This roundtable was supported by:
Areim • Cromwell Property Group
Savills Investment Management • Sirius Capital Partners

Almost a year after the onset of the pandemic, the Nordic real estate investment market appears to be in comparatively rosy health. Local advisor Pangea Property Partners pegs total investment for Sweden, Norway, Denmark and Finland in 2020 at €41.5 billion, a fall of only 9 percent compared with 2019’s all-time record total, and the sixth year running in which volumes have topped €40 billion.

Despite questions being raised about Sweden’s comparatively laissez-faire approach to virus control, the region has largely escaped the economic devastation and high death toll seen across much of western Europe. The participants in this year’s PERE Nordic roundtable discussion express their relief that the region’s property markets also remain relatively unscathed.

The market froze during the second quarter of 2020. But then it rebounded quickly, and the end of the year saw a flurry of big deals that bolstered the annual figures. “All of us have been quite positively surprised by how robust the real estate market has been during this time,” says Peter Broström, head of Nordics at Savills Investment Management.

Erika Olsén, chief investment officer at Nordic value-add manager, Areim, reels off the characteristics that underpin the region’s safe-haven status: “Nordic countries have low national debt, which is important in a crisis because governments can afford to spend to support people and businesses. We also have a relatively stable political situation, low corruption and a high level of trust in political and business life. That contributes to a calmness that allows people to be innovative. The population is growing, and the healthcare and school systems are free.”

The crisis has reminded investors of the value associated with safe and stable locations, argues Patrick Gylling, chief executive at Helsinki-based private equity investor Sirius Capital Partners. “Sometimes a crisis shows investors why there is a risk premium, and those risks are lower in the Nordics because it is a liquid, transparent and super-stable environment. If you look at the funds raised by all Nordic managers, not a single one of them has lost money, even the ones raised in 2007. They all have acceptable internal rates of return and some of them have exceptional IRRs.”

A smooth transition to new ways of doing business has been facilitated by an already well-established work-from-home culture, suggests Pontus Flemme Gärdsell, head of Nordics at Brisbane-headquartered manager Cromwell Property Group. “The work-life balance here is slightly different than in some other European countries. Moving to more flexible working was not a big change.”

Meanwhile, the region’s cultural traditions are not as inimical as some to social distancing, observes Gylling. “A study in Finland showed 23 percent of the population think their quality of life has increased during covid. Here, you do not go around hugging everyone or kissing them on the cheek. I can imagine how big a problem that must be in Spain, for instance. There is a joke in Finland: now we have to keep a two-meter distance. But after covid, we can go back to the normal four.”

Net capital inflow

Foreign capital has continued to flow into the Nordics market, despite the hurdles presented by the virus. Pangea identifies overseas investors as accounting for 34 percent of transactions by volume in 2020. In Denmark and Finland, the proportion was more than 60 percent. Foreign vendors accounted for only 16 percent, resulting in a positive net inflow of capital.

Gärdsell says: “Covid has impacted capital raising. But in comparison with the rest of Europe we do get more calls on our Nordics platform, and more and more investors have an appetite for the region. That is a result of its reputation as a safe haven, and the relatively light response to the virus compared to other countries where there is a full lockdown, which also helps them to continue doing business here.”
Olsén describes the fundraising environment as “extremely positive”, both among existing investors and potential new capital sources. “Fundraising is usually hard work because you have to spend a lot of time traveling. But now everyone has adapted to doing work meetings by video.”

The panelists agree that managers with an established track record and existing investor base to draw on are far more likely to be able to raise capital successfully than new entrants to the market. “It also depends on what you are fundraising for,” adds Broström. “If it is a previously established strategy then it is probably easier than for a totally new approach with a different risk profile.”

While many investors are tempted to treat the Nordics as a single market, the participants stress that they are separate countries, each with a different currency. While Finland lies within the eurozone, Sweden, Denmark and Norway each retain their own coinage. “To understand why some foreign capital sources are more interested in specific countries than others, you have to consider factors like currency and size,” says Gärdsell. “For example, Norway is less attractive for some investors because of its dependency on oil.”

