Swedish institutional investors have benefited from a stable domestic real estate market, but competition for institutional grade assets is high. Pirkko Juntunen reports
With the euro-zone buckling under the weight of a southern sovereign debt crisis, the Nordic real estate markets have looked increasingly attractive to risk-averse investors. Sweden, in particular, is shaping up very favourably as a relative safe haven, with its enviable economic growth and stable public finances.
But cross-border investors bullish on Swedish real estate have to consider that the market is dominated by large domestic institutions. Sweden's state pension buffer funds have renewed their interest in real estate with several joint ventures and deals, while most pension funds in the country are looking to increase or remain at current allocation levels.
There have been some signs that Swedish institutional investors are beginning to look beyond their borders. In a recent deal, national buffer funds AP1 and AP2 created a joint real estate company, Cityhold Property, to focus on European property investments. The firm will be managed in co-operation with Stockholm-based European real estate specialist Catella, which will assist Cityhold with resources and skills over a contract spanning several years. Cityhold will focus on long-term investments in commercial property in major European cities.
But the majority of Swedish institutional investors remain focused on their home property market. Vasakronan, another real estate company owned by buffer funds (AP1, AP2, AP3 and AP4), focuses on the domestic real estate market in Sweden, as does AMF Fastigheter, the real estate arm of pension provider AMF. Both have looked at international opportunities, but have not made any moves outside their borders. In addition, both Vasakronan and AMF prefer to be large players in the markets that they operate in, and to retain control of their investments.
AMF has also looked at international real estate but refrained from investing, so far. "If we do not understand the market and if we do not have the level of control we like, we are not going to invest," says Mats Hederson, chief executive at AMF Fastigheter.
AMF is not only a financial investor but also operates the properties it invests in. Hederos says this practice was fairly unusual a few years back and AMF might have been viewed as old-fashioned for doing so. "This trend has now turned and most institutional investors want to manage the properties they own. Tenants like this and we are now considered wise for keeping the control," he says.
"In the current environment we are not looking to expand abroad. We want to be close to the action and have our own staff present. It is important for us to know what we invest in. We want to retain control of what we invest in."
Vasakronan, meanwhile, is the largest property investor in Sweden, managing 218 properties with a total area of approximately 2.8m sq.m. and a total asset value of SEK80.3bn (€537m). Many of the properties are situated in clusters and offer supplementary services to the tenants.
Fredrik Wirdenius, CEO at Vasakronan, says the focus has been to build assets and become the largest player in the market where it is active. The firm focuses on offices and large retail space such as shopping centres. "We are also active in quite a few projects where we are building and developing sites," he added.
Vasakronan is also amenable to disposing of assets in order to boost the overall quality of its portfolio. "There are not that many new projects available but there are opportunities in developing existing properties and improving the quality," Wirdenius says. The company is also keen on a smaller number of deals involving larger properties, rather than numerous small ones, he explains.
The European sovereign debt crisis and market volatility is making investors nervous and many are watching the news with trepidation, hoping that the negativity is not going to prompt tenants to downsize and affect rental interest, Wirdenus says. So far, he adds, the market is still fairly positive. Having institutional backers in the form of the AP buffer funds is positive, according to Wirdenius, since this gives Vasakronan access to financing and the stability these types of owners offer."We can also act on short notice and be anti-cyclical in our strategy," he says.
AMF and AP4 also own a joint property company, Rikshem, which changed its name from Dombron in September 2011. The residential specialist was a spin-off from Vasakronan, as part of the latter's strategy to focus exclusively on commercial real estate sectors.
Rikshem is currently valued at SEK8.5bn, but the ambition is to grow it to between SEK20bn and SEK25bn. "We want to build this to a significant player in the market and acquire critical mass, particularly in the Stockholm area," says Hederos. But he points out that this growth will only be achieved should the appropriate opportunities arise. "Everything comes down to returns," he says.
As well as traditional residential assets, Rikshem invests in public real estate assets, such as carehomes for the elderly. "These types of investments are great for long-term investors such as pension providers," Hederos adds. "It is important to find long-term projects."
Cornerstone Real Estate Advisers Europe has identified a similar appetite among Swedish institutional investors for so-called public real estate assets. "We spent some considerable time identifying what investors from Sweden were seeking, in terms of their real estate exposure following the challenging times that investors had witnessed in recent years," says Charles Weeks, co-head of business development for Europe at Cornerstone. "It soon became clear that the most important real estate attribute for most investors was a high, sustainable, inflation-linked cash flow that could match the profile of their underlying liabilities."
Having reviewed the Swedish and Nordic real estate markets, Cornerstone identified Swedish assets with the best potential. These include schools, university buildings, sports and recreational facilities, and public service (libraries, museums) and administrative (town halls, government departments) buildings. "The panacea, as far as the investors were concerned, was if these cash flows could deliver a material premium to Swedish treasury bonds, whilst anchoring the cash flows with strong credit rated tenants," Weeks says.
To some extent, the appeal of public real estate is a result of the limited volume of large-scale, institutional-grade quality assets in the mainstream commercial sectors. "Another issue for institutional investors is the lack of sizeable projects," says Peter Wiman, head of research at Savills Sweden.
Wiman says interest in Swedish real estate is strong from both domestic institutions and foreign investors, including non-Swedish Nordic investors, such as Norwegian pension provider KLP and Norway's Storebrand. Both sets of investors are attracted to the stable public finances, economic growth and market transparency, but at the same time they are investing carefully and selectively.
AMF's Hederos does admit that there are some fears that Stockholm might head for a bubble eventually but, for the time being, fundamentals appear to be still holding."Of course we have to realise that it cannot remain this good for all eternity but so far, so good," he says.