While most of Europe was left shell-shocked by the 2008 financial crisis, Sweden quickly rebounded, reporting 5.7% GDP growth in 2010. Performance has been strong ever since: in the past four years the country has averaged 3% GDP growth.
At the same time, Swedish house prices had been growing at breakneck speed since 2012, thanks to a growing population, high levels of immigration and urbanisation, low inflation, strong income growth and a conducive monetary policy.
Foreign investment in Swedish real estate is greater than in the other Nordic countries, pre-dating the 2008 financial crisis, and the country is widely considered to be a safe haven on this score. Total real estate transactions amounted to SKr147.5bn ($16.7bn) in 2017, 23% of which came from foreign investors, according to commercial property firm Newsec.
A housing bubble?
What goes up, must come down, however. From late 2017 onwards, house prices in Sweden saw their steepest drop since the end of 2008. In January 2018, the Swedish housing price index HOX fell 2.2% year on year, with flats in Stockholm hit the hardest with a fall of 8.6%: not surprising, given that the capital accounts for 45% of Sweden’s total real estate market.
The impact on the construction sector has been clear, with highly leveraged small to medium-sized developers’ stock falling by as much as 60%. Newsec predicts that, as a result, there will be bankruptcies, further project delays and buyer hesitancy in 2018 and 2019, while GDP growth is expected to slow but remain strong.
Although some have described this as a market crash, the consensus among Sweden’s banks and real estate CEOs is that it is more a case of market slowdown and correction, and that prices could continue to drop for a matter of months or years.
“When people talk about the housing bubble, they often forget it’s a specific part of the market relating to highly priced apartments in Stockholm,” says Ilija Batljan, CEO of Swedish property company SBB. Indeed, the ongoing housing slump is only affecting direct sales, not the letting market.
Understanding the market
One of the main causes of the so-called bubble is a mismatch over the past few years between supply and demand, according to Claes Magnus Akesson, chief financial officer at Sweden’s largest housing developer, JM. “Currently, the demand is predominantly from first-time buyers, young people or buyers with less purchasing power,” he says. “However, Stockholm has an oversupply of luxury apartments, and not enough lower to medium-income flats.”
One intentional cause of the price slump is the fiscal policy of Sweden’s Financial Supervisory Authority (FSA), especially since 2016. On two occasions, the FSA set tougher amortisation rules to allay fears surrounding what was perceived as too-easy access to mortgages – potentially leading to excess demand – and the rapid rise of house prices and debt.
Mr Batljan contends that the government mistimed its latest mortgage measure, announced in May 2017, just when prices were peaking and naturally beginning to descend. Similarly, Sweden’s minister of housing, Peter Eriksson, says he believes the government’s response was too drastic and too late. However, the FSA denies responsibility and blames the oversupply of luxury housing.
“When prices are going up, somebody says: ‘This can’t go on, I’ll get out before it ends.’ So it’s self-fulfilling,” says Tomas Hermansson, CEO of real estate company Bonnier Fastigheter. “The newspapers start to write about it and that drives uncertainty.” So too does geopolitics, especially rising interest rates in the US.
Window of opportunity
But does the bubble present an opportunity for investors interested in Stockholm? “There’s been a shortage of options because everyone has been wanting to buy, and suddenly this window is opening up,” says Mr Hermansson. “Prices are going down now by as much as 20% to 30%, but there’ll be a big uptake in the longer term.”
Most foreign investment in Swedish property is through the stock market, where there are 28 listed real estate companies. “Most of the residential developers have seen their share price fall by 50% on average. So this is definitely a big opportunity,” says Mr Akesson.
Opportunities abound in light of the huge demand for more affordable apartments in Stockholm, caused partially by the aforementioned oversupply of luxury housing. However, Mr Akesson says he has not seen many foreign investors developing or buying lower to average-priced apartments to sell. “Developments are always a bigger risk, and foreigners don’t understand the planning process as well, the local context and language. But it’s just a matter of time before opportunistic investors come,” he says.
Despite most Swedes speaking English, the rules around building in Sweden have been hard to access in other languages. “We are now starting translation, beginning with English,” says Mr Eriksson. Similarly, local investment promotion agency Invest Stockholm is hosting courses for foreign investors to guide them through the market and the planning process. The agency advises that first-time foreign investors should work with local companies.
As one the fastest growing cities in Europe, economically and demographically, Stockholm's need for more housing is widely acknowledged. For decades, the capital had a population growth of 20,000 per year, while new production averaged 6000 units. However, over the past four years population growth has risen to 40,000 per year, while new production has risen to 15,000 units a year, according to Mr Akesson. “Considering an average of two people per home, there’s been a widening gap [for decades],” he adds.
