Northern exposure

Comprised of some of the most successful economies in Europe, the Nordic region continues to attract investors with its stable, low-risk profile. PERE travels north to speak with fund managers making waves in the market.

As a term, ‘Nordic region’ can confuse some native English speakers. Comprised of Denmark, Norway, Sweden, Iceland and Finland, the term was popularized in the 19th century as a way to encompass Finland in the group of nations, which shares much common history with its western neighbors but is not ethnically or linguistically Scandinavian.

Despite Finland's difference in this regard, the bloc remains one of the most culturally homogenous in Europe, and as a region it ranks equally with Europe's biggest economies. The Nordic institutional real estate investment market is larger than both the French and Dutch markets and—in Europe—only the UK and Germany have larger property markets than the Nordic region. Given the cultural similarities and ease of cross-border operations, many investors and analysts find it more helpful to look at the region as a whole, rather than individual countries. For property investors, the high liquidity, transparency, similar laws and business practices and stable political and financial situation across the area make it an attractive destination for capital.

Macroeconomic factors have prompted a rise in consumer spending, generating increased investor interest in the retail space. At the same time, increased activity in the labor market is resulting in a higher demand for office space, particularly in Stockholm and Helsinki.

The Nordic real estate market achieved new levels of turnover in 2006, totaling approximately €40 billion ($56 million). At the same time, recent and upcoming changes in governments are relaxing some of the rules in the traditional Nordic welfare state model. In Sweden, last year saw the defeat of the left-wing government, which had been in power for 12 years, by Frederick Reinfeldt's center-right alliance. Already this has resulted in tax cuts and the biggest privatizations in Sweden's history. In Denmark, a center-right coalition that has been in power since 2001 is rapidly cutting taxes as it is threatened by rising poll numbers from the left-wing opposition party. In August the Danish government announced a new €1.3 billion ($1.8 billion) tax cut, prompting speculation it will call an election in the fall.

The macroeconomic factors have prompted a rise in consumer spending, generating increased investor interest in the retail space. At the same time, increased activity in the labor market is resulting in a higher demand for office space, particularly in Stockholm and Helsinki. Meanwhile, the increased foreign investment that these factors have spurred has resulted in significant yield compression, especially in Sweden and Finland where most of the international attention has been concentrated. Finland, in particular, has seen a rapid decrease in yields over the past several years.

In the pages that follow, we take a closer look at this exciting and evolving market. We start by talking to investors in the region and find out where firms are finding opportunity: Many are revising their Nordic strategy to take into account falling yields. At the same time, all investors need to understand the differences between the countries in the region, where a rift exists between traditionally more open countries, like Sweden and Finland, and Denmark and Norway, which tend to be more closed. But that doesn't mean that deals aren't getting done.

Next we catch up with Johan Bergman, a managing director with Stockholm-based Niam, the largest private equity real estate firm in the region. Fresh from raising Niam Fund III, Bergman talks with PERE about how the firm is broadening its mandate and why it has shifted its focus from core residential properties to opportunistic plays in the office and retail sectors.

Finally, we'll take a look at development opportunities for retail properties in Finland, where rising consumer spending, combined with a lack of existing retail stock, is spelling big opportunity. Though the barriers to development for foreign investors can be high, demographic trends indicate it could be well worth the effort.

We also examine the facts and figures that make the Nordic countries such an interesting investment destination. Jon Lekander at Aberdeen Property Investors notes that although the Nordic countries are often seen as a periphery market, the numbers in fact show they are a central part of the European economy and can stand toe-to-toe with their larger neighbors to the south. With inflation under control, falling unemployment and rising GDP, the Nordic countries will likely have some good times ahead.