One typically doesn’t experience too many shocks in Sweden, so to arrive in the capital of Stockholm to discover rioting had taken place for six consecutive nights was disconcerting. Tensions had been heightened by the arrest of an immigrant living in one of the city’s suburb, and disorder broke out sporadically in various fringes of the city.

On the day of the roundtable, however, there was no sign of any social unrest downtown – no broken windows or burned out cars. There was the unrelated hiccup of a truck stuck in a tunnel that delayed some rush-hour traffic, but otherwise it was a sunny peaceful morning in Stockholm. 

Certainly, the six real estate professionals making their way to the offices of CBRE Group for the discussion seemed unperturbed by the troubles. Daniel Andersson, head of capital markets for the Nordics at global property services firm CBRE already was present. He was joined by Rickard 

Dahlberg, a founding partner of Nordic Real Estate Partners (NREP); Johan Bergman, chief executive officer of Niam; Tomas Svensson, portfolio manager for real estate at Swedish buffer fund Första AP-fonden (AP1), otherwise known as the First Swedish National Pension Fund; Tonny Nielsen, head of investment management for the Nordics and Eastern Europe at Aberdeen Asset Management; and Tomas Otterud of Custor Capital, an advisory firm.

The unrest made for an unusual entry point to the discussion because most debates about the Nordic region usually open up with tributes to its stability. As AP1’s Svensson points out, the thing about the Nordics is that there are very few big shocks. “There is virtually no political risk,” he says, adding that, to some extent, that reality could cancel out such negatives as the strong Swedish krona against the weak euro – a situation that possibly could dissuade European players from making property investments in the region. It certainly is hurting exports. 

Money, money, money

Indeed, currency rather than social unrest was one of the hot topics introduced by the roundtable participants. The Swedish krona, for example, has risen almost 10 percent over the last year. “Do you treat it as a disadvantage?” Svensson asks of the fund managers present.

“We don’t; we leave it to our investors,” answers Niam’s Bergman. “Some do hedge and some don’t, and some have assets in all kinds of currencies and think that is a natural hedge. Obviously, it would be easier without that exposure, but our investors don’t seem to mind. They can handle it.”

That seemed to be the agreed-upon position among the participants. NREP’s Dahlberg adds that the best fund structure usually ends up being the one where investors decide upon their own hedging strategies rather than leaving it to the manager. “Most of our investors are institutional and have desks handling currency,” he notes. 
Custor Capital’s Otterud, who used to run the multi-manager platform at Aberdeen and Credit Suisse, agrees that investors will “do it themselves,” but he also says that the argument could be turned around. The problem is that disagreeable currency valuations can affect the performance of the manager. 

“From the perspective of the performance of the manager, your carry is dependent upon it,” says Otterud. “For instance, a euro-denominated fund of funds with a large sterling-denominated UK exposure would have been damaged significantly over the last four years. There is no good answer to it, but you could be judged financially at the end of the day in terms of carry, IRR and hence your track record.”

Niam’s Bergman counters that, even if a manager wished to manage the situation itself, it would be extremely expensive to do so. “It is a problem even if you wanted to provide a service,” he states. “It is non-recourse and it is very expensive.”

Having posed the currency question in the first place, Svensson notes that AP1 has ‘overlays’, making the Swedish buffer fund’s position reasonably simple. “If we go to developing countries, the cost of hedging is too much. Also, if we believe in those developing countries, then they should provide a natural hedge in the long run,” he says. “As a result, you need to balance the currency situation in places such as 
Sweden with the fact that there is virtually no political risk. It goes back to the first point about the region being stable.”

Volume down, activity up 

CBRE’s Andersson suggests that the fact that German open-ended funds currently are not active in the Nordic region definitely has something to do with the currency situation but also with the current investment environment, or lack thereof. Indeed, CBRE’s data suggests that deal volume this year has fallen for the whole of the Nordic region compared to 2012. Then again, 2012 was an exceptionally strong year. 

The global property services firm notes that €20.5 billion of deals were agreed across the region in 2012 – a 20 percent increase on 2011. The last quarter of 2012 alone recorded some €7.5 billion of transactions, making it the strongest quarter since the third quarter of 2008 – in other words, since the collapse of Lehman Brothers.  

