When it comes to investment in property, the Nordics are an attractive option – regardless of whether this
is direct or indirect exposure to the asset class and the region. Over the decade ending on March 30, 2018, the Nasdaq index for the Nordic property sector had increased with
an average annual rate of 13.6% (total return). In the single largest of the Nordic markets, Sweden, the index has risen by an additional 0.3 percentage points.
And while what goes up must eventually come down, there are few signs that this will happen any time soon. The market is made of professional players with good knowhow in both property management and in finance.
Similarly, asset quality is generally high and there seems to be an insatiable demand for new space to let, in both the office and residential rental segments. Finally, the price of money – which is perhaps the most important of all inputs in the modern property industry – is expected to remain low for a long time to come.
To add to that there is a strong underlying economy, political stability and a level of corruption lower than in most countries – indeed, the Nordic economies frequently top the lists of low-corruption countries. Thus, fundamentals indicate that the region’s property industry will remain prosperous for the coming years – but of course there are challenges.
Economic fundamentals can change fast, resulting in falling demand, and interest rates could start rising more rapidly than planned. These are perhaps not improbable events but are manageable as they have a cyclical element. A riskier – and in the short term, harder to manage – event might be a sudden capital drought. The property industry by its nature is highly capital intensive and while cash-flow generation is the main objective of operation, it is important to have working channels to secure capital, both for the development of new projects but also to maintain existing property.
When Lehman Brothers collapsed and the credit crunch went from being a local to a global phenomenon, Nordic banks tightened the screws. The Nordic banking sector was highly exposed to property and from a risk management perspective it was important to reduce that exposure. As a result, the sector started steering its funding away from being almost solely provided by banks to the money market – and, more specifically, the corporate bond market.
Today, most larger Nordic property companies have a healthy presence in the bond market – some might argue that it is becoming a bit too healthy. In the Swedish money market, for example, almost half of the outstanding volume of bonds has been issued by property companies.
While most issuers are robust companies with stable cash flows and are nowhere near at risk of becoming insolvent, this has created the need for larger issuers to enter foreign markets. So far, most of the bonds denominated in foreign currencies have been issued in euros (although some companies have also entered the sterling market) and there is more supply to come.
Based on historic performance, the case for indirect exposure to Nordic properties is strong – through equities as well as funds and fixed income – and as the number of companies entering the international markets increases, the number of opportunities to invest in Nordic property markets will only grow further.
Sverrir Thór is economics and finance editor of Fastighetsnytt.