SWEDEN - The Central Bank of Sweden warned last week of property price volatility as institutional investors continue to plough cash into Nordic real estate.

Central bank deputy governor Lars Nyberg warned in a speech foreign investor interest in the Swedish property market could have a negative impact on Sweden’s financial stability.

"More foreign participants mean that the risks are spread to different types of investor, which is positive," he said.

"It also contributes to making the Swedish property market more liquid. At the same time, it is also conceivable that potentially negative developments in the international market could more easily spread to the Swedish market

"If, for instance, an investor were to make losses on another country’s market, it is conceivable that the investor would sell Swedish property to cover the loss. Prices could thus change quickly without any change in the underlying factors," he continued.

Overseas investors accounted for 4o% of total investment in the Swedish real estate market in 2006.

His warning echoes Finnish pension fund Fennia’s decision last year to reallocate 30% of its €600m real estate portfolio outside its domestic market.

At that time, director of real estate investment Timo Stenius cited the potential for values to "change sharply".

Nyberg’s warning came as IPD reported total regional returns on Nordic real estate of 15.6% in 2006. The return beat bonds but underperformed equities (27.9%), including real estate equities (44.8%). IPD attributed property’s five-year high 5.8% to income return and 9.3% to capital growth.

Sweden’s attractiveness in 2006 was attributable, in part, to currency movements although Denmark and Norway outperformed Sweden in local currencies - 17.8% and 17.6% respectively - while Sweden outperformed both in euros (20.9%).

Investors still continue to view Nordic real estate as an investible alternative to mature Europe, driven by healthy fundamentals which are in turn boosted by strong consumer spending.

Standard Life Investments announced last week it had acquired two retail warehouse properties for combined €35.5m for its European Property Growth Fund.

The assets, bought for €18m each, are located in Gävle and Västerås, satellite towns near the capital, Stockholm. Both are let on long leases and the fund will focus on prime properties, including in secondary cities.

Fund manager Will Fulton said the Nordic region represented "a key strategic market" for the fund, adding he was bullish about both Sweden and Finland, "especially retail".

"The fundamentals have been strong for some time, and they’re improving," said Fulton. "Swedish GDP has been upgraded, and we see growth accelerating."