Regulations on management of the real estate portfolio in the Government Pension Fund Global

Adopted by the Ministry of Finance 24 February 2010 pursuant to the Act of 21 December 2005, number 123 relating to the Government Pension Fund, Section 2, paragraph 2 and Section 7.

Adopted by the Ministry of Finance 24 February 2010 pursuant to the Act of 21 December 2005, number 123 relating to the Government Pension Fund, Section 2, paragraph 2 and Section 7.

Section 1. Norges Bank’s management responsibility
(1) Norges Bank (the Bank) shall place up to 5 per cent of the assets of the Government Pension Fund Global (the Fund) in a designated portfolio of real estate investments (the real estate portfolio) in accordance with these regulations.
(2) Norges Bank shall seek to achieve the highest possible rate of return on the investments in foreign currency within the limitation that follow from these regulations.

Section 2. Definitions
(1) In these regulations, gross value means the value of the real estate portfolio before deductions for the Fund’s share of liabilities related to the investments.
(2) In these regulations, net value means the value of the real estate portfolio less the Fund’s share of liabilities related to the investments.
(3) The net return of the real estate portfolio shall be calculated after deduction of all costs, such as operating, transaction, tax, management and custody costs.
(4) Real estate in these regulations means rights to land and buildings on the land. Real estate does not include infrastructure such as roads, railways, harbours, airports and other fundamental infrastructure.

Section 3. General framework for investments in real estate
(1) The real estate portfolio can be invested in real estate or in equity and interest-bearing instruments issued by listed or non-listed companies, fund structures and other legal entities whose primary business is acquisition, development and management or financing of real estate.
(2) The real estate portfolio may be invested in derivatives that are naturally linked to real estate instruments. For the purpose of calculating country composition and the percentage of listed investments, derivatives shall be depicted with the underlying economic exposure.
(3) The Bank may carry out investments in the real estate portfolio through Norwegian or foreign wholly or partly owned companies.
(4) Investments in listed equity instruments shall be listed on regulated and recognised markets. Unlisted companies and fund structures shall be established in OECD countries, countries Norway has tax agreements with or other countries Norway may demand tax information pursuant to other international legal agreements.
(5) The Bank may not invest in real estate located in Norway or in real estate companies, real estate funds or similar structures which have as primary purpose to invest in Norway.
(6) The real estate portfolio may not be invested in securities issued by enterprises that the Ministry of Finance has screened out or excluded from the investment universe.
(7) The Bank shall establish guidelines for valuation of instruments in connection with internal transactions between the real estate portfolio and the equity and fixed-income portfolio.

Section 4. Strategic country and sector distribution
The Ministry of Finance lays down the strategic country and sector distribution with associated ceilings for deviation from the gross value of the real estate portfolio’s investments, based on grounded proposals from the Bank. The strategic country and sector distribution must be specified before investments can start.

Section 5. Return objective
(1) The Bank shall seek to achieve a net return on the real estate portfolio that at least corresponds to the Investment Property Databank (IPD) Global Property Benchmark for the Government Pension Fund Global (IPD SPU). The return of IPD SPU is equal to IPD’s Global Property Benchmark, weighted with the strategic country distribution in Section 4, and adjusted for the effect of any actual leverage and for the Ministry’s estimates for normal management and tax costs.
(2) The real estate portfolio’s return and return objective are calculated as an annualised five year average of annual time-weighted return, measured in the currency basket that corresponds to the return objective’s currency composition.

Section 6. Diversification requirements
(1) The real estate portfolio shall be well diversified geographically, over sectors and over real estate and instruments.
(2) The Bank shall limit risk in the real estate portfolio by means of ceilings for
     a) investment in emerging markets
     b) investment in real estate under development
     c) investment in real estate that is not let
     d) investment in a single year (vintage)
     e) investment in interest-bearing instruments 
      f) investment in listed real estate shares

Section 7. Leverage
(1) Debt financing may be used in fund structures and other legal entities with the aim of performing a management task in an effective manner, but such leverage may not be used for the purpose of increasing  the Fund’s financial exposure to risky assets.
(2) The Bank shall establish ceilings for the real estate portfolio’s total debt ratio and maximum debt ratio on individual investments.

Section 8. External managers and service providers (outsourcing)
(1) The Bank may give assignments to external managers and outsource operational functions, cf. the Regulations of 17 December 2009 No. 1630 regarding risk management and internal control in Norges Bank, Section 5.
(2) The Bank establishes a ceiling for how large a part of the fund a single external manager may manage.
(3) The remuneration structure in agreements with external managers shall be designed so that they safeguard the Fund’s economic interests.

