The bad news is that Nordic real estate is unlikely to repeat last year’s stellar performance as the market reaches the top of the cycle. The good news is that the heady growth seen recently will be replaced by lower but stable, solid and sustainable growth.
This was a key message for delegates at PropertyEU's Outlook 2018: Europe & Nordics Investment Briefing, which was held last week at Catella Corporate Finance’s Stockholm office.
'2018 is unlikely to be as good as 2017, which was absolutely fantastic and difficult to repeat,' said Ingemar Rindstig, executive director, real estate, Nordics, EY. 'But we see another positive and stable year for commercial property in the Nordics.'
Sweden, the biggest market in the region, has outperformed and is now poised for change. 'The Swedish property market has passed the peak of the cycle and growth rates in the office market will slow down,' said Arvid Lindquist, head of research, Catella. 'The liquidity premium you get from property will become even more important as the market turns, but underlying stable growth will keep Swedish property an attractive investment over the coming years.'
In Stockholm, prime office rents have soared 45% since 2015, driven by buoyant economic growth. 'Such a level of increase is unlikely to be sustainable, and prices now look stretched,' said Lindquist. Institutions, private and listed companies, with access to cheap funding, have all focused on the prime market and the spreads between the CBD and secondary cities have increased.
'Stockholm has seen ten years of tremendous success in the office market, there are very few hotspots in Europe where you can catch the same uplift,' said Martin Schellein, head investment management Europe, Union Investment Real Estate. 'However, I don’t see much of a pipeline for offices and the city is growing, so there is further potential for rental growth ahead, even if not as dynamic as it has been. We are still very positive about prospects for offices.'
The Stockholm Chambers of Commerce recently said the biggest obstacle to growth was the lack of supply of new offices. 'I see an opportunity to do development in this sector,' said Carl Struve, director Nordics, Grosvenor.
Locations on the fringe of the CBD could offer the best opportunities, said Schellein: 'Our strategy is to watch out for gentrification and follow the patterns in the urban fabric: in upcoming locations where house prices rise, then we know there is an emerging office market to follow.'
While the office sector has been soaring, house prices have fallen by 10% in the last six months and there is a problem of oversupply. Construction activity is set to decline as developers are postponing plans to build. 'The resi development activity we have had has been too much of a good thing,' said Rindstig.
'We expect prices to fall by 15%, but that is not the big issue,’ said Lindquist. 'The real problem is time. It will take three times as long for stock to be absorbed. Residential investments have been an important economic driver since 2014, but now we think that the halving of investment will drag down economic growth in the second half of the year by as much as 1/1.5% of GDP.'
