to the finance committee in response to questions, that all of the unlisted real estate investment had taken place in the second half of the year.

In 2016, the fund invested 0.14 percent of its assets in new unlisted property assets, down from the previous three years when it had put around 1 percent of assets into unlisted real estate annually.

New model gives more flexibility

Slyngstad said the new model introduced last year by the Finance Ministry provided better overall risk management, in NBIM's opinion, and gave the manager more flexibility over its real estate investments.

"It means in practice that we can evaluate listed real estate companies and compare them to unlisted real estate, changing these, and earn money on this, even though its is the same type of property," he said.

The pause had happened because earlier on in the year, it had been possible to buy real estate equities for a lower price than actual buildings, and also because there had been a high level of uncertainty in particular regarding the UK, Slyngstad said.

Asked by FW Asset Management if NBIM was slowing the pace of its investment in real estate overall, a spokesman for the management firm referred to the recently-published strategy document for 2017 to 2019.

In it, NBIM states: "We will invest at a steady pace, and expect the real estate investments to be 4 percent of the fund by the end of the strategy period."

This target, which the spokesman said referred to unlisted real estate investments only, implies an increase in unlisted real estate allocation of around 0.5 percent on average per year.

This is less in percentage terms than the increase seen prior to 2016, though in absolute terms it could arguably be on a similar level to some previous years — if the fund continued to grow at the same rapid rate seen over the last five years.

Almost NOK 250 billion in real estate

Since it was first mandated by the Norwegian government in 2010 to broaden its asset mix from equities and bonds to include real estate as well, the GPFG has invested NOK 248.6 billion (EUR 26.3 billion) in listed and unlisted real estate.

Even though real estate accounted for just 3.2 percent of the NOK 7,510 billion fund at the end of last year, staff in Norges Bank Real Estate Management (NBREM) make up a quarter of all staff at the overall NBIM investment operation.

This obvious high cost of direct real estate investment has weakened political support for the investment type.

The Finance Ministry's decision in April last year to limit real estate to 7 percent and make it clear this would in practice have to be lower because of market fluctuations — as well as taking property out of the benchmark — was based on expert reports that cast doubt on the benefits of direct property investments.

Labour MP Torstein Tvedt Solberg, who sits on the finance committee, said: "I would say we are in a new phase with real estate, there was a build up phase which was rapid, and now there is a more steady growth phase.

"They are still looking for good projects, but they are not in a rush," he said.

No real estate deals in Asia so far

NBREM set up offices in Tokyo and Singapore in the autumn of 2015 with a view to investing in Asian real estate, but has yet to make a single deal there.

Slyngstad said the manager has simply not found any good opportunities in the region yet, and has preferred to make other deals elsewhere.

Karin Thorburn, research chair professor of finance at the Norwegian School of Economics, said an effect of the Finance Ministry's change to the benchmark last year has been to make sure the GPFG only makes real estate investments if they can outperform a combination of stocks and bonds.

She said that if the GFPG is in fact slowing or scaling back its unlisted real estate investment, this would be a good thing.

"I'm a strong believer that the oil fund shouldn't have a large organization for direct investments in real estate," she said.

She is concerned that if the GFPG hires a lot of people to invest in real estate, it could have a tendency to do that even though it may not make good sense to do so from an overall portfolio point of view.

"Another issue is that the unlisted portfolio is concentrated and Brexit could have huge consequences.

"If you ask me, they should slowly sell out of unlisted property, but given the pricing, and Brexit, I cannot say when is a good time," Thorburn said.