MAGAZINE: Caution drives investors to Nordic safe haven as cycle nears end

Investors are playing it safe and turning to stable destinations in Europe as concerns about a market slowdown and geopolitical volatility mount.

The first month of 2019 has carried on where 2018 left off, with no discernible let-up in the flow of investment capital. Despite the prevailing sense that the market is in the late stage of the economic cycle and the volatile geopolitical climate, the appetite for major real estate transactions remains strong. A survey of 150 professionals by Union Investment found that while 41% expected market conditions to deteriorate over the coming year, the majority were prepared to accept a lower return for the same level of risk.

For the time being at least, confidence in the health of the global economy is strong enough to allay any concerns about a slowdown. There are signs, however, that the mood is becoming more cautious as investors gravitate towards safer destinations. One beneficiary of this trend has been the Nordic markets, where a number of major transactions took place in January. The largest was a property swap deal involving a total of €484 mln of office assets between two domestic investors, Castellum and Lilium, which saw Castellum divest the last of the assets in northern Sweden that it inherited when it bought out Norrporten in 2016. The company bought six properties in Linköping for €160 mln from Lilium, a smaller regional player, while the latter significantly boosted its AUM by acquiring Castellum’s 20 offices in the northern town of Sundsvall for €324 mln.

‘It was a rational deal for both parties in terms of creating a managed portfolio,’ said Mikael Söderlundh, head of research at Pangea, which brokered the deal. ‘Property swaps often look attractive, but it’s actually both an acquisition and a sale and it’s often quite difficult to find a way through.’ Pangea’s latest research shows a strong start to the year in Sweden, with €1 bn of real estate changing hands in 19 deals in January, in the context of a total transaction volume of €2.8 bn across the Nordic region.

‘The number of transactions is not increasing but there is a lot of interest in large-sized portfolios and buying entire companies,’ said Söderlundh. ‘The volume has been driven up by the public-private and the listed sector in the last year, and that is partly being driven by international investors.’ The trend has continued into February, with German investment manager Allianz Real Estate and CBRE Global Investment Partners teaming up to buy a portfolio of eight logistics assets in Sweden and Denmark from Norwegian alternative assets manager Ness Risan & Partners (NRP) for €390 mln.

Krone devaluation
Sweden’s appeal to global investors has been magnified by the depreciation of the Krone during 2018. The SEK ended the year 4.5% lower against the euro and 8.9% down on the dollar. At its low point in August it was 14.5% below its peak dollar value at the start of February. That partly explains why Sweden, in contrast to the major European markets, has seen an influx of American investment capital. ‘It’s a combination of American investors like Starwood and Blackstone having a very good track record and history in the Nordics,’ said Söderlundh. ‘But the Nordics are also taking market share from, for example, the UK. In general volumes have dropped in Europe and increased in the Nordics, so we could be seeing a flight to safety.’

After Sweden, Norway was the second most active Nordic market in January, with 23 deals worth a combined value of €0.8 bn. The largest single transaction was the sale of the Raufoss Industripark, a logistics facility with around 238,000 m2 of leasable space, by HIG Capital to an NRP syndicate for NOK1.8 bn (€185 mln). International investors are relatively less prominent in Norway, according to Söderlundh, accounting for around 20% of volume on the purchasing side compared to more like 40% in the other countries, but overall all four nations are solid performers. ‘Over time the level of cross-border transactions should be high in a well-functioning property market like the Nordics,’ he said.

‘Growth is coming down globally and there is some uncertainty regarding geopolitical events such as Brexit, while the Nordic market looks very safe. It’s a typical core market.’
Safety appears to be the watchword across the core markets, where investors are prepared to pay a premium for properties in prime locations. In Madrid, Blackstone sold five office buildings to Zurich Insurance for €163.5 mln. The US investment bank was also involved in the UK’s biggest office deal of the month, the €329 mln sale of Sanctuary Buildings in London to Hana Financial Group and Kiwoon Securities. The sale represents a substantial return on investment for Blackstone, which bought the property in 2014 for €201 mln, while for the buyers the 4.2% yield was balanced by the presence of a secure tenant in the form of the Department for Education.

Record low yields
Eri Mitsostergiou, director of European research at Savills, said offices in central business districts will continue to be in high demand, despite average yields in Europe reaching a record low of 3.65% in the third quarter of 2013. Low vacancy rates – down to 3% in Stockholm and just 1.4% in Berlin – will drive up rents, while a shortage of stock is squeezing prices. ‘This product will remain a top pick in 2019, especially for risk adverse strategies,’ said Mitsostergiu. However, there were signs in January of investors adopting a more diverse approach, with a number of major deals in alternative types of long-term investment.

In the UK, Octopus Healthcare acquired seven care homes across the country for €124 mln, bringing its total senior housing portfolio to 26 properties. Student housing is another product seen as ‘crisis-resilient’, as student numbers are not impacted by recessions and demand is far outstripping supply. According to a study by StudentMarketing, there are only enough beds in purpose-built accommodation (PBSA) for 15% of students across the continent. Octopus Property secured a €41 mln loan in February to finance a PBSA scheme in Coventry, while Legal and General purchased a student residence let to Christ Church College, Oxford for the same amount. In Paris, Brookfield acquired a 1200-bed facility at the Saclay Campus from Harrison Street Real Estate for an undisclosed fee.

The growth of e-commerce is continuing to drive the logistics sector, with Tritax Big Box REIT forward funding a distribution centre for Amazon in northern England for €163 mln, while its sister company, Tritax EuroBox, bought a newbuild warehouse in Lodz, Poland, for €55 mln. The latter reflects a gross initial yield of 5.8%. Development sites are also proving popular, with Panattoni Europe acquiring a site in Poland’s Silesia region to build a 68,000 m2 facility for a planned investment of €61 mln. Goodman Group bought a 3.85 ha site at Park Royal, London for a reported €80 mln in February, marking a record price for UK land. ‘Infill locations such as Park Royal are experiencing strong demand from our customers,’ said Charles Crossland, managing director of Goodman UK.

Residential demand
The turn of the year has also seen a revival of interest in the residential sector in several markets. In Germany Instone Real Estate secured three development projects in Potsdam, Hanover and Norderstedt with a projected sales volume of €265 mln in what the company described as an ‘exciting market environment’. STAM Europe has launched a dedicated residential property fund focusing on family-sized homes in Paris, citing the attractiveness of a ‘resilient asset class… which has not sustained the inflation occurred by the price per m2 of offices.’

Mikael Söderlundh said the ‘sudden interest in residential properties in Sweden’ has been a striking development in the Nordics, as international players such as Blackstone move in to a sector that has been dominated by domestic players. Last year saw a battle between Vonovia and Starwood for Victoria Park AB, which ended with the giant German landlord buying up Starwood’s stake in the Swedish company. ‘The rental market in Sweden is regulated so it’s generally low rents in the existing stock, providing interesting opportunities for an active investor,’ said Söderlundh. ‘Yields are low but it’s very secure cash flows, like no vacancy at all, very long queues and there has been an undersupply of rentals for many years.’


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