The cold comforts of investing in the Nordics

Increasing volumes of international capital are seeking a warm welcome in the real estate markets of the chilly Nordics.

This article was sponsored by Anvil, EQT Partners, Fokus Asset Management and NRP Asset Management; it appeared in the May 2019 issue of PERE magazine.

Photography by Göran Ekeberg

For outsiders, the Nordics can be both profoundly welcoming and decidedly forbidding. On one hand, the region is famed for its hospitality, so much so that the Danish word hygge, which might be translated as “warm and cozy,” has entered the common European vocabulary. On the other, its weather is legendarily inclement, as the terrified tourists aboard the Viking Sky cruise ship discovered when the stricken vessel was tossed by enormous waves off the Norwegian coast at the end of March. Fortunately, all escaped with their lives.

As the participants in PERE’s Nordic roundtable meet on a crisp and sunny early-April afternoon at the hosts’ Stockholm offices, the private equity firm EQT, the former tendency is far more evident than the latter. Around the table are fund and asset managers from four firms based in the region: Henrik Orrbeck, head of real estate for the Nordics at the Stockholm-headquartered firm; Nick Laird, chief executive of Oslo-based manager Anvil; Thorbjørn Pedersen, chief executive at another Norwegian firm, the investment manager NRP Asset Management; and Tonny Nielsen, founder of Copenhagen-headquartered manager Fokus Asset Management.

The warm welcome that the region and its major national real estate markets – Sweden, Norway, Denmark and Finland – have increasingly extended to international capital in recent years is the topic of conversation as the discussion gets underway.

Overseas investment

“Over the past five years, it has become more accepted that international investors will be in the Nordics,” says Fokus chief executive Nielsen. “The market has become more transparent and more professional. Sweden has always been a destination for international players, but today investors are looking as much into Denmark, Finland and, to some extent, Norway as much as they are at Sweden. Last year, foreign investors accounted for half of the volume of acquisitions in Denmark.”

Laird, founder of Oslo-headquartered Anvil, has observed the same trend. “That changed dramatically, certainly from a Norway perspective, starting five years ago with the first overseas investments at scale, and it has continued,” he says.

“Each of the individual national markets has grown significantly in terms of scale and volume, which makes it possible for big investors to get into the market and get out again,” notes NRP’s Pedersen. “Bigger investors from outside this area have more capital and are paying the best prices at the moment.”

The driver for international investment in the Nordics is global institutions’ desire to diversify their portfolios, observes EQT managing director Orrbeck: “They want real estate to diversify the equity risk in their public portfolios, as well as investments that diversify away from the real estate risk in their home markets,” he says. “There is a lot of Asian capital currently targeting Europe, and the Americans are interested in Europe because it is seen as less late cycle than the US. Within that European context, the Nordics fare extremely well.”

US capital has higher return expectations and therefore targets value-add or opportunistic strategies, while Asian investors usually prefer core assets and trophy buildings, he adds. Both Pedersen and Nielsen say they have sold assets to South Korean investors recently.

The climate in the Nordic market may be more accessible to foreign investors than it had been, but they still face challenging conditions. Domestic buyers may not be as dominant as they were, but it is still striking how much local capital is active, says Laird: “The Danish pension funds are legendary and the Swedish pension funds are dominant. For core assets, you are competing against some very well-connected local money. It is doable – we took over a core asset last week – but it is harder to execute that kind of strategy and succeed when you come to a new country that is relatively small.”

The relatively modest size of many individual assets sometime still deters large overseas investors reluctant to invest the management time in deals that will not move the needle for them, but local vendors can address the issue by building portfolios, suggests Pedersen: “If you package your assets then it is easier to find deals. There are portfolio premiums to be taken up. In February, we sold a Nordic logistics portfolio to Allianz and CBRE GIP for more than SKr4 billion ($429 million; €382 million), which I believe is the largest transaction this year. We will remain fund managers for that portfolio going forward.”

