Strategies targeting defensive Nordic retail and residential assets reap rewards, writes Shayla Walmsley.
According to a survey published this week by Union investment, 80% of German, French and UK real estate investors expect activity to concentrate in northern European markets, including the Nordics.
Just this week, Aberdeen Asset Management announced the first close of a fund targeting prime residential assets, raising €115m from institutional investors, while Denmark’s Nordic Real Estate Partners (NREP) said it had secured €121m for its food-anchored Nordic retail fund, including commitments from Danish pension funds JØP (lawyers and economists) and PBU (early-learning teachers), and German insurer Talanx Group.
Both funds are seeking to appeal to investors’ current risk-aversion. The Aberdeen vehicle will employ a “conservative investment strategy” to acquire “high quality” residential, while NREP’s is targeting the highly defensive necessity-retail sector.
NREP is targeting returns of 12-13%, predominantly through income generation but also with some capital appreciation, from food-anchored retail assets in Nordic cities with strong demographic outlooks. The strategy was described by NREP’s CEO Mikkel Bülow-Lehnsby as a “focused value-add investment approach”, although investor relations manager Gustaf Lilliehöök admits concern at “value-add” implying a downside risk that does not apply.
The two principal risks facing the investors in the funds are associated with pricing and what might be termed macro-over-optimism. One impact of the Nordic region’s safe-haven status - as in other markets less affected by the crisis - will be to sustain high prices through greater weight of capital. But as Union Investment spokesman Fabian Hellbusch points out, rents could go down slightly.
Pricing in the prime Nordic property markets does not suggest a bubble (yet), but it does mean investors have to be selective. NREP, for example, will forego big-ticket regional shopping centres and high street assets sought by overseas investors in favour of the “necessity-anchored segment”. Lilliehöök says: “If you know what you’re doing, there is an attractive risk-adjusted return opportunity with low downside risk.”
Aberdeen fund manager Fredrik Eliasson acknowledges that Scandinavian markets are becoming more competitive, but says his fund will be able to deploy capital within 24 months, partly because it is also targeting niche residential as student accommodation and nursing homes.
“Pricing is probably one of the key challenges, but since our investment vehicle and our investors have a realistic view on this, and therefore also reasonable return requirements, we should be able to match this,” he says.
The Nordic funds do have to their advantage an ability to raise financing from banks, an attractive proposition when you consider that 62% of respondents in Union Investment’s survey expected a new credit crunch.
Eliasson says the low-risk and moderate use of leverage in the Aberdeen fund will make it possible to gain favourable debt financing terms from the banks. “This contributes to a low cost of capital for us, which is essential in this business,” he says.
Lilliehöök acknowledges that pension funds would ordinarily have preferred lower gearing than the 50% cap on the Nordic retail fund. But he points to an “extremely favourable” loan facility agreement with Danish mortgage bank Nycredit in what is, after all, an attractively priced mortgage market. It could be argued that pension funds should accept upper-range gearing in this fund while still stipulating lower leverage in others.
A significant minority (37%) of those polled by Union Investment believe Sweden will emerge stronger from the financial crisis. Yet the euro-zone accounts for 70% of Sweden’s exports - a pretty stark statistic given its export-driven growth. Finance minister Anders Borg earlier this month warned investors against tagging the krona currency as a haven from the euro. The IMF had already indicated the Swedish economy, though “structurally sound”, was up against weakened growth momentum. Meanwhile, Denmark is facing low or absent growth in exports and consumer spending, as well as rising unemployment.
Investors seeking sanctuary in Nordic property markets could end up disappointed. If this does happen, it is unlikely to be because they chose the wrong Nordic strategy but rather the wider confidence in the region’s safe haven status was unfounded.