1. real estate

investment briefing
prime time
for the nordics
Domestic and foreign investors are vying for opportunities in the Nordics,
attracted by the region’s strong macro fundamentals and positive outlook
1
3
2
‘Unlike many European countries, the
Nordics will not fall into deflation this year,
which is very important for investments’
Marcelo Cajias, Patrizia Immobilien
1. Marcelo cajias, senior manager of research at patrizia immobilien 2. michael james, associate real estate at
paul hastings 3. full panel 4. james raynor, ceo grosvenor fund management 5. anders palmgren, founder
and director of genesta 6. andrew smith, managing director of catella uk
PHotos: mark shenley
4
5
6
By Nicol Dynes
T
he four countries that make up the Nordics are
set for another bumper year in 2015 as the momentum continues following record investment
levels in 2014. Market experts at PropertyEU’s Nordics
Investment Briefing, held in London in late February,
agreed that the region’s strong macroeconomic fundamentals will continue to make it a magnet for investors
this year – particularly against the backdrop of turbulence in the eurozone. ‘2014 was a historic year for the
Nordics investment market, which attracted 20% of all
investment into Europe. Property investment increased
by at least 60% compared to 2013 and by more than
240% compared to 2009, and the momentum seems
to be continuing this year,’ said Marcelo Cajias, senior
manager of research at Patrizia Immobilien.
‘We saw a lot of activity in 2014 and we expect to see a
lot more this year, as our clients are keen to invest in the
region,’ said Michael James of Paul Hastings, the international law firm which hosted the briefing.
‘It is prime time at the moment in all four countries,’
agreed Andrew Smith, managing director of financial
adviser and asset manager Catella. With the eurozone
still in turmoil, the main attractions of Norway, Sweden,
Finland and Denmark are their macroeconomic stability,
characterised by low levels of debt, robust GDP growth,
modest and stable inflation and healthy domestic demand. This pristine economic health is reflected in the
countries’ common triple-A status. An added attraction
for investors is having control over their currencies.
Unlike many European countries, the Nordics ‘will not
fall into deflation this year, which is very important for
household spending and for investments’, said Cajias, as
people will not defer purchases in the expectation that
prices will fall.
For retail specialists like Grosvenor Fund Management,
the macro picture is particularly important and reassuring. ‘The high wealth and high savings rates make us
very comfortable with the outlook for the Nordics,’ said
CEO James Raynor. Grosvenor has been in Sweden,
which accounts for 25% of its investments in the region,
since 2011, and expects its business there to grow.
‘We see our presence as a regional play so we will definitely expand to other Nordic countries, depending
on opportunity. On top of a solid macro picture, there
are many micro issues that make sense,’ Raynor said.
Shopping centres are very popular and often act as town
centres, partly because of the cold weather. And while
domestic retailers dominate the scene at present, the situation will change as international chains move in and
boost demand further.
Growing urbanisation
One trend common to the Nordic countries and the rest
of Europe is growing urbanisation, with a marked demographic decline in some regions and an influx of people
into the cities. ‘Demographics play an important role
when investing in real estate assets, due to significant
shifts in regional demand and a concentration of economic production and wealth in some areas,’ said Cajias.
Broadband internet penetration in the Nordics is the
highest in Europe, which will fuel ecommerce and have
an impact on both the retail and the logistics markets.
Despite a common perception among real estate investors that the Nordic countries are expensive, experts agree
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investment briefing
nordics
future population growth will centre on the main metropolitan areas
POPULATION GROWTH RATES 2012-2025
NORWAY
4.5
5
Property investment in the Nordics increased by at least 60% in
2014 compared to 2013 and by more than 240% compared to 2009.
DENMARK
Source: PATRIZIA, Reuters, RegioGraph, Oxford Economics
Note: Population growth in NUTS3-level
that opportunities abound for those who know the markets well. The main barrier to investing is not price but
competition as local and foreign funds vie for the same
deals. ‘The Nordics are not expensive, if you take into account that we are talking about triple-A countries and a
relatively low-risk environment,’ said Raynor. ‘Some locations in the Nordics are incredibly cheap, it is a matter
of knowing where to look,’ said Anders Palmgren, director and head of investor relations at Genesta. Pricing is
also less of an issue as it possible to borrow money very
cheaply, panellists agreed.
Strong local funds
The environment is very competitive, as local capitalrich funds are on the lookout for investments. ‘There are
some very strong local pension funds and their cost of
capital has been difficult to beat, so the companies they
back tend to do all the buying. There is a huge amount of
capital looking for opportunities,’ said Smith.
All the domestic funds have been increasing their allocation to real estate and several have also ventured outside
their home markets, seeking new strategies and buying
in London or Paris or even investing in real estate funds
targeted at Asia or the US, Smith said. Sweden is particularly competitive as it attracts more people and more
interest, and funds here are keen to expand but not to
sell. ‘In Finland, on the contrary, local funds are rebalancing their portfolios and downsizing their domestic
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allocation, so from a foreign investor’s perspective it is
easier to find investments there,’ said Palmgren.