Sweden is comfortably the largest market, representing almost half of transaction volumes, and it has the widest investor base, including many active local institutional buyers and REITs. “Sweden has never needed foreign buyers for a healthy transactional market,” notes Olsén.

“The increasing gap between real estate yields and bonds should lead to an increase in international investment in Norway. But their domestic market is also very strong.” The market has benefited from an increasingly diverse range of buyers, who favor different Nordic markets, she adds. “Diversification of ownership creates a healthy climate for transactions that can even operate quite well during a crisis.”

Finland is much more dependent on the foreign buyers, says Gylling. “There is a lot less domestic capital around. We have a few large pension companies with a lot of real estate assets. But they already own a very large direct portfolio, so if anything, they are net sellers. When foreign investors cannot travel, we see a drop in transaction volumes, as we have seen this year. That, in turn, can create opportunities for players with a local presence.”

Stability of income

As elsewhere, the disruption caused by lockdowns and social distancing has disrupted many businesses in the Nordics, prompting managers of real estate to consider how best to meet the changing needs of their occupiers while protecting the interests of investors.

“The pandemic has stopped the world and given us time to reflect. In a crisis you have to adapt, be innovative and think long-term to survive.” muses Olsén. “If you believe in your tenants’ business in the long term, then the way to support them is to work closely with them while they are struggling in the short term by offering them flexibility.”

That will require a change in approach from property owners, says Broström. “During covid, many retailers have been asking their landlords to provide them with some kind of flexibility to reduce space, or increase it, and to find a different mechanism for paying their rent. It is still impossible for many businesses in all sectors to see how they will develop in the next 12-24 months. Occupiers will continue to need more flexibility, so managers and institutional investors need to acknowledge that lease terms will become shorter.”

Stability of income is still achievable, argues Gärdsell. But it will no longer be represented in the form of a long-term lease. “Structuring leases in a different way can still create stable cashflow as long as you keep the tenant happy. You can keep the same tenant there for 10 years if you offer a good-quality product. But you will not necessarily start the relationship with a 10-year lease. It is already quite common for us in Finland where we have a lot of tenants on rolling leases.”

That will mean more work for local managers, suggests Broström. “The way you maintain a stable income stream is to have feet on the ground and a dedicated team to make sure your tenants are happy. It will be harder to manage real estate from another country and expect that, if you buy a 10-year lease, you can rest on it for 10 years and do nothing.”

Greater stability of income can be achieved by aggregating assets, says Gylling. “If you take the supermarket portfolio we assembled and floated, then, as a whole, it has a growing, predictable cashflow. But each individual asset has an unstable and unpredictable stream. It does not matter which sector you are in. If you can provide flexibility for the tenant and find a way to turn it into a stable cashflow, then you will have an attractive investment.”

Investing in innovation

In December, Nordic manager NREP formed a partnership with tech firm Spacemaker to adopt a new building design technology based on artificial intelligence. PERE canvasses the views of the participants on digitalization in the post-covid real estate market

Gylling: NREP seems to be exiting investments by creating big platforms, selling them to a long-term owner and then remaining as manager. With that model, it makes sense to make investments into technologies and integrate them into your platforms. It is more difficult to do that if you are an opportunistic manager doing lots of different types of smaller deals.

Olsén: Collecting and using data is extremely important in enabling managers to be smart, adaptable and flexible. Employees now have a far greater say in deciding what sort of workspace they want to occupy, and to understand their needs we must use data. Our sector is a big CO2 polluter, and innovation will also help us to tackle that. We could buy into a technology platform or two.

Gärdsell: I do not foresee Cromwell acquiring an entity in that way. But we are investing heavily in technological tools that will continue to position our business for growth under our “invest to manage” strategy. Managers that do not will fall behind. That is a benefit of having 460 people in our global platform. With 20 people in the Nordics, we would not be able to do that locally.

Broström: The bigger a manager gets, the more important it is to streamline procedures and data streams across all countries. Each office having its own processes does not work anymore. That means we need to form partnerships with international technology platforms to access the data we need – not only in the Nordics, but around the globe.

