Sweden lowered the Nordic real estate market in 2022
Sten Thorup Kristensen
The Nordic property market has attracted many foreign investors in the years following the financial crisis. Here you found prosperity and stability, and thus the return on the best properties was almost as certain as the return on a bond. And precisely alternatives to bonds were needed when the interest rate was ultra-low, if not downright negative. From this point of perspective, there is also no mystery that in 2022, when interest rates skyrocketed and bonds again became a better alternative, there was a slowdown in the Nordic property market.
This slowdown is clear from a new report from Jones Lang LaSalle (JLL) and EDC International Poul Erik Bech. They calculate a total transaction volume in Denmark, Norway, Sweden and Finland of approx. 41 billion euro in 2022, which thus became the worst year since 2014 – the last year when people were still living with the after-effects of the financial crisis. The problems in the wake of the interest rate rise are not really visible in the full-year figures for Denmark. This is because many large deals were completed in the first half of the year, before the market stalled over the summer, which led to 2022 was overall one of the best years ever.
A difficult situation
In Finland, the transaction volume definitely increased in 2022, which, however, must also be seen in the light of the fact that 2021 was not as exceptionally strong here as it was in the other countries. But both Norway, and especially Sweden, drag down the overall Nordic status.
“If you only look at reported transactions, the Nordic real estate market appears to be in a reasonable place. But that is not entirely the case. The real estate market in Sweden in particular is in a difficult situation, as corporate bonds make up a significant proportion of the total financing for real estate investments,” explains Joseph Alberti, head of analysis at EDC Erhverv Poul Erik Bech.
“The interest rate on corporate bonds has skyrocketed over the past year, and the market expects significantly more bankruptcies. This makes it expensive and difficult to borrow money for companies that cannot raise capital from the bank. It is not so widespread in Denmark, but not unknown, as companies such as e.g. Gefion, Oskar Group and NPV raise money through bond issues,” he elaborates.
It is especially the many listed real estate companies in Sweden that are responsible for the downturn. According to the report, over the past four years they have been involved in 70 percent of the property dealers. But in 2022, this proportion is halved.
Low stock prices
For the Swedish companies, it is particularly painful that they have quickly felt the increase in interest rates in practice, because they have financed themselves with short-term loans a la what we know here at home as adjustable-rate loans. But listed property companies in the other countries are also challenged:
As recently as last spring, JLL calculated that the share prices corresponded to the stock market valuing the roughly 40 listed real estate companies in the Nordics at approx. 15 percent higher than the intrinsic values promised. Equity investors thus saw more value in the underlying portfolios than the companies themselves did. Today, it is the other way around. The listed real estate sector has come under pressure in the Nordics, and today trade at around 30 percent discount for a median listed real estate company – which stands in contrast with the 15 percent premiums a year ago. With such a low valuation, companies with tight financing cannot get out of their problems by issuing new shares either.
In the property market, higher funding costs are affecting all segments. A strong rental market for community service, logistics and prime office properties bodes well for these segments to mitigate, to some extent, yield requirement with higher rents. Residential rental properties are among the segments where values are under pressure also linked to lower visibility on rental growth, short term. The retail and hotel market remains under pressure with caution with regards to rental outlook, despite the already high underlying yield requirement of the properties.