In the last quarter of 2012, for example, there was the €950 million sale by Niam of a 72.5 percent stake in Norway’s second largest shopping center company Sektor Gruppen to an investor group comprised of Joh. Johansson, Varner Invest and Home Invest; the €434 million sale of Statoil’s headquarters in Norway for around NOK 3.2 billion to a mix of domestic and international investors; and the €533 million purchase of Kista Galleria in Stockholm by Citycon and the Canada Pension Plan Investment Board. 

In its latest Nordic Investment MarketView report, however, CBRE acknowledges that regional activity was just €4 billion in the first quarter of 2013, which is down 23 percent on last year. The firm says Nordic economic activity is “abating” and GDP growth is expected to slow down this year.

Andersson offers an alternate explanation for the apparent slowdown in property transactions – at least in Sweden. “Last year was dominated by large deals, mostly in Stockholm, and probably was a record year for core assets,” he says. “We haven’t seen much of that this year, and there is supply constraint. The trend was that nearly 100 percent of the buyers were Swedish institutions, and they are not sellers. If the German sellers have sold off, there is pretty much no stock left to buy.”

Still, Andersson is not moaning. In fact, the CBRE capital markets team is busier than ever, he says. The team currently possesses more mandates than at any other time, which he is optimistic should offset a decline in overall investment volume. Furthermore, he thinks there will be as many deals – if not more – this year, though they will be smaller.

Boots on the ground 

Given that the Nordics is a collection of different countries with their own idiosyncracies and not a single bloc, most industry players believe it is best to invest in the region with boots on the ground. The three fund managers present – Niam, Aberdeen and NREP – certainly do and, consequently, those firms are transacting with some confidence. 

Niam’s Bergman notes that his firm is investing two new funds: one is an opportunistic fund that closed on €720 million in equity last year – the second largest opportunity fund raised in the whole of Europe in 2012 – and the other is a core-plus fund that so far has raised around €200 million and is set to close this summer on an expected €300 million. The point, however, is that the firm is finding opportunities for both of these different products, so much so that Niam Nordic Fund V already has invested one third of its capital and is approaching the 50 percent threshold. As a result, Niam expects to be on the road with Nordic Fund VI next year.

In Sweden, the market is not really distressed, Bergman says. Still, Niam Nordic Fund V’s latest deal was to buy a prime asset called Klara Strand in the middle of Stockholm, near to the Grand Central Station, for around SEK 1.1 billion. It bought the six connected buildings from developer Skanska. 

Bergman reports that the bulk of Niam’s Fund V deals have been “normal rather than distressed.” Speaking of the Skanska acquisition, he adds: “Our last deal was a city center property. We bought that property because it is sufficiently big and has leasehold issues that kept the competition away. We saw opportunities to turn the building around but, in the end, the location tells us this is an institutional asset.”

In anticipation of the banking crisis in Denmark, Niam opened an office in the capital of Copenhagen two years ago. Sure enough, its first deal there was to buy a large residential portfolio from a state entity created by the Danish government to handle the country’s battered banking sector, which has seen some of the smaller banks and even some mid-sized one crumble.

“We see other opportunities in Copenhagen because a lot of the Danish institutions are sitting on the sidelines,” adds Bergman. “As for Finland, it probably has the most affected economy in the Nordics. However, unless you think Finland is going over the cliff, there are good opportunities. Again, the usual suspects are not active.”

Different strokes

It is evident that the three fund managers taking part in the roundtable share the same broad view of the Nordic countries: Sweden, the biggest market, is not distressed per se; Norway is the strongest economy thanks to its oil and gas production; Finland has a “quiet” economy, as Aberdeen’s Nielsen puts it; and Denmark is characterized by a banking problem stemming from over-enthusiasm prior to 2008. Still, the managers in the room clearly have different approaches.

NREP, for example, has approached the region by working with niche investment strategies, which the firm’s chief investment officer believes enables it to deliver the best risk-adjusted returns. Dahlberg notes that NREP has focused so far on modern logistics and ‘necessity-driven’ retail, as well as self-storage properties, and has raised some €650 million for such investments. The firm recently closed its second retail fund, for which it raised €175 million in capital commitments to invest in necessity retail with “optimization potential,” he says.

That focused approach has been successful, and Dahlberg reveals that NREP will now raise a fund that will offer exposure to all of NREP’s activities rather than individual investment strategies. 

