Strong demand for Nordic real estate is tempting more owners to put assets up for sale in 2017, according to Pangea Property Partners.
The weight of capital hanging over the market ensured that the region maintained a three-year run of rising investment volumes and ended 2016 on more than €43 bn of deals.
For full-year 2017, the volume may come in somewhat lower at around €36 bn, Pangea said. This would, however, be around the same level as the last boom year of 2007.
Overall the Nordic markets - Sweden, Norway, Denmark and Finland - will 'continue to perform well', Pangea says in a new report, Real Estate Outlook 2017.
The report pinpoints segments with strong rental growth, such as central offices in Stockholm and Oslo, as well as quality hotels, as 'winners', while yields will tilt upwards for secondary assets.
Vendor groups
'The strong investor demand for Nordic real estate in recent years is now combined with more sellers putting their assets for sale,' says Mikael Söderlundh, head of Research at Pangea Property Partners.
The potential vendor groups, the report says, include property funds about to reach expiry and property companies which want to streamline their portfolios by divesting non-core assets. Castellum already switched to this strategy in 2016 after its €2.7 bn acquisition of the Norrporten portfolio earlier in the year.
Other potential sellers, according to Pangea's report, are various private investors seeing good exit opportunities in the current market. In addition, there is increasing sell focus among municipalities, owner-occupiers and developers.
'Several international investors will probably also realise their profits in the Nordic markets in 2017, but there are new large global property funds, many with core and core+ profile, entering the market at the same time,' Söderlundh said.
Shrinking office stock
According to the report, there will be widening yield spreads in 2017. Secondary yields will start climbing due to higher financing costs, while prime yields will remain at a record low, pushed down by strong investor demand and rental growth.
In particular, office rents in Stockholm will continue increasing throughout 2017 and the Oslo office market will follow. 'It's quite exceptional, both cities will shrink their office stock over the next few years, while occupier demand is rising,' said Jørn Høistad, head of Research Norway at Pangea Property Partners.
The estimate for 2017-2018 is that almost 500,000 m2 of office space will be converted to other uses in Stockholm and Oslo. This substantially exceeds the new office supply of about 450,000 m2.
'The stock to be converted is from the secondary markets so it's not a one-to-one relationship, but it will certainly put further pressure on rent increases. Vacancy levels are already low,' Høistad said.
Defensive hospitality
Hotels are expected to be another winner in 2017, with strong performance in most major Nordic cities. 'Investors are gradually accepting hotels as a defensive investment offering long leases, low vacancy risk and stable cash flows,' said Bård Bjølgerud, CEO at Pangea Property Partners.
Real Estate Outlook 2017 is a new pan-Nordic research report produced by Pangea Property Partners. During the coming weeks, it will be presented to more than 80 major property investors within and outside the Nordics.
Pangea is an independent Nordic corporate finance and advisory firm.
