A sound economic footing has attracted cross-border capital to Sweden, but local institutional investors are still active. Pirkko Juntunen reports
The Swedish property market has attracted the most international investor interest compared to its Nordic neighbours in recent years, but high prices, low yields and tighter financing are risks that investors need to take into consideration.
Sweden is the largest market and its sound economic fundamentals, together with transparency and ease of doing business has played in its favour. Prime locations and core assets are still the most attractive both to foreign and domestic investors. Because of the limited stock there are few properties on the market as investors search for long-term income.
Håvard Bjorå, Nordic director at IPD, says the low yields and lack of supply makes the market more difficult than before. “The competition from local players is tough and it is price driven to the extreme.”
Johan Bernström, head of investment at Savills in Stockholm, says the strong Swedish currency has also slowed interest in the Swedish market from international buyers, but expects to see increased business within the next six months. “Our economy is strong with low interest rates and there is liquidity and transparency in the market,” he says. “Sweden is important as a diversifier and we are seeing international buyers coming in as long-term investors, not just on a short-term, opportunistic basis.”
Grosvenor Fund Management is one of a few international players that have recently entered the Swedish market. It opened an office in Stockholm at the beginning of the year and has acquired four assets and signed a fifth.
Giles Wintle, managing director for continental Europe, says Grosvenor Fund Management is focusing on creating sustainable cash flows and growing them over time. As such, it tends to invest in retail in town centres. In Sweden the focus has been on in-town shopping centres. “We start with selecting our preferred towns based on a number of factors, notably GDP per head and growth prospects,” he says. “We like Sweden because we find good wealth distribution, meaning that there are a number of pockets of wealth not just in Stockholm but elsewhere around the country, allowing us to have a diverse approach.”
Wintle says that Grosvenor Fund Management likes to invest where people live, work and shop, mentioning the southern city of Malmö as an example. He also cites the ease of access, transparency and professional advisors as traits that make Sweden an interesting market. “Depending on your strategy, there is not necessarily a lot of competition. While there is a lot of interest in prime Stockholm assets, if you are willing to spend some time to learn about the rest of the country, it is easier to find value.”
Wintle also notes that the Swedish retail market is interesting because it has not yet attracted as many international retailers as other European countries, mainly because it has its own strong retail-brands such as H&M. It will be interesting to watch it develop.
Most of the large Swedish institutional investors continue to be direct investors in their domestic markets and while some, such as the country’s buffer funds have created joint venture vehicles for international investments, the majority is happy to stay on Swedish shores.
However, some Swedish institutions like diversification when they allocate to real estate, according to Stefan Cornelissen, head of institutional business Benelux and Nordic at M&G. “This can mean blending domestic, regional and some of the better euro-zone assets. It can also mean allocating to the growth story that is Asian real estate and, increasingly, playing real estate lender and providing commercial mortgages to other real estate buyers,” he says. “Institutions are tending to find any of these strategies can provide more effective risk-adjusted returns when compared to domestic real estate alone.”
Vasakronan, jointly owned by the country’s state pension funds AP1, AP2, AP3 and AP4, is one of the leading property companies in Sweden. It focuses on Sweden’s major growth regions: Stockholm, Uppsala, Gothenburg, Malmö and Lund. It owns and manages 199 properties with a total area of approximately 2,600,000sqm. Many of the properties are situated in clusters and offer supplementary services to the tenants. The property portfolio is valued at SEK83.3bn.
Fredrik Wirdenius, CEO of Vasakronan, said the Swedish market shows a clear division between prime locations in large cities, where there is great demand, and the rest of the market which has very much come to a halt. “The spread between what is good and what is bad is growing. The three largest city areas are standing out as excellent with growth potential,” he says.
International competition is growing in Sweden but many view Swedish real estate as expensive and low-yielding. “The risk in the region is that you pay too much,” says Stefan Wundrak, director of property research at Henderson Global Investors. “And once safe havens are no longer needed, the question is if the premium will disappear.”
Wirdenius concurs, saying that, while many international investors like the environment and fundamentals, investing in Sweden does not pay enough, but has seen the likes of Grosvenor Fund Management and some German and US investors entering the market. The increasing international competition does not make Wirdenius want to look abroad. “We have enough to do at home and there are always opportunities. In fact, the first half of 2012 was the most active we have ever been,” he adds.
Vasakronan has not made any major acquisitions but has continuously improved its stock and added to its assets in Gothenburg and Malmö while selling some in Stockholm. “The outlook is positive in general, but the office space will be tough as demand outweighs supply,” Wirdenius says. “But the rental market there is stable. There are some signs for weaker consumption, which has a negative effect on the retail sector. We are very selective in our approach as the risks in the sector are increasing.” He cites a couple of high profile bankruptcies in the Swedish home electronics sector.
Another major domestic investor is AMF Fastigheter, part of AMF, the pension and insurance provider. AMF has total assets of SEK326bn with 11.9% invested in real estate, which returned 2.3% for the first half of 2012. AMF’s real estate portfolio totals SEK38bn which includes its part ownership of Rikshem, a residential property company.
It has some 33 assets, with the majority in Stockholm and fewer in Gothenburg. Most, or 74%, is invested in the office sector, 20% in retail and restaurants, and the remainder in other areas.
Mats Hederos, CEO of AMF Fastigheter, said that a new trend has emerged in the market over the past couple of years: increased interest in public real estate, such as hospitals, prisons, schools and care homes for the elderly. ”Here we have safe and secure counterparties in the government and local authorities with good returns,” he says.
Another sector in focus is inner city shopping where urbanisation is leading to growth in the largest cities, Hederos says. He agrees with Wirdenius that the outlook is bifurcated with a stark difference between what works and what does not. ”Competition for prime and top class assets is tough with high demand for properties suitable for institutional investors.”
AMF Fastigheter is also taking into consideration the increasing popularity of online shopping and the growing practice of working from home, and the effects these are having on the retail and office sectors. “Online shopping is a clear trend but we still need more studies to see the clear effects,” Hederos says. “Working from home seems to have an opposite trend with particularly young professionals wanting to meet up and connect – not necessarily in the traditional office environment but in cafés and other areas available for socialising.”