Currency is also an issue for foreign investors, particularly in Sweden and Norway, which both issue their own: the Swedish krona and Norwegian krone. “Currency is always important and hedging is expensive at the moment. Once you factor in the cost, some investors simply won’t be competitive in certain asset classes,” says Orrbeck.

Nielsen argues: “One of the benefits for Finland and Denmark is that we are euro denominated, whereas for eurozone investors in Sweden or Norway hedging costs you 1 percent of your return.”

Orrbeck counters that Sweden has its own advantages, however: “Sweden is by far the most liquid market, with a tradition of international investment, which weighs on the other side of that equation.”

Positive growth

In an era notable for political turmoil and growing economic uncertainty, the Nordic countries offer a safe harbor of comparative social and economic stability. That lies at the heart of the region’s enduring appeal for investors, argues Nielsen: “All four countries are in positive growth. Five years ago, people were saying the Nordics are a safe haven and that is still true today.”

Laird contrasts the stability of the region with the Brexit-inspired chaos in the UK. “If you go down the checklist of what real estate investors look for, the Nordics tick all the boxes: politically stable and homogenous with healthy governments, high per capita income, educated population, population growth,” he observes.

“The relative nature of the Nordics compared with the rest of Europe is important. In terms of predictability and visibility of the future, I think it is hard to beat this region. What happened yesterday is likely to happen tomorrow. I am not sure you can say that about other countries as easily. This is a great place to park money.”

Not that it is all plain sailing. Amid a generally healthy economic picture, the participants highlight the region’s shallow commercial lending market, which is controlled by a small number of large banks, as one concern: “The banks are more dominant in the Nordics than other parts of Europe and there are few alternative financing sources,” says Laird. “That changes the dynamic of what you can invest into, how high you can go on leverage, how much amortization there is on a deal.”

Norway is one of the world’s largest exporters of oil, and the slump in oil prices in 2015-17 had an impact there, says Pedersen. “Some areas are more sensitive to the oil price and therefore more volatile, so local knowledge is important if you are to select the best-performing locations. In general, though, it has been a growth market. Rents are high. Yields have come down. Where do you put your money? People really want to buy the best, but that means the yields for prime real estate get even sharper – although that is something you see in all markets, not just the Nordics.”


Each of the Nordic countries has different market dynamics, so they offer a range of possibilities for investors and managers to deploy capital. Laird notes that Finland currently seems to be “flavor of the month” among foreign investors – a trend that Nielsen suggests can be attributed to its offering higher yields than other European countries – but that in general “investors make decisions that are deal- or strategy-specific rather than picking countries.”

Perhaps unsurprisingly given its global popularity, EQT’s Orrbeck and NRP’s Pedersen both back logistics as a sector that offers the potential for growth, albeit with a slightly different emphasis. EQT has entered the urban logistics market by taking over Swedish-listed property company Stendörren, thereby gaining access to 7.75 million square feet of small warehouse units.

Orrbeck says: “We are buying smaller and simpler warehouse buildings in light industrial areas that were located outside Stockholm, but are now really inside the city because of its growth. A lot of sites of that sort have been converted to alternative uses with a higher value, so we like that there are barriers to entry in that market at the same time as demand from e-commerce users is increasing.”

NRP meanwhile has a strong focus on logistics property. “There is very limited speculative building in that sector,” says Pedersen. “The economics of operating old and new assets is very different and that creates growth as tenants move from the old type of asset to the new, so there is significant potential there.”

The participants agree that the performance of office assets in the Nordic capitals’ central business districts has been robust. In particular, Laird argues that rising rents are creating opportunities in secondary locations: “If you can guess where the value-oriented tenants are going to go, rents will usually increase there,” he says.

