With transaction volumes in Finland and Denmark on course to reach record highs this year, near-term growth momentum in Nordic real estate is expected to remain healthy.
According to Dr Tero Lehtonen, Head of Research at JLL Finland, the Finnish real estate market will post the highest ever transaction volume this year totalling eight to nine billion euros (US$9-11 billion) – about 4.6 billion euros higher than volumes generated in 2016.
The record-breaking estimate for 2017 is driven partly by two large transactions—the sale of Sponda Oyj and Logicor. U.S.-based Blackstone investment fund recently announced that it would acquire Finnish company Sponda Oyj for 3.8 billion euros (1.76 billion euros in equity) while also agreeing to sell logistics operator Logicor to China Investment Corporation for 12.25 billion euros.
Optimism in the real estate market stems from the country’s strong economic growth as well as its stable political environment and, in the near future, JLL estimates that Finland’s annual transaction volumes will stabilise around four to five billion euros, which is above the historical average.
After several years of sluggish growth, Finland’s economy is among the fastest-growing in Western Europe currently, and investors have taken the opportunity to invest as growth momentum remains strong, according to Lehtonen. Finland also benefits from being the only Nordic country in the Eurozone. “This is seen as positive by both investors and occupiers,” says Lehtonen, citing the decision by Nordea Bank to relocate its headquarters from Stockholm to Helsinki.
Shift in overseas interest in Finland
Foreign buyers have mainly focused on potential investments in Helsinki’s metropolitan areas, and interest has shifted from the traditional asset classes of offices, retail and logistics to healthcare and residential, says Lehtonen. The number of domestic property funds has also grown, and these funds prefer to invest in smaller properties around growing university cities. On the other hand, local pension funds have sold several secondary portfolios and tend to seek investments only in the biggest cities as well as through joint ventures outside of Finland.”
“Even though yields in Finland are historically at their lowest levels ever, pricing remains attractive vis-à-vis most Western European countries,” says Lehtonen.
With strong consumer confidence and growing employment, the outlook for the retail market is also positive, although rental values are currently tenant-friendly, particularly for larger units, due to the development of new shopping centres.
Elsewhere, Denmark is also expected to post record commercial real estate transaction volumes. Investment volume is projected to reach Danish Krone (DKK) 80 billion (US$13 billion) this year, compared with DKK 64 billion in 2016.
The share of international investors entering the Danish market rose in the first half of 2017 compared with 2016 and, according to Peter Winter from Sadolin & Albæk, a partner company of JLL in Denmark, the market is impacted by the appetite for large-volume single properties and property portfolios from this international capital.
“Danish investors also tend to be more risk averse highlighted by the share of value-add investment rising from 13 percent in 2016 to 49 percent in the first half year of 2017,” he says.
Strong but somewhat cautious in Stockholm
According to Gustaf Lettstrom from JLL’s research team in EMEA, transactions in Stockholm are estimated to reach SEK 150 billion (US$19 billion) in 2017, in line with volumes in 2014 and 2015, but lower than the SEK 210 billion posted in 2016. “The market is still very strong but there’s a somewhat slower pace of growth compared with the previous year and the exceptional high investment volume,” he explains.
Stockholm is still the fourth largest real estate market in Europe by transaction volume, and by far the most liquid market among the Nordic countries.
Relatively good access to capital, low interest rates and a lack of alternative investments will continue to drive demand for Swedish commercial real estate, Lettstrom adds.
Although Swedish banks have become more restrictive in their lending policies, the country’s real estate companies tend to seek alternative financing in the debt capital markets space.
According to Lettstrom, international investors regard the country as a safe haven, and the share of international capital entering the Swedish market has increased.
“Historically the office and residential sectors have seen the strongest growth but now we are seeing increasing demand for logistics and community service assets with strong tenants and long leases.”
However, strong e-commerce growth is seen dampening expansion in the retail sector.
“2017 will mark the 20th year of positive growth for the industry, and we see signs of a cooling market,” he adds. “Retail investors have become more cautious, probably highly affected by the development of e-commerce. As a result, we’re likely to see a sharper focus on core-properties with high street and full-service shopping centers that offer retail alongside other services remaining strong.”
Active Norwegian funds
In Norway, top-tier properties in the capital city of Oslo continue to attract solid international interest while other cities see much lower interest. “The Norwegian funds and overseas closed-ended funds are buying all over the country, as are property companies,” says Ragnar Eggen at Akershus, a JLL partner company in Oslo. In the retail sector, e-commerce is growing rapidly, which bodes well for investment in warehouse, storage and logistics assets.
With regards to intra-capital flows, Lettstrom cites greater movements of capital within the region, especially between Sweden and Norway. “Norway has always invested in Sweden, but the Swedish market is foremost driven by domestic investors although interest outside of the country has increased in recent years.”
“Swedish investors probably find current yields too low and the competition too strong. At the same time, they see growth opportunities in regions outside of their home country. Sweden’s CBD office yield is now at a record low of 3.5 percent.”
Click here to read more about commercial real estate investment in EMEA