“We believe working with one fund rather than multiple funds will make us better aligned with investors and make our fundraising more efficient,” says Dahlberg. “Thus, the next fund will incorporate both the retail and logistics structures, but in one entity.” He adds that NREP likely will target €325 million for the fundraising and should be in a position to start investing the new fund in the first quarter of 2014. 

Aberdeen’s approach 

Aberdeen has a different approach that involves a number of strategies, such as a residential fund in Sweden and a pan-Nordic core fund – a vehicle that Nielsen reveals for the first time. The firm is working towards launching this new open-ended fund, he says, adding that he is confident it will reach €100 million of equity upon first close. 

“Up to 40 percent of the fund will be in retail properties because we expect retail to perform better than offices on average and retail is less volatile, thereby fitting well into a core fund,” Nielsen says. “We see the main investors coming from outside the Nordics and we are talking to global investors, but we expect investor demand will come mostly from Europe. There clearly is an appetite for Nordic core investments.”

Nielsen elaborates further: “There still are investors that would like to invest in core assets. When many European investors look to diversify from their domestic portfolio, they mainly are targeting Germany or the Nordic region.”

At this point, Nielsen talks about the demand for lower leverage that exists among investors, which draws Niam’s Bergman and NREP’s Dahlberg back into the conversation. Some 75 percent to 80 percent of Niam’s investor base is from the US and Asia, and they “don’t mind leverage,” says Bergman. “But our core-plus fund mainly is targeting European investors, so there is a cap because those investors do mind leverage.”

Taking the debate forward, Nielsen says that, when one is talking about Denmark, the main benefit of doing deals in this market is attractive mortgage financing possibilities. He believes foreign investors primarily are looking at residential property investment at the moment because one can get up to 80 percent leverage and long commitments of up to 30 years with low margins. 

Dahlberg points out that NREP is very much in the Danish property market and is focusing on retail assets. “The interesting thing is it has been quite a closed market compared to Sweden, which has seen a lot of international capital coming in. Now, the majority of the capital being placed outside of CBD offices is coming from outside the country,” he says. “That will make Denmark more international, and I think we will see more liquidity in that market over the next five to 10 years. More diversity will be a benefit in the long term.”

Nielsen concurs. “Liquidity in the market is extremely important, especially if you are not local,” he says. “If you are talking to an investor from say the Middle East, the main thing they are looking at is liquidity, apart from attractive return prospects. That is the main reason they are looking at Sweden.”

Sound advice
Custor Capital advises both limited partners and general partners in their strategies. Therefore, the firm is in a strong position to explain how investors are reacting in the region and which manager strategies are gaining traction.  When it comes to Nordic limited partners, Otterud says there is a “mixed picture.” He believes AP1, along with some Danish investors, have been exceptions as far as investing internationally through commingled funds. Swedish investors haven’t been very active internationally, he observes, and one also sees some of the more “mature, experienced Nordic investors” cutting back on activity. 

From Otterud’s vantage point, it is themes such as social infrastructure in Sweden that are attracting local interest, he says, adding that many institutions have set up their own vehicles in this area of the market. “We therefore are more focused on niche managers in this area, working with fund managers and capital sources for specific opportunities rather than broad-based funds,” he reveals. One example is a fund for nursing homes, for which Otterud says there is a “huge lack of modern facilities in Sweden.” The property type is very suitable for institutional investors given its long leases of 15 to 25 years with municipalities or institutional-grade operators, he notes.

Another area in demand is residential conversion because, again, there is a lack of residential property in Stockholm.Assignments at Custor Capital over the last 12 months reveal much about the Nordics. Mandates include advising on the creation and capital-raising of a SEK 2 billion nursing home platform for Svenska Vårdfastigheter and a SEK 300 million residential property platform for Trosse, as well as a €350 million capital sourcing and co-investment transaction for a mixed-use commercial portfolio on behalf of a global fund manager. Meanwhile, the advisory firm just closed on the sale of a €100 million LP interest in logistics property on behalf of a Nordic pension plan and advised on the recapitalisation of a €370 million commercial property portfolio on behalf of a global fund manager. 

Fun with finance 

That last mandate provokes a discussion about debt and financing. Otterud says the managers that are able to secure better finance are the established ones with good relationships. For the managers that are less well established, it is more challenging. “On top of that, if it is development, it is even more challenging,” he adds. 

