Firm Foundations
by Sukhdeep Dhillon
The Best in 2019
Stockholm offices delivers the best total return of 10%
Copenhagen logistics has the best capital growth at 4.2%
Helsinki offices has the lowest yield at 3.40%
Oslo offices will offer the best rental growth at 5.58%
The Nordic commercial real estate market continues to benefit from favourable macroeconomic conditions providing a 'firm foundation' for real estate occupation and investment. Sector wise, offices will remain under pressure from undersupply in the CBD areas, which in turn is focusing attention on attractive submarkets. The retail and logistics sectors are undergoing structural changes, the former contracting and the latter expanding with the shift to e-commerce.
Though offices are the preferred asset class for investors in the Nordics, they are not the strongest sector in terms of total returns. Outcomes though, will continue to be positive in both the prime segment and market as a whole. The best performing office market in 2019 will be Stockholm (5.9%), also the strongest over the 2019--2023 forecast period (5.2% pa). Stockholm ‘s market total returns are even more robust; double-digit in 2019 (11.4%) and 6.3% pa for the remaining years of the forecast.
Stable income growth underpins these returns as capital growth falls away towards the end of the forecast period; by 2022 all Nordics markets will see some negative capital growth. Office yields are expected to expand gradually over the five-year forecast, with Helsinki continuing to have the lowest yield at 3.75% by 2023.
One thing common across the region is the lack of high-quality office space, particularly in CBD areas, which is pushing both investors and occupiers to surrounding submarkets. With this dynamic, office rental growth is projected to stay positive, with Helsinki and Stockholm posting the strongest prime rental growth on average at 2.6% pa from 2019 to 2023. Partly because of the low space issue, we are expecting market average rents in Stockholm to do better at 5.5% pa over the forecast period.
Logistics
Logistics is the most successful sector in the Nordics for prime total returns, and the strongest prime returns on average in the region will be posted recorded by Copenhagen at 6.4% pa over 2019-2023.
The logistics sector will benefit from vigorous investor demand, attracted by higher returns driven by secure income. Capital growth in the sector turns negative towards the end of the forecast and is low across the entire period. Investor interest is still robust enough to see one more year of yield compression in 2019 before decompression occurs. In many markets, logistics rents are likely to stay low (below 1% pa) over the 2019-2023 forecast.
The Nordic market with the highest prime total return in 2019 is Helsinki (5.96%). It is predicted to strengthen towards the end of the forecast, resulting in an average of 5.2% pa, the best in the region for 2019-2023. In this sector, a wide variation of outcomes for capital growth will be occur with Oslo seeing decline of -1.4% pa on average and Copenhagen growth of 1.0% pa.
Investors are becoming more selective in retail, which means we expect yields will expand across the region by 40 bps on average. Rental growth will ease in the retail sector, because of the equally selective approach by retailers to acquiring physical space. Retailer caution stems out of the Nordics developing one of the most sophisticated e-commerce offers in Europe. We anticipate that the leading rental growth will come from Stockholm at 3.1% pa over the forecast period.
Risk to the Forecast
A slowdown in the real estate investment market due to investor perceptions of overpricing poses a risk
Even so, the Nordics remain an attractive option for investors as the fundamentals indicate the region will remain prosperous
Although most Nordics have trading exposure, presenting a downside risk to occupational markets, domestic demand is stable and government debt across the region is heading down