The demand for affordable housing has risen due to Sweden’s increasingly young population and large inflow of immigrants. The shortage is exacerbated by tax legislation that is preventing older people from selling off their houses and bigger apartments because their profits are taxed.
In response to the shortage, Sweden’s government has committed to building 340,000 dwellings in the Stockholm region by 2030, worth a total of $63bn. This is Sweden’s largest housing push since the so-called Million Programme of the 1960s, which was twice the size. However, with Stockholm’s population expected to grow by about 850,000 by 2030, will the housing programme be enough, especially in light of the existing deficit?
“We don’t have enough companies here to reach our [340,000] target,” says Soren Pettersson, who works with Invest Stockholm. “We’ve got the four big real estate companies who are up to their necks with work. If we’re going to succeed, we need foreign companies to help double the pace”.
Of note is the fact that Sweden is building a new high-speed train line, called East Link, which will better connect the capital to its surroundings and significantly cut the journey time to and from Stockholm’s satellite towns. Thus, East Link will increase the size of Stockholm as a living area.
Betting on letting
Another consequence of the shortage in affordable housing is increased demand for rentals. To get a rental, “you have to wait between five and 20 years. The average age of [adults] still living at home is 27,” says Biljana Pehrsson, CEO of real estate company Kungsleden. There are just over 6000 vacant rental apartments in all of Sweden, which amounts to a little over 0.2% of total housing stock.
In light of the huge demand, Mr Batljan believes that “rental residentials are the best opportunity for foreign investors in Sweden, [especially in Stockholm]”. This is why Blackstone bought a large share of listed rental residential company D Carnegie in late 2016, .
Mr Akesson agrees: “Rental residentials have been good assets over the years. They are very liquid, although there’s municipality regulation on how much rent could be charged.”
Mr Batljan’s top tip is to “rent after refurbishing efficiently”, which he says can offer a yield on cost of 7% or 8%. He also recommends investing in the new market for community service properties – schools, homes for the elderly, hospitals – which is open for private investors and is considered low risk with good returns.
It should be noted that many, if not most, people in Sweden buy apartments in a co-op, an economic association where the buyers form a board. It is very unusual for such boards to approve subletting, which explains why Sweden does not have much of a buy-to-let market.
The commercial story
Sweden’s commercial property segment is far removed from the drama surrounding the bubble. As a very stable market, Stockholm is one of the leading European and global locations for multinational corporations locating their headquarters. Home to Swedish companies such as Spotify, the capital has a thriving tech scene and start-up economy, which is why Stockholm’s most common occupation is a programmer.
Over the past decade, the country’s robust economic growth has attracted ever more companies, and therefore led to growing demand for commercial space. However, supply of office space has been limited. This is partly the result of strict regulations regarding obtaining building permits. Mr Eriksson, the minister of housing, agrees that the planning process takes too long, but says: “We have addressed this, not least by digitising the process a lot.”
The office segment’s market share fell from 30% to 18% of total volume in 2017, leaving residential as the largest segment with 26%, according to Newsec. Nevertheless, demand for office space is still very high, rents are rising, and in Stockholm’s central business district the vacancy rate is 2%, and below 5% in the inner city according to Newsec.
Retail properties made up 18% of the transaction volume in 2017, similar to previous years. However, as in many countries, e-commerce is a problem for the retail market. Nevertheless, large retail players are expected to keep expanding their stores, albeit to increase visibility rather than sales.
The government has recently proposed raising taxation on commercial property transactions, something which Mr Hermansson says “may have scared investors off – but it shouldn’t be too bad”. Under the proposal, a new general limitation on the right of interest expense deduction may be introduced for negative net interest.
Other potential disruptors are the 2018 general elections and the gradual increase in Swedish interest rates – following the global trend – expected to begin in mid-2018. Moreover, Newsec warns that the cost of building has risen at a unprecedented rate since 2013, but that this trend is showing signs of correcting itself since the housing bubble.
Most importantly, Swedish fundamentals are very firm. Sweden remains a safe haven from political uncertainty in Europe and elsewhere. Moreover, Sweden boasts market transparency, very low interest rates, a strong, highly digitised economy and ranks highly in ease of doing business rankings. “The Swedish krona is at one of its lowest levels – hence our very high exports – so for foreign investment this lowers prices by 30% or more,” says Mr Eriksson.