Winners and losers

The discussion turns to opportunities. While there is plenty of capital still seeking a home in Nordic real estate, the menu of investable sectors has been shortened by the pandemic, says Broström. “Even though there is a lot of activity in the market, both on the occupier and investment side, it is within a few categories, which means there is a narrow band for matching capital with what you can actually acquire. We saw a huge residential portfolio being sold in Denmark because residential is viewed as a very safe investment. That is why we see big logistics sheds being sold, and also other types of building where underlying tenants will probably outperform in the long term. There are lots of retail deals you could do at significantly lower prices, and there are still opportunities in assets like food-anchored retail parks and the accessible, dominant retail parks, which are still trading well. But there is less capital to deploy for that sector.”

While some sectors have clearly been winners or losers in the pandemic, the office segment is somewhere in the middle, observes Gärdsell. “It is at a turning point because demand is changing due to the accelerated work-from-home trend. I did not expect so much uncertainty around the segment. Outdated office was a tricky business even before the pandemic, and it will be more so going forward. But I think there will still be good demand for quality product.”

“In the office sector, wellbeing is the big trend. It is good that we have stopped squeezing people into smaller and smaller spaces,” says Olsén, adding that there has been increased interest in property for public sector use and in niche segments, particularly infrastructure and data centers. “Data centers has been a really small, immature market,” she says. “But now it is growing, and we see the benefits in Sweden and Norway where you have renewable energy, power and fiber cables. We will see demand from international capital.”

The closing months of 2020 saw a slew of deals in which investors snapped up big portfolios or existing platforms. Paying a premium for such large chunks of real estate can be good business, argues Gylling. “The reason why you have a portfolio premium is because you have created a stable cashflow out of something that, on an individual asset basis, is not fully stable. Because the spread between yields and interest rates is very wide you can capture that gap. The only question is, is the cashflow stable? On a single asset, it probably isn’t. But if you have a big portfolio that is diversified, yet still within the same segment, then it becomes stable, so you perhaps no longer need a 400-basis-point spread to the risk-free rate. Maybe 300 is still very good.”

Many Swedish quoted property companies may provide M&A targets for investors keen to bulk up on Nordic property quickly, adds Olsén. “There is no need for lots of small companies that look the same. We will definitely see consolidation in the listed property sector in Sweden.”

What opportunities there are will be in high demand. Few other regional markets have emerged from the pandemic with their reputation for stability enhanced. In a period where investors are largely inclined to eschew risk, it is a safe bet that the Nordics will continue to be a magnet for international capital.


Meet the roundtable

Erika Olsén
Chief investment officer, Areim

Olsén is head of investments and an adjunct member of the investment committee at Areim. The Stockholm-headquartered manager operates across all four Nordic markets, focusing mainly on offices and residential. It also maintains offices in Oslo and Helsinki. It has raised four value-add funds, the latest of which, Areim Fund IV, was closed in 2019 with €685 million of commitments.

Pontus Flemme Gärdsell
Head of Nordics, Cromwell Property Group

Gärdsell is responsible for growing Cromwell’s Nordic business and managing its local teams in Copenhagen, Helsinki, Malmo and Stockholm. The Australian-listed globaAll Postsl investment manager invests in the office, light industrial and retail sectors in the region, and manages portfolios in Denmark and Finland for its Singapore REIT, CEREIT.

Patrick Gylling
Chief executive, Sirius Capital Partners

Gylling co-founded Helsinki-based private equity real estate firm Sirius in 2015. The company has invested equity capital of €450 million for four vehicles, focusing on supermarkets in Finland and Sweden, as well as offices in Helsinki. He is also chairman of listed supermarket property owner Cibus Nordic Real Estate, which was created by Sirius as a way to exit two earlier funds.

Peter Broström
Head of Nordics, Savills Investment Management

Broström joined Savills’ investment management arm in 2008 and was appointed head of Nordics in 2015. Based in Stockholm, he leads a team of 15 people and has overall responsibility for transactions and asset management for Nordic funds and assets owned by the firm’s pan-European Funds.