It was only two years ago when at a PERE Nordics roundtable a participant attributed the robustness of the Nordics real estate market during the covid-19 pandemic to “its reputation as a safe haven.”

Its strength can still be demonstrated by several fundraises this year. These include NREP’s €3.65 billion NSF V, the biggest Nordics private real estate fund ever raised – as well as the largest European value-add real estate fund – and Areim’s Fund V, for which the Helsinki-based manager raised over €877 million and is its largest fund to date.

The days of the Nordics as a safe haven, however, are numbered. As recent headlines will attest, Sweden’s property market – the largest in the region by volume – is beset with challenges unthinkable only two years ago.

As interest rates have risen, real estate investment activity in the country has plummeted over the last 12 months, according to a blog post this week from MSCI Real Assets. Just $13.6 billion was invested in Swedish commercial property in the 12 months ended March 2023, representing less than half the transaction volume of the prior 12 months, the data provider revealed. Moreover, a mere $1.3 billion was deployed in Q1 2023, marking the lowest deal volume in the country since Q4 2009.

In addition to higher rates, a widening bid-ask spread was also partly to blame for transaction activity slowing down, according to MSCI. The gap between the price expectations of buyers and sellers for Swedish office properties, for example, had reached 25 percent at the end of the first quarter, the firm added.

Meanwhile, Swedish listed property firms have come under pressure from rising rates to offload assets, which have subsequently been scooped up by firms such as NREP, Blackstone and Brookfield over the past year. Such transactions have drawn comparisons to value-add and opportunistic investors buying into distressed situations in troubled markets like Spain and Ireland during the aftermath of the global financial crisis.

Sweden has also shown that banking sector troubles – and the potential implications for the real estate lending market – is not a US-only issue. In a March report, the International Monetary Fund noted that “the Swedish banking system is large and highly exposed to both residential and commercial real estate” and identified this exposure as a systemic risk to the country’s financial system.  Banking sector assets, after all, represented around 300 percent of Sweden’s GDP at year-end 2021, the report stated.

But some investors already had reservations about investing in the region even before Sweden’s property market woes became headline news. Among five global investors on a panel at PERE Europe last month, only two were active in the Nordics.

One of those two investors, Karim Habra, head of Europe and co-head of Asia-Pacific at Ivanhoé Cambridge, pointed out how the real estate subsidiary of the Caisse de dépôt et placement du Québec has struggled to invest in the region because “it’s a difficult market to access if you don’t have a team on the ground.” Ivanhoé Cambridge has opted to have on-the-ground teams in Paris, London and Germany – the largest real estate markets in Europe – and to instead invest in the Nordics through local operating partners and fund managers, he explained.

Of course, troubled property markets rarely remain that way. Indeed, Spain and Ireland have much healthier real estate markets today than they did prior to the GFC. Sweden could rebound in a similar way. However, that possibility will not prevent the Nordics from losing its safe-haven reputation. Once that is lost, it will not be easy to restore.