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* Wealth fund earns 7.2 pct return on investment in Q3
* Says profit was fifth best in fund's history
* Launches real estate investment with $719 mln London buy
* Most real estate activity seen in UK in 2011
(Adds details, quotes)
By Camilla Knudsen and Wojciech Moskwa
OSLO, Nov 4 (Reuters) - Norway's sovereign wealth fund (SWF) said it earned $34 billion on its investments in the third quarter as stock markets rallied, and picked a prime central London retail site for its first ever real estate purchase.
The $500-billion-plus SWF, the world's second largest behind its peer in the United Arab Emirates, agreed to buy a 25 percent stake in the UK Crown Estate's Regent Street properties for 448 million pounds ($719 million).
"Better-than-expected earnings figures from a range of companies and reduced fears of an economic slowdown in Europe contributed to the stock market rally," said Yngve Slyngstad, chief executive of Norges Bank Investment Management (NBIM).
"Concern over some southern European countries' sovereign debt also eased somewhat."
In line with preliminary data, the value of the central bank-run fund stood at 2.91 trillion Norwegian crowns ($503.5 billion) on Sept. 30, up from 2.79 trillion at end-June. The fund has since topped 3 trillion crowns, Norway has said.
The third-quarter return on investment stood at 7.2 percent, about 0.4 percent above the fund's benchmark portfolio. About 60.4 percent of the fund was allocated in stocks, against 59.6 percent at the end of the second quarter.
About 70 percent of the new capital inflows to the fund, which is fed by Norwegian tax revenues from oil and gas operations, went to bond purchases with the rest to equities.
The Regent Street acquisition is the first property investment for the fund, which was cleared in March to invest up to 5 percent of its assets in property through a corresponding decrease in debt investments. The fund now holds up to 40 percent of total assets in debt.
The fund said it planned to invest mainly in unlisted real estate, well-developed markets and traditional property types, initially in Europe and in major cities.
"Much of the real estate activity in 2011 will be in Britain, but we also have begun to look at France and Germany," Slyngstad told reporters, adding the fund would not look at investing in U.S. real estate before 2012 or 2013.
The Regent Street portfolio consists of 113 buildings owned by the Crown Estate, on behalf of Britain, in one of London's main shopping districts.
In February, Crown Estate said it was considering bringing third parties into plans to develop its 1.4-billion-pound portfolio. [ID:nLDE5BG14X]
The Norwegian government has often been at odds with Norges Bank over the fund's investment profile, with bankers seeking to keep the SWF focused on financial profits.
The SWF said oil major BP (BP.L) -- whose Macondo well blew out in the Gulf of Mexico in April, leading to the worst-ever oil spill -- was its most profitable investment in the quarter. In the second quarter BP was the worst performer.
Some other top performers in the fund were Spanish telecom company Telefonica (TEF.MC) and oil major Royal Dutch Shell (RDSa.L). The worst third-quarter performers were U.S. banks Wells Fargo (WFC.N) and Bank of America (BAC.N) together with Swiss drugmaker Roche ROG.VX.
Slyngstad further suggested the fund would maintain some 350 billion crowns in assets under external management, even though the size of the fund is growing.
Norges Bank has said Norway should consider scrapping a regional allocation weighting system for the fund, which currently favours investments in Europe. If scrapped, the fund would invest more in the Americas and in Asia. (Editing by John Stonestreet) ($1=5.779 Norwegian Crown)