Investment in Nordic real estate is heading for an all-time high in the next two years - despite the forecast of lower returns.
Newsec Advisory, the pan Nordic and Baltic firm, predicts transaction volume of €45 bn in 2020 and €50 bn in 2021, a new record.
In Newsec Property Outlook Spring 2020, the firm says the region is benefiting both from the general global enthusiasm for real estate in the face of continued lower returns from many other asset classes, and rising allocations of capital specifically targeting the Nordic region.
‘The interest in the Nordics is huge,’ head of Newsec Advisory Max Barclay told PropertyEU. ‘It is hard to measure but its a level of interest that I haven’t historically ever seen before.’
The report was able to measure the 30 largest pension funds in Scandinavia and the Baltics which alone have almost doubled their allocations to the asset class from an average 5.8% 15 years ago to 10.9% in 2019. In Sweden, the allocation has risen by as much as 165%.
‘I would say that allocation will continue to increase rather than level out. We are in an environment where we have low growth, low inflation and low interest rates; that means it is very hard to find returns in other asset classes than real estate,’ Barclay said.
International capital faces strong competition from local investors in the region, and accounted for 31% of transactions in 2019 the outlook says. Barclay said investors from Germany and Asia in particular have been prominent in the last few quarters.
Larger deal sizes and more structured transaction will continue: last year several major M&A transactions and large portfolio trades resulted in a record 42 deals over SEK 1 bn in Sweden. Swedish deals account for about half the whole Nordic regional market.
Lower average total returns in the Nordics, of 5%-7%, ‘will look a little weak compared to the historical average’ but are still generally stronger than those on the stock, bond and other alternative markets’, the outlook comments.
‘So real estate looks very attractive, especially if you can buy in the right neighbourhood let to the right tenants, with long leases and a secure value and return going forward,’ added Barclay.
He sees Coronavirus adding fresh uncertainty to issues including trade wars, Brexit negotiations and lower global growth.
‘The potential threat here is that it will have severe effects on the global economy: then we will face rising unemployment, decreasing economies, and that could hurt cashflow and have a negative effect on values. But we are not thinking of a catastrophe scenario but rather that it will increase real estate’s attraction more.’