The presence of strong local funds can also be a positive,
as demand and liquidity are such that it is always easy
to exit the market. ‘The fact that it is mainly domestic
funds investing in these countries is good, because there
is always a liquid market to sell into if you need to sell,
and it also provides stability,’ said Raynor. ‘Compare and
contrast that with Spain, which has gone from uninvestable to expensive in a very short space of time.’
It is no longer just pension funds and institutional investors, but also private investors who are looking for
exposure to real estate in the Nordics. This is not surprising, given the low interest rates and government bond
yields, said Cajias. ‘There are not many ways to generate
returns of 4% or more, no cash-generating alternatives
to real estate.’ The surge in listings of real estate companies has been a clear indication of this growing interest.
One example was the listing of NP3 Fastigheter, a Swedish real estate company with a focus on smaller cities:
too small a prize for most foreign investors, said Smith,
but a quotation that attracted massive interest from local
pension funds as well as private investors, to the point
that it was six times oversubscribed.
Size is an issue for many foreign investors, Raynor said:
‘Deploying resources to transact does not make sense if
you cannot get the scale and assemble a good portfolio.’
One of the factors making Sweden attractive as an invest-
‘incredible returns’ in Helsinki
Opportunities differ per city, region and property sector and local knowledge is essential in order to exploit
them, experts agreed. The office market in the Nordic
countries has seen robust development, fuelled by limited availability of product and an increase in cross-border
investments, but ‘demand is strong and pricing is tight,
so it is difficult to create returns. Offices is a more local
business than retail or residential, so in order to add value it is essential to know where the asset is, and have
offices and people on the ground to gain a good insight,’
said Palmgren. Helsinki offers great opportunities, he
said, as ‘office buildings in the centre of the city offer
incredible rates of return.’ Outside the city prospects are
less rosy: ‘I am bullish about Helsinki but not about Finland in general, because population growth is zero and
there is massive migration from the countryside into the
capital, so it is important to pay attention to where you
invest,’ he said.
All the panellists played down the impact of political risk
arising from Finland’s proximity to Russia. ‘Last year
2014 Q4
2013 Q4
2012 Q4
The main Nordic markets show strong compression of prime office
yields to levels well below the aggregated European mean.
Source: PATRIZIA, PMA, Union, CBRE
ment destination is that people, wealth and investments
are not confined to the capital city. Strong manufacturing
hubs and universities are dotted around the country. According to Raynor, ‘Sweden has pockets of wealth all around
and dynamic growth in the regions outside the capital, so
there are a lot of things to be done outside Stockholm.’
2011 Q4
2010 Q4
2009 Q4
2008 Q4
2007 Q4
2006 Q4
2005 Q4
2004 Q4
2003 Q4
COPENHAGEN
2002 Q4
0
4
3.5
2001 Q4
Population growth is taking place principally across the main metropolitan areas
and many regions, especially in the north, show a strong demographic decline.
Demographic concentration will in future play a more important role when
investing in real estate assets due to the significant shift in regional demand.
5
10
2000 Q4
>=12%
2013
12.0%
2014 (F)
10.0%
2012
6.0%
2011
3.0%
2010
0.0%
5.5
15
2009
-1.0%
STOCKHOLM
6
2008
3
-2.0%
OSLO
7
20
2007
OSLO
7
2006
HELSINKI
6
4
<=-4%
HELSINKI
6.5
9
6
2005
STOCKHOLM
7
61%
2004
6
0
N O R W AY
7
COPENHAGEN
7.5
25
2003
9
10
MEAN EUROPEAN PRIME YIELD
8
2001
12
prime office yields fall sharply
8.5 %
SWEDEN
242%
2000
SWEDEN
15
FINLAND
30
15
IN €BN
FINLAND
NUMBER OF COUNTRIES
18
<0%
0% - 2%
2% - 4%
4% - 9%
>9%
DENMARK
35
66%
2002
POPULATION GROWTH
2005-2014
transaction volumes hit record in 2014
Source: PATRIZIA, PMA
Finland had the highest foreign investment as a percentage of all the Nordic countries,’ said Smith. ‘The idea of
it being risky is nonsense: if anything, the perception of
risk being high means that there are more opportunities,’ said Palmgren.
The Nordics are also a case study of how situations perceived as negative can be turned around to offer an advantage. Norway is a case in point: the steep fall in the oil
price is already having an impact on the economy, even
if it remains to be seen how it will translate to the real
estate sector. Yet the slowdown is a cloud with a silver
lining, said Palmgren: ‘As a value-add manager we see
interesting opportunities in the oil price falling. Twelve
months ago Norway was not a target market for us, but
now it is because of the higher returns it offers.’ Some
investors are expecting returns of 17%.
The cold weather is another factor usually regarded as a
negative, yet it is helping the logistics sector boom. In a region with a big and growing technology sector, companies need space for
investment briefings
data centres and, as computers need
at mipim
cooling, they prefer the cold climates
10 March | Amsterdam
of the Nordics. According to Catella’s
11 March | Global capital flows
Smith, Facebook, Microsoft, Google
12 March | Student housing
and many others have all taken big
12 March | Logistics roundtable
lettings in the Nordics. ‘It is cheaper
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and colder so it meets their needs and
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it makes perfect sense,’ he said.
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