Section 9. Due diligence
(1) The Bank shall establish guidelines that ensure due diligence for each individual investment before an investment is made in real estate that is covered by these regulations.
(2) The due diligence process shall include assessments of the various risk aspects connected to the investment, including market risk, liquidity risk, credit risk, counterparty risk, operational risk, legal, tax and any technical and environmental risk.
(3) The investment may only be made after it has been approved by the Bank in writing. The approval document shall include an account of the factors described in the second paragraph and a confirmation that the necessary systems and procedures have been implemented.

Section 10. Strategic plan
(1) The Bank shall devise a multi-year strategic plan for real estate.
(2) The strategic plan shall describe how the Bank shall achieve the highest possible net return within the limitations that follow from these regulations.

Section 11. Valuation 
(1) At least once a year, the Bank shall obtain an external, independent valuation of the unlisted real estate investments. The annual valuation shall reflect the value on 31 December.

Section 12. Entering accounting returns etc. against the Fund’s krone account
The value of the Fund’s krone account shall be equivalent to the book value of the portfolio of real estate, financial instruments and cash deposits in foreign currency. Norges Bank’s book return on the portfolio, less management fee to the Bank, and with other deductions or additions for entries in accordance with Norges Bank’s accounting policies, shall be added to the Fund’s krone account on 31 December each year.

Section 13. Relation to other regulations on the management of the Government Pension Fund Global
The Regulations of 22 December 2005 No. 1725 regarding the management of the Government Pension Fund Global and guidelines for the management of the Government Pension Fund Global apply to the real estate portfolio as long as they are appropriate and do not conflict with these regulations.

Section 14. Public reports
(1) The annual report for the real estate portfolio, cf. guidelines for management of the Government Pension Fund Global point 4.3 paragraph 1, shall as a minimum include the following information:
     a) an explanation of the choice of investment strategy and of the
         implementation of the real estate management
     b) gross and net time-weighted return in the currency basket that corresponds
         to the return objective’s currency composition 
     c) the value of the real estate portfolio, cf. Section 11.
     d) analysis of important contributions to the total return 
     e) money-weighted return and distribution of the return in terms of direct return
          and appreciation 
      f) return compared with developments in the return objective, cf. Section 5, and
         an explanation and quantification of the main causes of differences in the
         return 
     g) reporting on the risk properties of the portfolio, cf. Section 6 
     h) a complete overview of the portfolio 
      i) the use of leverage in the real estate portfolio and how the leverage affects
         the real estate portfolio’s risk, cf. Section 7
      j) performance related costs and transaction, tax, management and custody
         costs 
     k) an overview of the organisation of the real estate management
      l) an evaluation of investments in listed property companies and interest-
         bearing instruments against comparable investments and the return
         objective, cf. Section 5, and an explanation and quantification of the main
         causes of differences in the return
    m) an account of the Bank’s work in accordance with the provisions on
         responsible management, cf. guidelines for Norges Bank’s work on
         responsible management and exercise of ownership rights

(2) The quarterly report for the real estate portfolio, cf. guidelines for management of the Government Pension Fund Global point 4.3 paragraph 2, shall as a minimum include a report of the real estate portfolio’s actual return and developments in the return objective, cf. Section 5, in the currency basket that corresponds to the return objective’s currency composition.

Section 15. Reporting to IPD
(1) The Bank shall submit property specific data to IPD in accordance with their standards for unlisted investments wherever possible.
(2) The data submitted shall facilitate the calculation of the real estate portfolio’s leverage, cf. Section 5.

Section 16. Publication of internal regulations
The Bank shall publish the ceilings established pursuant to Section 6 paragraph 2 and the guidelines for due diligence established pursuant to Section 9 paragraph 1.
 
Section 17. Phasing real estate into the Fund's portfolio
(1) The allocation of capital to the real estate portfolio shall be equal to a corresponding reduction in the benchmark portfolio for fixed income instruments. 
(2) The Bank's advice on the composition of the theoretical transfer portfolio shall only be based on the benchmark portfolio for equity instruments and fixed income instruments. When calculating the theoretical transfer portfolio the most recently available market value of the real estate portfolio shall be used to calculate the value of the Fund's total benchmark portfolio.
(3) The Bank shall seek to spread the phasing in over several years and over relevant risk factors, cf. Section 6 paragraph 1.
(4) The pace of phasing in shall be determined on the basis of the Bank’s long term expectations of return and risk in the real estate market and the Fund’s possible investments in other markets.
(5) The Bank shall inform of the status of implementation of the phasing in and the costs connected with the phasing in in the public annual report, cf. guidelines for management of the Government Pension Fund Global point 4.3 paragraph 1.

Section 18. Entry into force
The regulations come into force on 1 March 2010.