He is also bullish about the prospects of some of the smaller cities: “University towns like Aarhus and Uppsala have all the positives that make the Nordics attractive and a young demographic. Yields are 50-75 basis points fatter than the capitals. Of course, you need to exit, and local buyers are very crafty, but if you get in at the right price you are going to get a lot of cash-on-cash.”

There is some debate about the strength of the Nordics’ rented housing markets. Pedersen is cautious: “Residential prices have not moved upwards much for two years. The residential market is about micro-location and the types of flats you are building. If you get that right you can still make a lot of money. If you do it wrong it is very difficult.”

With prices for many assets already high, however, Nielsen likes the income-producing characteristics of homes for rent: “You cannot predict yield growth or control it so you need to play a little safer. I have a strong belief in residential and offices because of the urbanization megatrend. Niche housing types like housing for the elderly and student accommodation in Copenhagen are really picking up. Buying residential is close to risk-free so you should perhaps compare it to a bond – if you do that you get a good premium and you also get the asset, so you have an inflation hedge.”

In another trend keeping pace with what is happening globally, all of the participants prefer to avoid retail investments for the time being. “Rents are clearly dropping,” says Nielsen. “There are a limited number of investors looking at retail and most of them are only looking at the high street. Most investors are worried about the impact of e-commerce on shopping center returns.”

Downside protection

In the rising market of recent years, most strategies have worked well because the region has seen continual rental growth and falling cap rates, says Orrbeck. “Most deployment into real estate has probably generated double-digit returns in the last five years if leveraged.”

However, the benign investment environment may not last much longer. “That is quite different to what you will see over the coming five years,” he predicts. “Because there isn’t room for significant further cap rate compression, and rental growth will probably be softer. As a general theme, people are looking for less correlation to the financial cycle and more to other cycles as a way to position their portfolios in the event that we have a slightly slower economy.”

Nonetheless, the roundtablers all express optimism about the future of the Nordic real estate market, and concur that it is well-placed to weather the ripple effects of any potential global economic shock.

“The Nordic countries offer downside protection,” says Laird. “After the financial crisis, the markets in Norway and Sweden only dropped 15 percent instead of the 30 or 35 percent we saw in the UK and US, and they came back much quicker. The markets are more resilient because there is so much local capital.”

“Nordic banks don’t foreclose; they work it out with their customers,” adds Orrbeck. “So as long as you were prudent with the assets you bought and didn’t put too much leverage on them, it will be a couple of tough years, but you will come out of the other side.”

At this stage in a lengthy real estate cycle, many investors are looking to insulate their portfolios against an anticipated cooling of the market. It would not be a surprise if an increasing number are drawn by the region’s safe-haven reputation to keep their capital snug and warm in the Nordics.

Nordics: Key deals

The roundtablers select transactions from the past 24 months that illustrate pivotal themes in the market

Stavanger: oil’s slump did not impact the town’s attractiveness

Orrbeck: Local property company Øgreid Eiendom sells 3 million square feet of offices at the Anker Quarter in the central business district of Stavanger to Norwegian manager Union in September 2017 for its Union Real Estate II value-add fund.

His analysis: The market in Norway has become more international, but that deal showed there is still so much local capital that at a time when Stavanger was feeling the impact of a slump in oil prices, you still saw Union taking a value-add position. For good locations there is always liquidity because of local capital’s ability to see through short-term factors.

CityCenter: a Helsinki mall traded with Sponda

Nielsen: US private equity real estate giant Blackstone and Nordic manager AREIM buy Finnish-listed office and retail property company Sponda for €1.8 billion in June 2017.

His analysis: This surprised me because normally listed real estate companies are priced above internal value under these late-cycle market conditions, so the buyers must see something others don’t.

Warehousing: challenging to find portfolios in Sweden

Pedersen: Prologis European Logistics Fund buys a portfolio of logistics buildings in Sweden for SKr3.8 billion ($410 million; €365 million) from Swedish pension fund Alecta and local property firm Bockasjö in April 2019.

