Nordic retail has performed well, and there are good opportunities to redevelop town centres and buy mis-priced assets. Håkan Blixt reports
The economic disruption during the global financial crisis of the past two years has created a divergence in the risk-returns on various property sectors in many countries across Europe and elsewhere. Such disturbances also create opportunities, some of the most tantalising of which can be found in the Nordic retail sector.
Any investor in retail property would naturally fear that the economic downturn would have hit consumer demand quite hard. While it would be absurd to say there has been no impact in the region it has in fact been less severe than in many other countries.
For example, luxury brands are not as prevalent in the Nordic region as in some other western countries and a tendency towards consumer staples has meant total retail sales in the region have proved to be quite robust, even to the point of displaying overall positive growth in the past year. The impact of the downturn has largely been limited to larger ticket items. The general belief is that consumers put off buying larger goods such as TVs and sofas, and while they are eating out less, they continue to buy food, clothes and other basic goods in ever increasing quantities.
The political and economic backdrop is also supportive of the retail sector. Nordic governments have been quick to respond to the crisis and disposable income, especially in Sweden, has increased over the past year because of tax cuts and lower interest rates.
The Nordic region's industrial base has weathered the downturn quite well, giving further support to consumers. The economy is dominated by large domestic companies in the manufacturing and forest products industries. Although many of these have seen a reduction in business over the past year or so they have still managed to deliver positive results, although not without making some redundancies.
One concern in the Nordic region, as elsewhere, is the rising unemployment rate. Unemployment is roughly 8-9% and is forecast to reach 10-11% in 2010 and 2011. But what is particularly supportive of the retail sector is that unemployment has increased much less in and around the cities, where retail outlets are concentrated.
The financial system too has helped to support the economy. With the exception of Denmark, the banking sector remains quite healthy. Danish banks were exposed to sub-prime assets in the US and they also tend to be relatively small, meaning they had less capacity to write off bad debts. But generally, Nordic banks' conservative lending over the past three or four years has proved to be a success. Some Swedish banks did invest in the Baltic republics, which have suffered badly in the downturn, but they appear to have resolved many of the issues that resulted.
So, given the supportive background for retail, where do the opportunities lie? The two markets offering most potential for retail property investment are Sweden and Finland. Denmark's retail sector has been hit hard by the economic downturn and some stores have gone into bankruptcy. Big national brands are struggling. A further limiting factor is that it is difficult for non-domestic investors to operate in Denmark. This goes for Norway, too.
Nevertheless, there are plenty of opportunities in Sweden and Finland. But it is important to recognise that there are key differences between these two markets. In Sweden, out-of-town shopping parks have been developed extensively over the past 15 years, whereas in Finland shops are concentrated in urban centres.
Historically, Sweden's shops were found only in town and city centres. The majority of these centres were developed in the 1950s and 1960s when a lot of the smaller cities were created. When the modern retail park concept arose people went to them rather than go into the urban centres, which lost the leading brand outlets and became outdated. Retail parks are commonplace now outside all medium-sized to large cities. However, this means there is a significant opportunity to once again increase the attractiveness and presence of high street shopping by redeveloping the urban centres. With the right management and some refurbishment there are opportunities to get shoppers back from the out-of-town retail parks.
Finland is behind Sweden in terms of the shopping experience and it does not offer retail shopping parks. But this means that the opportunity is there to develop them. Location is crucial and a back-to-basics approach is required. But if we can pinpoint shopping centres that have been mismanaged and are in need of refurbishment then there are good opportunities, provided the current asset owners recognise they have to sell at discounts.
Retail assets in Sweden and Finland currently offer steady, reliable long-term yields of 6.75% to 7% on good-quality assets. With the right approach investors can build rental income rather than just yield compression. Even so, yield compression down to 6% or 6.25% is certainly possible.
Lease agreements generally in the Nordic states also rise in line with inflation on an annual basis. This situation is negotiable and is not set in law but it is general practice, with at least 95% or more of all commercial leases in Sweden and Finland linked to the consumer price index.
Risk can also be controlled in the retail sector more easily than in other sectors. It is possible to monitor how tenants are doing just by visiting premises as well as reviewing retail sales figures generally. One can also identify a downturn in the early stages and react if necessary. But with regards to offices or warehouses it is more difficult to analyse how individual companies are doing.
The market generally has mispriced retail assets in the Nordic region. There are many opportunities to buy good-quality assets with strong tenant covenants at attractive prices. But investors should be aware that it is also possible to buy bad properties that are overpriced. The key is to know the market. The retail sector has been a very good investment in the past and is well placed for the future to grow from strength to strength.