The Nordic country is heading for property investment records, but it’s a nuanced picture for financing overall as lenders remain measured in their approach. Doug Morrison reports.
These are heady days for the property industry in Sweden, making the most of a healthy economy and presiding over a market that is destined for an all-time high investment volume.
According to the latest figures from Savills, investment turnover totalled SEK134 billion (€14 billion; $15 billion) in the first three quarters of 2016, setting the market – led by the office and residential sectors – on course this year to surpass the previous peak in 2008.
Domestic institutions dominate, although there is talk now of Sweden, and the Nordics generally, joining Germany as a new safe haven for global investors currently put off by the uncertainty swirling around real estate in the post-Brexit UK.
“It’s a combination of stable political climate and strong public finances in most of the Nordic countries. If you look at the macro indicators, the Nordics look quite good,” says Peter Wiman, head of research at Savills in Sweden.
Behind the headline numbers, however, a more nuanced market emerges. The main reason for the exceptionally high volume was the SEK22 billion acquisition by the listed Swedish giant Castellum of the privately held Norrporten group. Castellum’s deal aside, the investment volume for the nine months to September was still 7 percent higher than the same period in 2015.
Savills’s research also reveals that Sweden exhibits a familiar trait among European markets – a shortage of available prime stock. This was reflected in an average deal size of SEK331 million – 27 percent higher than the 10-year average – but an 8 percent fall in the number of transactions. The supply/demand dynamics therefore have also contributed to historically low yields across all sectors and cities. Prime offices in Stockholm, for instance, are yielding 3.75 percent compared with 4 percent a year ago. Safe haven or not, such yield compression may well mean Sweden is too pricey for some foreign investors.
“Sweden has always been high on the target list of any of the investors from Europe and all parts of the world,” says Wiman. “But they have been struggling to buy assets in competition with Swedish pension funds. A lot of them hedge the currency, and if you assume a currency peg costs 25 basis points, that makes all the difference at such a low [property] yield level.”
Sweden exhibits another common European real estate characteristic – the abundance of equity capital offset by a more restricted supply of debt finance. In the latest edition of the Swedish Catella Real Estate Debt Indicator, property companies’ average loan-to-value (LTV) has increased slightly to 54.7 percent while their average interest rate has fallen to 2.6 percent. Catella points out, too, that Sweden’s listed property companies have outperformed the wider stock market. But the research, based on a survey of property companies and banks, indicates that the property debt financing market is in contraction, despite the outperformance and investors’ evident enthusiasm for Swedish real estate.
At the same time, Savills’s research highlights the fact that listed property companies issued SEK10.3 billion of bonds during the first three quarters of 2016 – already surpassing the SEK8.2 billion yearly average for the past four years. “The Swedish banks are still quite restrictive in their lending. But on the other side, it’s a lot healthier than 2007 – LTVs are at modest levels,” says Wiman. “This is one of the reasons why the bond market is booming because a lot of property owners look at bond financing as a way to increase financial leverage.”
Thomas Due, head of real estate lending at Stockholm-based Nordea, one of the leading pan-Nordic players, suggests that the relatively subdued direct lending environment reflects a region at an advanced stage in the property cycle. “All Nordic markets have experienced declining yields for some years, as well as interest levels. The downside risk is therefore potentially higher,” he says. “We have seen that the LTV levels have been reduced from previously 60-75 percent to 50-65 percent. Both lenders and borrowers seem to aim for this reduction.”
Due adds: “Nordea has remained with a stable portfolio through 2016, and we expect almost the same for 2017. The present commercial real estate lending volume is approximately €30 billion. But the capital requirement for a bank is high for this segment, and we are therefore focused on sufficient risk-adjusted profitability.”
In some respects, the lending climate reflects a wider cautionary policy among European lenders. In its latest European Lending Trends research, Cushman & Wakefield (C&W) says the overall volume of new loan originations was down across Europe in the past six months, in part due to the uncertainty over Brexit.
The outlook is positive, however, with 80 percent of the 50 major lenders surveyed by C&W expecting loan originations to be the same, or increase, compared with the past six months, rising to over 90 percent for refinancing. And yet C&W asserts that Sweden may see little of this upswing in lending by the pan-European debt providers. “The trend towards lending by geography has also not changed,” says Edward Daubeney, director EMEA structured finance at C&W. “We see more lending in Central and Eastern Europe and Italy, mostly at the expense of the Nordic countries.”
Nordea’s Thomas Due concurs. He also believes foreign investors buying Nordic assets prefer to go to local banks for their financing. “We see very few foreign lenders following their clients to the Nordics. Real estate financing is a local business, and a bank needs the necessary knowledge about geography, market trends, supply/demand,” he says.
By contrast, two major German lenders very clearly see the Nordics as a platform for growth. German landesbank Helaba has been active in Nordic real estate markets for a decade, and in September formally opened a representative office in Stockholm. “Our aim is to further expand our business with local and international investors in this attractive market for commercial real estate financing transactions,” says Herbert Hans Grüntker, Helaba’s CEO.
In an equally significant move that month, Allianz Real Estate completed its first debt transaction in Sweden with a SEK690 million loan to Dutch group Eurocommercial Properties for the refinancing of a shopping centre in Karlstad.
According to Arvid Lindqvist, Catella’s head of research, the mixed signals among investors and lenders can be explained by Sweden’s economy, property and credit markets reaching “an inflection point”. Lindqvist argues that the direct property investment market lags the credit market by about 12 months and though 2016 will see record volumes, the underlying trend will be down next year. And though the economy is expected to grow by 3.3 percent in 2016, a slowdown in growth is also forecast next year.
“We will see policy rates bottom out at low levels while GDP growth slows down,” he says. “We think the prime market will remain low yielding but spreads will increase between A, B and C locations during the first half of 2017 because the selling pressure will increase on the secondary markets, and that is why average yields will increase.”
As Lindqvist argues, it will be “a mild and short-lived correction” and, if anything, the higher yields will mean Sweden remains “highly interesting” to global investors.