A long-time magnet for foreign capital, Sweden has dominated Nordic real estate for decades and still represents 45% of the regional market transaction volume. However, in 2015, heads turned after Oslo received NKr15bn ($1.87bn) of real estate foreign investment, a whopping 40% of Norway’s market share and equal to the past 10 years of foreign capital into the country’s real estate market. Since then, overseas investment has contributed to about 25% of Norway’s total transaction volume, which in turn represents 25% of the Nordic volume.

The starting gun was fired when Starwood Capital and Blackstone took a big bite of Norwegian real estate in late 2014 and early 2015, buying multi-billion-krone portfolios. A deluge of foreign interest followed.


An oil slump bonus?

This dramatic entry can be attributed, in part, to Norway’s oil downturn in 2014, which saw the krone depreciate by 39% against the euro, thereby making the country significantly cheaper for foreigners.

However, international investors began looking to Norway before the oil price decline, according to Jo Gullhaugen from eal estate company Union. “Investors were more attracted by yields, population growth, ease of doing business, and other fundamentals such as the strong fiscal position of the Norwegian state,” he says.

The hunt for yields has pushed investors beyond London, Paris and central Europe’s crowded real estate markets, blighted by political uncertainty. Norway’s fresh and safe market started to look like an attractive proposition.

Sheltered Oslo

Norway’s onshore economy is robust. Indeed, only 1% of GDP relates to oil, meaning the country is well protected from volatility and cushioned by a vast sovereign wealth fund that is used to stimulate the economy yearly, and more so during crises.

Thus, although the downturn hit Norway’s oil-rich west coast hard, Oslo was largely spared. Indeed, unemployment actually decreased and, when interest rates were cut to mitigate the slump, Oslo’s housing prices increased.

Concerned about a growing housing bubble, the government introduced restrictions on mortgages and loans in 2017. Subsequently, Oslo saw a sharp 10% drop in housing prices since their peak in September 2017. The past two months have seen prices stabilise and increase slightly as the market has corrected.

With the boom over and house prices expected to rise by 2% annually, the dying bubble is not a foreign investment opportunity, according to Erik Bruce of Nordea Bank. Besides, foreign investment in Norway’s residential market is very rare, he adds: unlike in Sweden, residentials are not a large asset class because 90% of Norwegians own their own home, meaning the letting market is small.

Thus, for large international investors, the opportunities are not big enough. However, smaller companies willing to take time building critical mass could benefit, especially since the krone is still weak. Indeed, John Solberg, head of property company CBRE Norway, believes Oslo’s residential opportunities have been neglected by investors, and that foreigners should select local partners and enter the lucrative developers’ market, which is likely to offer strong returns for several years.

Moreover, with the oil downturn and housing bubble in the past, the macroeconomic picture for Norway is looking good. GDP growth is forecast at 2% for 2018 according to the IMF. Unemployment is below 4% in Oslo. The greater Oslo metropolitan area, with 1.3 million inhabitants, is expected to grow by 1.3% in 2018.

Commercial hot spot

Commercial turnover hit €8bn in 2017, according to data from Pangea Research. Foreign investment in Norway has almost exclusively focused on commercial real estate, mostly through direct single-asset transactions. Madison International and the Carlyle Group were the frontrunners for single-asset transactions, and others followed suit because returns are good, according to Christian Müller of law firm Thommessen.

There are only three Norwegian listed companies in real estate because most are financially independent and privately held due to incentives that reduce Norwegian’s taxable fortune. As a result, the stock market is less attractive for foreign investors.

However, unlike in Sweden, a big chunk of Norway’s market use syndicates funds such as Pareto Securities: single-purpose vehicles – essentially, private equity – that buy individual ready-built assets by facilitating and raising capital from private investors. Foreign investors are welcome to enter these structures, becoming indirect players, like everyone else, but beneficiaries of local expertise. Foreign investors such as HIG Capital have used syndicates to buy an industrial park, among other assets.

Although Oslo has an unusually high amount of city-centre development, many commercial opportunities exists just outside the centre in areas such as Okern. However, Mr Solberg says French real estate giant Klépierre is struggling in Okern because demand for shopping malls has fallen in Oslo.

Commercial trajectory

Since 2015 it has been relatively easy to make money in Oslo’s commercial property market due to yield compression and high demand. Prime yields today stand at 3.75% and vacancy rates in greater Oslo are at 6%, and lower in the central business district.

With an interest rate hike expected in mid-2018, some fear that yields will soften and rise, pushing real estate values down. While yields may initially follow interest rates upwards, Mr Müller expects these to be balanced by rent increases, CPI inflation adjustment and continued strong demand and availability of capital.

Mr Gullhaugen says: “I don’t think we’ll see a further decline of yields in Oslo – I believe they’ve flattened out already and are at their bottom level. Prime yield may increase to 4% within the next 12 to 18 months, primarily driven by higher interest rates. Overall, we think the market is sound.”

Local firm Pangea Property Partners takes a more negative view of Oslo which, in terms of return on investment for prime offices, is the most expensive of the Nordic capitals. “Investors looking at Oslo’s offices need to have a case based on rental growth or higher inflation CPI,” says CEO Bard Bjolgerud.

Rental upside for prime offices in Oslo is between 10% and 15%, as in Stockholm’s central business district. However, the cost of renting an office in the latter is roughly double that of Oslo. But while Norway is an interesting and low-risk market, it remains outside the EU and has a local currency that makes it more expensive to hedge.

Moreover, Oslo is a maturing market and some people lag. “Being so rich and therefore picky, Oslo was quite a closed market, historically,” says Mr Solberg. “Local favoritism was very evident, but now you only see traces of it.”