Domestic institutions dominate Norway’s real estate markets but are looking globally. Pirkko Juntunen reports

Norway’s enviable economic growth, financial stability and strong backdrop make it an attractive investment, not least in the commercial real estate sector.

OECD research shows GDP growth of 3.7% for 2012 and unemployment as low as 3%, a dream for most European countries. In addition, consumption is on the up and house prices are increasing as population growth, combined with limited stock, further boosts the sector. In addition, Norway’s oil wealth gives it more financial freedom to manoeuvre, lower interest rates and govern its own finances.

According to research from DNB Næringsmegling, the commercial real estate arm of the banking and financial services group, rental income in the office sector continues to be high despite some 280,000sqm of new office space in the greater Oslo area and another 170,000 expected in the next year. Vacancies in the sector are also falling as office employment in general is increasing and because a large part of older office space has been converted for residential use. In addition, the tragic events of 22 July 2011 have led to significant relocations, taking a large chunk out of the available space. The relocations are, however, temporary, which will in the long run boost availability.

Bjørn-Erik Anderssen, director of research and valuation at DNB Næringsmegling, the real estate arm of DNB Nor, says transactions in the future will be affected by the more stringent capital adequacy requirements under Basel III, but transaction volumes will continue to grow in the near future. “Last year we saw transactions worth NOK36bn, but expect 2012 to be in the range of NOK40-45bn,” he says.

In the first half of 2012, there have been 60 transactions over NOK50m with 60% coming from the greater Oslo area.

Despite the glowing economic backdrop, foreign investors are yet to invest in any significant numbers, as some local processes have made it a seemingly difficult market to enter. In addition, financing is tough everywhere and is likely to remain so for some time.

There is growing evidence that financing is moving away from traditional banks to the bond markets. However, the Norwegian bond market remains small and only the most highly rated investors with prime real estate will be able to take this route. Anders Berggren, CEO of Storebrand Eiendom, the real estate arm of the insurance and pension provider, believes that, while interest from foreign investors has been muted, a gradual increase is likely in the coming years. “I believe the real estate sector is the right way to play the macro story. Our economy will inevitably attract outside investors,” he says. 

Other issues that may have made foreign investors reluctant are the lack of liquidity in the market, currency risk and an unfamiliar bidding process. “International organisations are more used to several steps in the bidding process, whereas in Norway it is a quicker process without conditional bids and final bids,” Berggren says.

Rebuking the notion that the Norwegian real estate market is a members-only club, he says Storebrand would welcome competition. “We, and I presume most other players as well, would welcome foreign capital.”

Storebrand, like many of the other large domestic investors, is mainly focused on the Norwegian real estate market as well as Sweden, through its subsidiary SPP. “We have an efficient home market and direct investment is also tax-efficient,” he said.

DNB also invests directly in Norway and Sweden but has a substantial allocation in international real estate via funds. Andersen agreed that international investors are likely to become more common as they see Norway as a diversification as well as a long-term growth.

There are some large domestic players that invest abroad, most notably, of course, Government Pension Fund Global, which only invests internationally and can now invest up to 5% of its total assets into real estate. But there are others such as KLP Eiendom, part of KLP, the insurance and pensions provider. KLP has assets close to NOK300bn, of which 12% is invested in real estate with a target of 14%. Gunnar Gjørtz, CEO of KLP Eiendom, says the main focus is Norway, Sweden and Denmark. 

“Our investments are generally in the bigger cities with prime location and quality. We also focus on liquidity and do not invest below NOK300m for a single project, which keeps us in the larger cities.”

Gjørtz says KLP is buying property as an investor but is also interested in renovation projects. Ultimately, it wants to be the freeholder and is not interested in leasehold deals, he adds.