A safe haven in the north

Things are lively at the main train station in Stockholm. Each day some 250,000 travellers pass through the station, which is surrounded by an abundance of restaurants, shops and service companies. The listed office building at Vasagatan 12, built in 1967 and completely modernised in 2016, is also nearby. Now named Stockholm Hub, it was recently bought by the open-ended retail real estate fund UniImmo: Global of Union Investment. By making this purchase, says Martin Schellein, Head Investment Management Europe at Union Investment Real Estate GmbH, the company took advantage of a rare opportunity “to own a first-class location in the centre of Stockholm.”

Investors are increasingly looking for opportunities of this kind. The commercial property market in the four Nordic countries experienced a transaction volume of some EUR 44 billion in 2017, nine percent above 2016 levels. International investors, not least from Germany, were also responsible for this. Deka, Patrizia, Schroder Real Estate, Savills Investment Management, Aberdeen and CBRE Global Investors are only a few of the renowned firms that have gone on a buying spree in Sweden, Finland, Denmark and Norway. And Union Investment didn’t limit itself to the office building near Stockholm’s main train station; the headquarters of the Vattenfall energy group and two other new office buildings in the up-and-coming district of Arenastaden north of the Swedish capital are now part of the investment management company’s portfolio.

Stability and transparency

From the viewpoint of investors, the big draw is the good economic trend for investments in the far north. Gross domestic product (GDP) grew in all four Nordic countries in 2017, most obviously in Sweden and Finland at about three percent. Experts predict further growth in 2018. This has been accompanied by a level of unemployment that is lower than the European average: around six percent (and falling) in Sweden in late 2017, for example.

“The Nordic property market is absolutely stable and shows little volatility,” observes Thomas Beyerle, Head of Group Research at Catella. The assessment of Marcus Cieleback, Head of Research at Patrizia Immobilien AG, is very much in line with that: “The Nordic countries,” he says, “primarily offer a stable social and economic basis.”

Amanda Welander, Head of Research at the real estate services adviser CBRE in Sweden, also mentions a “safe haven.” She sees several reasons for this: high liquidity in the market with steadily growing transaction volumes, transparent economies with low corruption and not least one of the fastest growing populations in Europe.

In fact, a list of the 12 fastest-growing urban agglomerations in Europe prepared by the UN includes three from the Nordic region: Oslo, Stockholm and Göteborg. This is not the only ranking in which the region is among the premier league. The leading group in the Dynamic Cities Index, with which Savills Investment Management (Savills IM) analyses cities across Europe, includes Stockholm (8th place), Oslo (13th place) and Copenhagen (19th place). And the Global Talent Competitiveness Index, which rates the ability of 119 countries and 90 cities to attract young talent, puts the Nordic countries – headed by Norway – in fourth to seventh place. Based on cities, Stockholm, Oslo, Copenhagen and Helsinki are right at the top, bested only by Zurich.

Currency risk and other challenges

Catella researcher Thomas Beyerle summarises these studies in one sentence: “The Nordic countries radiate a forward-looking approach.”  However, this does not mean they are completely unproblematic for international investors. First comes currency risk, since Finland is the only Nordic country in the euro zone. Moreover, each individual market is relatively small. However, if the investment volume of all four countries is combined, CBRE concludes that they account for 15 percent of the total European market – far more than France’s share.

Yet, although the four countries have opened up to international investors over the past few years, they are still dominated by local players. Still, information from Catella indicates that the share of foreign investors increased in 2017 – although subject to major differences. The share of international investors in Finland surged to 73 percent while it was only 13 percent in Sweden. And Patrizia researcher Marcus Cieleback points out that Nordic investors dominate among foreign investors.

Another challenge is the price level. Investors haven’t had a hope of bargain prices in the Scandinavian countries for a long time now. Instead, prime yields have reached a level that is almost as low as those in European top markets. According to CBRE, at the end of 2017 prime yields for office properties were between 3.5 percent (in Sweden, Finland and Norway) and 3.85 percent (in Denmark). CBRE researcher Amanda Welander believes that property yields in core markets will be stable in 2018, while she still sees potential for yield compression in secondary locations.

Capital is flowing not only into office buildings, but also into retail properties, logistics parks and hotels. Investors in Sweden, Finland and Denmark in particular have put residential buildings at the top of their shopping lists. “Copenhagen,” explains Rikke Lykke, Managing Director Nordic Region at Patrizia, “as a capital and a flourishing economic and cultural centre, is profiting from a growing population and increased urbanisation.”  In contrast, Eva Granlund, Head of Real Estate Investment Nordic at asset manager Schroder Real Estate, describes Helsinki as an “attractive investment market that still has a lot of headroom.” 

Focus on Stockholm

Many investors are focusing on one city, Stockholm. One reason for this is that the Stockholm metropolitan area, with a population of at least 2 million, is the largest and most important economic area in the Nordic countries. Stockholm is also experiencing considerable population growth. According to the Swedish statics agency, the number of Stockholmers increased by almost one quarter (23.7 percent) between 2005 and 2017. Growth totalled 1.6 percent in 2017 alone. The one-million mark is projected to be passed in 2022; at present Stockholm is home to almost 950,000 people.

The economic trend also remains positive. “Stockholm is a good city for business and entrepreneurship,” emphasises its Social Democratic Mayor, Karin Wanngård. The number of people holding jobs subject to social security insurance increased by an impressive 30,000 between 2016 and 2017. This has also affected the office market in the Swedish capital: the vacancy rate in the Central Business District (CBD) is 2.9 percent, according to analysts at Cushman & Wakefield, and peak rents are equivalent to about EUR 60 per square meter per month.

Rents in the Swedish capital are the third-highest in Europe, after London and Paris. It is also noteworthy that Stockholm and Amsterdam are the only European cities that experienced rising rents both during the decade before the financial market crisis (1998-2007) and the decade thereafter (2008-2017). And there’s a good chance the curve is still headed upward. The amount of available office space is experiencing only moderate growth, with a mere 48,000 square meters of new space in the CBD in Stockholm coming onto the market in 2018 and 2019, according to CBRE. Experts therefore expect that rents will rise another ten percent or so between 2017 and 2021.

Attractive waterside location

It's no wonder that the city urgently needs space for more offices and apartments. The current largest urban expansion zone is on a former gasworks site north of the city, where the new Royal Seaport urban district is being created on the waterfront. A total of 12,000 apartments and space for 35,000 workers is rising there – a major project that is not scheduled for completion until 2030.

A mixed-use project that includes office, retail, residential and leisure space is taking shape in the new district of Arenastaden, also in the northern part of Stockholm – where Union Investment acquired the 17,400 square meter U7 office building from the Swedish developer Fabege in 2016. Some 6,000 apartments and 50,000 jobs will also be created in the new urban district of Hagastaden, 96 hectares in size, by 2025.

But people are looking critically at the trend for the prices of private residential properties in Sweden. Recent headlines have given the impression that housing prices are threatening to collapse, recalling the situation in Spain back in 2008. And in fact the price of owner-occupied residential property in the greater Stockholm area did decline by 8.7 percent in 2017. However, that should be put into context, stresses CBRE researcher Amanda Welander, noting that residential property has experienced a 74 percent price increase in Stockholm in the last ten years. Welander considers the possibility that a downturn in the Swedish residential sector will affect the commercial real estate market negatively to be “highly unlikely.” On the contrary, “a larger supply of residential units coming to market and a more modest price development should more likely have a positive effect as it will be easier for office employed staff to find and afford housing.”

By Christian Hunziker