sopranospinballmachine| The good times of lying flat and collecting rents are coming to an end, Norway sovereign funds turn to British real estate developers

Zhitong Finance noted that more than a decade ago, the size of Norway reached 1.SopranospinballmachineThe .6 trillion sovereign wealth fund has set off a dazzling real estate buying spree in London. Now, it is trying to find ways to keep the increasingly old landmarks shining.

First, NBIM, the Norwegian central bank, is dabbling in development projects to prepare for the expiration of a series of key leases in its UK portfolio.

The fund has taken back part of Bank of America's London office campus for a complete renovation. This may be a harbinger of answering a bigger question.SopranospinballmachineWhat happens if the bank chooses to withdraw completely when its main lease expires in 2032?

"it provides us with valuable insights and research," said Michael Carter, senior asset manager at NBIM. "We are going deep into the skeleton of that building, which is built in the same form as the main building of Bank of America."

This phenomenon is happening all over London. First Brexit, then the epidemic, now rising interest rates-all of which have upset the plans of quality property investors. Understaffed overseas funds, some of which were intended to be sold long before leases expire or depreciate, are being forced to consider complex redevelopment of buildings.

Like many sovereign investors with large checkbooks and small real estate teams, NBIM initially targeted either joint ventures with established companies or high-end buildings leased for a long time with top tenants. These low-risk buildings usually require little management, allowing funds with no real estate investment record to expand their portfolios without hiring hundreds of asset managers.

But 10 years after the acquisition of NBIM, Bank of America has about eight years left on its London lease, and the large occupier must consider whether to stay or leave because of the lack of large enough alternative buildings.

The fund considered selling the building, but stopped the process in the summer of 2022 after the conflict between Russia and Ukraine and rising interest rates subverted the commercial real estate market.

"this is an opportunity and we think it would be better for us to deploy our money elsewhere if we can sell it at a certain price," Carter said. "in fact, things have changed against us. We said no problem. We have been happy to own the property, keep it, complete the business plan, and maintain it for a while. "

A similar dilemma

Other funds face similar challenges.

The QIA faces the prospect of Credit Suisse and HSBC moving out of their Canary Wharf headquarters. The permanent National Corporation of Malaysia is renovating the former European Bank for Reconstruction and Construction Building at 175 Broadgate. It also owns 1 Silk Street (One Silk Street), which will need to be significantly upgraded after the law firm Linklaters moves out soon.

NBIM operates under strict government investment rules, which allow up to 7 per cent of investment in unlisted real estate. As of the end of March, only about 2 per cent of the fund's investment had been invested in unlisted real estate, totaling $28.5 billion, according to a recent filing. Carter says about 1/3 are partnerships and the rest are sole proprietorships.

Bank of America is not the only significant tenant in NBIM's London portfolio whose lease is about to expire. Amazon's agreement in nearby Sixty London is currently scheduled to expire in 2028.

Although the building is much newer than Bank of America's campus, Amazon will not necessarily update it. The pace of change in the office market has been subverted by the epidemic and growing environmental demand, which means that even relatively young buildings will need a lot of upgrading to attract tenants if companies choose not to renew their orders.

Carbon neutralization requirement

At 20 Gilzper Street (20 Giltspur Street), the fund is experimenting with technologies aimed at reducing the project's carbon footprint, including upgrading the entire floor to reuse steel frames while creating additional space. It is one of the first major developments directly undertaken by NBIM in the UK since NBIM signed its first property deal in London in early 2011, buying about 25 per cent of the Royal Regent Street property's 150-year lease.

The project, approved in October 2022, includes an additional area of about 25000 square feet (23000 square feet) to create a rentable property of just under 90, 000 square feet. The Bank of America Merrill Lynch Financial Center at 2 King Edward Street has a rental area of about 500000 square feet.

Carter said ESG was "one of the fastest growing areas of building technology and regulation", adding that its work in London was similar to that of the fund in Paris, where it has buildings up and down the Champs Elysees.

"obviously, the whole of London is under a lot of pressure," he added. "the pressure to reuse rather than replace is much greater."

NBIM was founded in the 1990s to invest in Norway's oil wealth. Since then, NBIM has added assets in Oxford Street Street, Mayfair and the city's financial district. Currently, in the UK alone, the fund holds as much as £4.5 billion ($5.6 billion) of unlisted property.

Matthew Fellows, senior investment manager of NBIM's UK real estate team, said: "We have been looking for more investment in London since 2019, but we have not really seen the right opportunity for the right price." "I'm somewhere between hope and expectation. I'll buy more this year."

The fund's most recent acquisition in the UK was in October 2022, when it bought a 49 per cent stake in a Cambridge life sciences company for £90.2 million.

Carter says there has been a natural shift from a passive owner of long-term income assets to an active manager.

He added: "We have enough equity to invest in our assets and have always wanted to be a proactive, hands-on investor."