Shopping in New Markets
Key Messages
Oslo offices and Helsinki logistics deliver the best total return of 11-12%
Oslo offices may see the best capital growth at 10.4%
Offices across the region may face yield compression. The lowest yield at 3.00% is in Helsinki followed by 3.15% in Sweden
Logistics yields may compress further except for Oslo, where yields will remain relatively flat this year at 4.75%
The Nordic region is increasingly attracting foreign capital from international investors who wish to diversify geographically. Domestic investment is beginning to ease, opening up opportunities for foreign investors who like the liquidity associated with the Nordic real estate. A big issue for investors will be sourcing product. Although the pipeline is healthy over 2020-2024 forecast period, investors may have to look in non-traditional locations for it.
Oslo prime total returns of 14.1% is the strongest in the Nordics and in Europe as a whole in 2020. It drops back over the rest of the forecast to be in line with other Nordics and will be overtaken by Stockholm (5.4%) in 2024. Stockholm’s market returns are likely to be prove stronger on balance over the period than returns for prime. This reflects the lack of supply to buy (and occupy) in core locations. The ongoing creation of new markets areas is attracting the attention of investor and occupier alike.
The principal contribution to 2020 return is strong capital growth. Both Stockholm and Oslo are likely to see prime capital growth stay positive over the period unlike Copenhagen and Helsinki. Office yields across the region have been trending downwards largely driven by the ultra-low interest rates. Prime yields may continue to compress over the first half the forecast period of 2020 to 2024 before expanding towards the end. Stockholm may eventually displace Helsinki as the Nordics’ lowest yielding market at 3% by 2024.
Record low vacancy rates continue to constrain the market. Yet rental growth is expected to taper off. Stockholm’s real estate market is the first to turn as our forecasts show prime rents decelerating from an average just over 9% over the past five years to approximately 3% pa over 2020-24. We expect the rental gap between Stockholm and other Nordic cities to narrow over the forecast period
Logistics assets across the Nordics are in high demand and short supply. The sector may maintain an attractive yield spread, and demand is reflected in the yield compression we expect across the region for 2020. The Nordic market with the highest prime total return in 2020 is Helsinki (12%), followed by Stockholm with a total return of 11.2%. Returns remain front loaded and will taper off by 2024. This reflects fall off in capital values that turn negative in many Nordic markets.
Modern warehouses feature highly on investors buy lists, driving an increase in speculative flexible logistics facilities. The demand is so strong the developers are confident these will be snapped up quickly. Yet the volume means it is unlikely to translate into solid rental growth that post 2020 is likely to stay flat.
The region is not immune to the restructuring trend in retail witnessed across Europe. Strongest return occur in Copenhagen in 2020 at 6.7% followed by Stockholm at 4.7%. Returns stay positive across the period because of income growth (capital growth is mostly negative).
While many believe the region lags behind other key cities, development is happening fast. SoffaDirekt is an e-tailer is embracing the change and has opened unmanned showrooms open 24/7. These smart stores are opening across the region. Retailer experimentation is helping keep rental growth low but positive overall in the core at between 1% and 2% over the forecast period.
Risk to the Forecast
A slowdown in the real estate investment market due to investor perceptions of overpricing remains a risk
Although most Nordics have trading exposure to China and the US, presenting a downside risk to occupational markets, domestic demand is stable and will help
The longer term impact of the UK Brexit deal on trade flows is also a potential risk to the economy
Sukhdeep Dhillon