'Consider currency effect on Nordic allocations'

The optimal portfolio allocation in the Nordics can differ depending on whether a cross-border investor comes from the dollar, sterling or euro zones.

Many cross-border investors talk about having an allocation to the Nordic region, without realising that this involves an allocation to up to four different currencies, Marcus Cieleback, head of research at Patrizia Immobilien, said.

Cieleback was speaking during the opening presentation entitled 'The Nordics: four countries, four currencies' at PropertyEU's latest Investment Briefing on the region. The event was hosted by CBRE in London on 27 March.

Patrizia's research chief said investment returns in Norway and Sweden tend to be more volatile for cross-border investors due to currency fluctuations. Norwegian and Swedish krone currencies tend to move in the same way in terms of exchange rate fluctuations, because the policies of the central banks of both countries are aligned.

The central banks follow their own path in terms of raising and lowering interest rates which can deviate from the policies of the European Central Bank and the Bank of England.

Eurozone investors have de facto no currency risk in Denmark as the Danish krone is tied to the euro via Exchange Rate Mechanism II, Cieleback noted. Similarly, Finland is in the eurozone.

All the panellists at the briefing agreed that monitoring developments in the currency markets and having a hedging strategy is a core component of investment in the Nordic countries.

Cieleback argued that returns - and more crucially, volatility - exhibit different patterns when considering currency risks.

'Many investors say they are only interested in direct property and don't care about the currency element, either going in unhedged or they may have hedging overlaying all their investments in property, stocks etc,' he said.

Cieleback said it was not enough for investors in unhedged investments to look only at the respective markets when deciding on their optimal strategy.

He noted that an analysis of historic mean total returns would suggest currency has a 'shift effect.. 'But if you look at volatility the picture gets a lot messier,' he said.

'Using the Sharpe ratio - how much return you get for a unit of risk - it is a very different picture depending on the currencies you are coming into the market with.'

Cieleback said that based on a Sharpe Ratio analysis, eurozone and local investors can get the best return for the lowest risk from Finnish residential property (61%). Danish and Finnish retail could also be good options for eurozone investors.

Sterling investors looking to build a risk-averse portfolio would, according to the Sharpe analysis, go for Swedish residential (55%) and Norwegian offices (21%).

Dollar investors would be best advised to put 100% in Finnish residential.

The presentation is linked below. The risk-adverse portfolio allocation is on page 14.

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