His analysis: It is a modern space, although the contracts are not that long. It sets a new yield level, and that price was achieved because big foreign buyers like Prologis can rarely find portfolios with enough scale to provide them with a large enough base in the Nordics to build on.

Lysaker: heavily contested

Laird: Norwegian life insurer Storebrand sells its 470,000 square foot office building in Lysaker, near Oslo, to a consortium of investors for NKr2.225 billion ($260 million; €230 million) in a sale-and-leaseback deal in December 2017.

His analysis: Storebrand has a 10-year lease, but it is likely to move out when that term expires, and that is the only weak office submarket in Oslo, with 15 percent vacancy. Nevertheless, it was heavily competed for and bought at a full price, representing a yield of 4.75 percent, by a buyer using 84 percent financing – a combination of mezzanine debt and preferred equity. It showed there was an appetite for non-core deals, but also the prevalence of preferred equity in Norway and Sweden.

Norges Bank: focused on costs

Norges is a special case

The participants discuss the recent decision of Norges Bank, manager of Norway’s $1trn sovereign wealth fund, to lower its target weighting to real estate and include both listed and unlisted property in its allocation

Pedersen: The decision was about price and liquidity. Norges is very focused on the cost of managing their funds, which they are saying is less than 6 basis points, but of course if you invest in listed real estate vehicles then they have their own fund management costs. Also, the market for trading in property shares has increased significantly and they argue statistical evidence shows that, when there is a shock, the direct real estate market becomes almost totally illiquid, but if you own shares you can always sell them even if the price falls.

Laird: The other part of that story is that the headcount in real estate would be disproportionate to the assets under management. One guy can trade trillions of dollars in shares. When you see how many people you need to invest that much capital in real estate you realize that you are going to have a lot of bodies running up and down the hallway. Norway is also an incredibly transparent country, so every acquisition they made was debated in the newspaper, and that is a hard way to run a business.

Nielsen: Because of their scale there was a risk that the real estate department would grow bigger than the rest of the business. I don’t think you can read too much into that for the rest of the real estate sector. Norges is a special case because of its size.


Meet the roundtablers

From left: Nick Laird, Thorbjørn Pedersen, Henrik Orrbeck, Tonny Nielsen

Nick Laird

Chief executive

Laird founded Anvil in 2015. The Oslo-based firm acquires, manages and finances real estate assets in the Nordics in partnership with both Nordic and foreign institutional capital. Since inception it has acquired a portfolio of around NKr10 billion ($1.1 billion; €1 billion) in Norway across all asset types, and is currently raising a €100 million Nordic mezzanine debt fund. Prior to Anvil, Laird co-founded Ambolt, the first Nordic real estate debt fund.

Tonny Nielsen

Partner, chief executive
Fokus Asset Management

Nielsen founded Fokus as a carve-out from Aberdeen Asset Management’s Copenhagen office three years ago. The firm employs 37 people and provides advice and asset management services to investors that want to enter the Danish real estate market. The company concentrates on core and core-plus strategies and its €2 billion of assets under management include Aberdeen’s former Danish open-ended fund.

Henrik Orrbeck

Managing director
EQT Partners

Orrbeck joined EQT four years ago to lead its real estate activities in the Nordics. He also acts as chief operating officer of EQT’s real estate platforms across Europe. The private equity firm was founded in 1994 in Sweden and now has 14 offices across Europe, Asia and North America. It added a real assets division four years ago, and in the real estate space focuses on value-add investments.

Thorbjørn Pedersen

Chief executive
NRP Asset Management

Pedersen leads the real estate funds business of Norwegian private investment firm Ness, Risan & Partners (NRP), which also invests in shipping. The firm currently has four active private real estate funds managing around NKr9 billion ($1 billion; €930 million) and total real estate assets under management of NKr20 billion. NRP is planning another fund launch shortly, and its funds invest mainly in the core and core-plus space.