Shopping malls are the latest target for AMF Fastigheter. CEO Mats Hederos tells Pirkko Juntunen why he believes Swedish real estate offers good value, as concerns about overheating subside

Mats Hederos, CEO of AMF Fastigheter, the real estate arm of AMF Pension, one of the largest pension providers in Sweden, is a busy man. Over the past year he has acquired three shopping malls in Stockholm, as well as refurbishing another shopping space, MOOD Stockholm.

MOOD Stockholm, which opened in March, is AMF's second-largest investment. "It is a 100% equity investment for AMF, demonstrating our confidence in the Stockholm retail market," says Hederos.

These acquisitions are part of the company's strategy to become a significant player in the market by building critical mass. AMF Fastigheter has continuously added prime Stockholm city-centre stock to its retail portfolio, which already includes Gallerian in Stockholm city centre, and another in Gothenburg, the second-largest city in Sweden.

AMF Fastigheter's direct-owned properties are concentrated in the two cities, focusing on office and retail space with a total value of SEK37.5bn (€4.2bn), including Rikshem, a housing specialist. As of April 2011, AMF Fastigheter owns 50% of Rikshem, with the other half owned by AP4, one of Sweden's national buffer funds. Rikshem's property portfolio has assets of SEK14bn.

Apart from housing, Rikshem also invests in public real estate such as care homes for the elderly, which fit well with long-term investors such as pension providers. Although AMF Fastigheter is usually the sole direct owner, it is keen to work with long-term partners such as AP4. The ambition is to increase Rikshem's stock to SEK20-25bn, says Hederos.

AMF Pension's strategic plan is to further increase its exposure to property investment in all segments from approximately 10% to 15% by the end of 2015 - it has already increased from 7% in 2011.

Hederos is expecting to continue focusing on Sweden and Stockholm. He is quick to point out that AMF is never active for the sake of being active, but the pension provider's domestic focus is in line with its strategy, and the opportunities make for good investments.

The co-operation with Rikshem is currently the only such project and there are not any others in the pipeline, Hederos says. "AMF Fastigheter won't look into any foreign investment projects as we only operate in the markets we know well. The Swedish and Stockholm property market has such a high potential that in our view no further geographical diversification is necessary."

AMF Pension has SEK372bn in assets and most assets are managed in-house as part of its long-term investment philosophy, with concentrated portfolios in liquid asset classes. The concentrated portfolios require in-depth company knowledge, a prerequisite for in-house management. In accordance with this philosophy the property portfolio is also concentrated in Stockholm and other growth regions of Sweden. The strategy has proved its mettle in turbulent times and the overall portfolio returned 2.4% in 2011 and generated 8% per annum over 15 years.

AMF Fastigheter also gets involved in projects where it builds and develops existing sites if it cannot find new sites to develop to the correct price, as its project MOOD Stockholm shows. "We don't want to just buy buildings, we also want to do something innovative and significant with them," Hederos says.

AMF Pension's property portfolio returned 9% in 2011, compared with 10.2% for the total return of the Swedish property market, according to the IPD Sweden Annual Property Index. The strongest-performing sector was retail, with a total return of 10.7%, and the weakest sector was residential, with a total return of 7.8%. The total return for 2011 was in line with the previous year but slightly higher than the long-term average, which over the past 15 years has been 9.1%. It has been a turbulent period for the property market, with capital values declining in five out of 15 years, according to IPD.

Compared with other asset classes, property outperformed both Swedish equities and property equities, with total returns of -13.5% and -10.7%, respectively. However, owing to falling interest rates, bonds performed strongly and achieved a total return of 13.3% in 2011. Offices in Stockholm CBD outperformed all other segments, with a total return of 12.3%. Low vacancy rates and strong rental growth in central parts of Stockholm has contributed to the strong capital growth. Offices in central Stockholm performed better than peripheral offices both over the long and short term. However, the best-performing office segment over 10 and 15 years was Gothenburg.

The sound economic fundamentals of Sweden and other Nordic countries, compared with some Southern European countries, have attracted increased interest from international investors.

Grosvenor Fund Management (GFM), for instance, recently reinforced its presence in the Nordic markets having acquired four assets in Sweden for itself and two major institutional investors. With a new office in Stockholm, GFM is on the lookout for further opportunities in the region.

Speaking to IP Real Estate in October last year, Hederos observed that there were some signs of overheating in the Swedish market. However, these concerns have not materialised as the market has adjusted to the ‘new normal'.

Hederos says the outlook is more balanced. "People have become accustomed to the situation and the optimism is more measured than before. People have learnt how to act within the new environment of lower expectations," he says. "Things can still change fast but compared with a year ago, things are moving faster in terms of renting out space a lot more quickly."

Hederos continues to see interest from other large domestic players as well as international interest in Swedish property. "Sweden, and specifically Stockholm, are in my view very stable markets with a lot of potential, as Stockholm is continuously growing, so there is an increased demand for more retail, living space and transport," he says.

AMF has looked at international real estate but refrained from investing so far because of the lack of transparency in some cases, as well as the loss of control. AMF is not only a financial investor but also operates the properties it invests in. Hederos believes part of AMF's success is that it manages its properties in-house and its long-term ownership strategy appeals to tenants.

"We believe that operational responsibility for a building is the key to success. High standards of property management are crucial," he says.