The ‘tough’ long-term economic effects of Covid-19 and a potential rise in office vacancy are looming risks, say Nordic investment specialists.
Participating in a five-strong panel hosted by Nordic advisory firm Newsec, Blackstone managing director Michael Swank said any second wave of the pandemic or a worsening economic dislocation could ‘start seeping into the office markets just because of the size of that asset class. Which is why it’s particularly important to invest in high-quality, resilient assets. That is a risk not just in the Nordics but across Europe.’
Jani Nokkanen, CIO of Nordic fund manager NREP, agreed: ‘Offices are the unknown and nobody knows what is going to happen,’ he said.
Swank added that he expected to see office vacancy increase over time. ‘As government programmes run out, there will be some increase. But good offices will always be good and that has always been our focus’. Buildings that are less sustainable and energy efficient, he said, ‘will struggle.’
A clear effect already being felt from the pandemic, the panel said, was the acceleration of a string of existing trends affecting real estate. ‘The digitalisation trend is one; coworking is another. Certain types of retail had been struggling for a while and the pandemic makes the problems greater. But you need to remember that other things are working,’ said Max Barclay, Newsec’s head of advisory.
Jens Henriksson, president and CEO of Swedbank, warned that there are ‘tough years ahead for the world economy’ which would affect real estate markets everywhere.
‘Economies will go through three different phases,’ he believed. ‘The first is the mitigation phase from an economic policy perspective and that’s pretty easy because what central banks and governments do is throw money at (the problem).The second phase is opening up the economy when you try to use different methods to increase investment while taking down the different mitigation effects you used before.
But, he said, we could see a long period of phases one and two repeating, with ‘mitigation-start-up; mitigation-start-up...’ The really difficult phase, he said, ‘will be phase three, namely the budget consolidation in 5, 6 or 7 years. . The key point isn’t right now but a few years’ ahead.’
Nordics a safe haven
While real estate will be affected by the macro-economic picture, the panel believed demand for the asset class and the yield it can provide will endure and investors will see the Nordics as a safe haven.
Swank said: ‘The Nordics to us have always been very attractive. It is a wealthy region, highly-educated, with economies that are some of the most stable in Europe and set to continue, strong population growth and very stable governments. From a real estate perspective the markets tend to be very liquid, transparent and easy to do business in and are welcoming to foreign investors.
‘The things that attracted us first to the Nordics are even more salient now. There is a high correlation with countries that are feeling optimistic today - I’d say the Nordic countries, the Netherlands and Germany are the clear standouts for us in Europe. We see that and a lot of other investors in Europe have seen that.
NREP’s Nokkanen and Rikke Lykke, Patrizia’s head of asset management and regional head of northern Europe & CEE, said it was important for investors to understand the differences between the countries and sectors in the Nordic region.
‘Where and how to invest depends on what kind of investor you are’, Lykke said. ‘Are you coming with euro-denominated money? These investors need to hedge and hedging is expensive. If you want to compete and you include hedging in your costs, you lose out.
‘‘On the other hand, there are also investors coming from the UK or US with other currency denominations and they are used to hedging. So that alone can influence decisions about where to invest.’
‘Within the Nordics real estate market there are differences,’ Helsinki-based Nokkanen said. ‘Just a few examples: Sweden has a very regulated residential market; Finland the most liberal in the world. Rikka earlier mentioned the different shopping behaviours; the care segment is completely different; how you use rental apartments - in Copenhagen 80% rent, in Oslo fewer than 10%.’
Debt in short supply
Participants also said that while plenty of equity is available, debt financing is less so and it is more expensive and LTVs have come down. Henriksson said banks ‘need to be careful with capital - because we do not know how long this crisis will last.’
‘‘Banking is not part of the solution for distressed assets like retail,’ Nokkanen observed. ‘The banks are just saying they are completely shut. We just started one retail project and that was not easy to finance. You need to package a lot of stuff to get any financing for retail.
‘My other worry is construction and development. It is one of the things that typically helps an economy to get back, and so that is where governments push money. The banks have been hesitant on that.’
