The Nordic economies have generally outperformed those in the rest of Europe historically, and this has been particularly marked in the last business cycle from the mid 1990s.
With the possible exception in the short term of Denmark, this outperformance is expected to continue in the future, albeit at a reduced rate. Indeed Sweden is set to be in the strongest position of the four countries in the next four to five years, as table 1 indicates.
The consistent outperformance has come about due to a concentration on high quality, high value goods. Consequently the Nordic region is now one of the wealthiest in Europe.
Over the last five years, Swedish GDP growth has been nearly double that of Europe as a whole, while an inflation rate of 1.2% is nearly one percentage point below the European average.
The Swedish economy is well diversified yet is extremely strong in high technology manufacturing and knowledge-based services. Presently, the economy is in a bullish mood, US recessionary fears notwithstanding, and the major confidence indicators show a high level of optimism.
Sweden is also witnessing a strong revival in the retail sector, on the back of five years of above average European consumer spending, which is expected to continue solidly into the future, with above 3% growth recorded for 2007.
Looking to the public sector side of the economy, Sweden now runs with a generally healthy government surplus and has a relatively low debt ratio.
The Swedish property market in Europe
Sweden's property institutions were early investors in direct real estate, and by the 1980s the country's insurers, pension and mutual funds were some of Europe's largest players in this sector. This early expertise has continued to evolve and today Sweden in a Nordic and indeed global context has a property investment market size that punches well above its weight in comparison to its European neighbours, as the IPD data in table 2 indicates.
Transparency is also very high, and this together with the burgeoning economy in the early part of this decade set the scene for rapid penetration of the country's investment market by international investors. German open-ended funds sweeping up prime real estate in Stockholm were in the vanguard of this, followed rapidly by US private equity and opportunity funds targeting portfolios across the country, which were then intensively asset managed by local partners.
Around a fifth of Sweden's population lives in Stockholm, accounting for around a quarter of its GDP. The majority of the populace works in the services sector, which accounts for around 85% of jobs in the capital. In 2004, 10 new companies per 1,000 inhabitants were started in Stockholm, explaining why a third of them are working in companies with just 149 employees. This reflects Sweden's own leading position in the formation of MSME's (micro, small and medium sized enterprises) per capita population (63.2) compared with the EU 15 average (55.5).
Stockholm is also one of the most competitive metropolitan regions in Europe according to the OECD, thanks to sophisticated capabilities in research and development, advanced business and specialised high growth and high-tech sectors. One of the world's leading ICT clusters is situated in the Stockholm suburb of Kista.
In income and consumption terms, Stockholm also reflects Sweden's status as one of Europe's most prosperous nations and its GDP per capita is the highest across the Nordic region and two-thirds above the EU 27 average.
The Stockholm property market
Healthy demand for office space has been recorded across Stockholm, with take-up in 2007 reaching 590,000m2 - a record year - supported by employment growth of around 3% in the business services sector. As a consequence, vacancy rates have continued to fall across all segments of the market.
Rental growth for prime space has remained positive, although there are signs that growth may have reached its peak in the current cycle with office rents rising by an annualised 10.3% in Q4, slightly lower than earlier in the year. Rental growth has also been recorded in secondary space, with rental levels of SEK3,000/m2/year. up 20% since the start of the year.
Healthy demand for warehousing combined with an ongoing aversion to speculative development has maintained low vacancy rates for warehousing space across the market. Prime rents in Stockholm moved up slightly during 2007, particularly for smaller units.
The investment market has been very active in Sweden and in particular Stockholm through 2007. Cross-border investment has remained strong, although, in common with the rest of Europe, the departure of the highly leveraged funds could depress volumes in 2008. Indeed, the final quarter of 2007 has seen prime office yields in Stockholm move out by 25bp, with secondary yields also showing a similar outward shift. Prime warehousing yields in Stockholm similarly softened by 25bp in the final quarter of 2007.
The combination of softening yields but healthy demand and rental growth in the occupier markets has led to cooling property performance; JLL has recorded gross returns of 8.4% in the office market, and prime warehousing achieved slightly lower returns of around 7%.
The fund manager's view
Our investment activity has been a conscious decision to exploit the deep and active occupier markets across the Stockholm region, underpinned by one of Europe's most dynamic economies and not least to take advantage of attractive property yields in a European context. Average ingoing yields have been at 7-7.5% and rental growth has already started to boost performance.
The combination of these factors together with the economic outlook for the next few years continues to provide a compelling story for real estate fund management and Valad's institutional and fund of funds investors who have backed the fund and its investment strategy to date.
David Seddon is chief investment officer, Europe, at Teesland IOG