Otterud notes that new sources of capital have arrived in the Nordics, with mezzanine debt providers appearing on the scene, albeit in small volumes by international standards. They are charging interest rates between 10 percent and 12 percent, which for residential conversions can be afforded.

In fact, Otterud adds that institutions are playing a part in real estate financing in the Nordics. He makes an example out of a forward purchase agreement that the firm is negotiating with an institution by way of ‘substitute finance’. 

Underlining demand, Custor Capital acted on a refinancing of a €350 million portfolio for a global fund manager and found strong appetite from institutions. However, it did find problems with where to ‘place’ it. “Is it fixed income? It is not always clear, but it is an area that institutions are definitely getting into,” says Otterud.

AP1 is prohibited from making loans itself, says Svensson. However, if the fund did invest in a mezzanine debt fund, that investment would be classified as private equity, not as real estate, and would provide a drag on the institution’s 5 percent of assets it is allowed to invest in non-listed assets.

Apart from this, the Swedish buffer fund potentially is the ideal investor as far as the global private equity real estate model is concerned. It is a long-term investor that is looking for diversification and return-enhancing strategies outside of its national border. “We are favoring the fund model as such, and the lion’s share of our new investments will be through funds,” Svensson added.

Still, it is not enough to get diversification through secondary locations domestically, notes Svensson. “Over time, there is a very high correlation in performance between core and secondary investments within a region,” he explains. “So, if we do things in Sweden (where AP1 already has significant property holdings), we would go higher up the return spectrum and perhaps invest with niche funds in order to drive returns. If we go with core strategies, we risk being over-allocated to one sector. That is why we have not been targeting diversified pan-Nordic funds – yet.” Svensson adds: “We will do both pan-Europe if focused on one sector or country-specific in different sectors.” However, he notes that the pension plan does not have fixed targets in terms of how much to invest as such.

Right on target

The mention of targets brings natural closure to the end of the roundtable. For CBRE, Andersson is hoping deals won’t take quite so long to complete and, of course, for more product to sell. The global property services firm continues to see a lot of activity from core and core-plus funds but, if an institution is not the buyer, yields go out quite dramatically. 

“When we sat here one year ago, I think that was one of the opportunities we saw,” Andersson says. “The market has adapted to that, and now it is a question of sourcing stock.”

Financing for some deals certainly doesn’t seem to be a problem. In fact, CBRE just went into exclusive talks on one property sale, having received as many as 13 bids. Only two were conditional upon financing, while the others were all equity or all equity with view to refinance later. If demand for property remains as strong as that, then Andersson’s ambitions for the firm in the Nordics should be realized. 

Meanwhile, AP1 will continue to build upon strategic positions to add to its SEK 18 billion real estate portfolio. The Swedish buffer fund plans to increasingly work with its tactical allocations in higher-returning strategies while continuing to focus on core holdings, Svensson says. Among the fund managers, Aberdeen will continue to focus on developing and managing both large and small funds, niche funds and various products for long-term investors. NREP will continue investing and raising funds, with the added ingredient that its next offering is likely to appeal to a wider investor base. And Niam will try to replicate the €1.7 billion of transactions it managed last year.“We will be buyers in some markets and sellers in others where it makes sense,” Niam’s Bergman says. “We will continue to try to take on as little risk as possible in order to reach our returns.”

Lastly, Custor Capital will carry on with its advisory mandates. It’s most recent success was resolving a €90 million secondary sale of an industrial fund interest on behalf of a Nordic LP. Given the strong interest investors generally have been showing towards the Nordics, the six roundtable participants ought to be successful in their goals. Of course, that is provided there are no unexpected shocks. 

The participants:

Tonny Nielsen
Head of investment management
Aberdeen Asset Management

Nielsen is head of investment management for the Nordic and Eastern Europe regions at Aberdeen Asset Management. He joined the firm in 2002 and now heads the investment management business from the Copenhagen office. 

Aberdeen employs around 300 people in the Nordic region and has a number of active investment funds ranging from regional to country-specific. The firm also manages a number of segregated mandates for clients in the Nordics and performs advisory work on behalf of such clients as Nordic banks. In total, it manages €9 billion of property assets in the region.

Rickard Dahlberg
Co-chief investment officer 
and co-founder
Nordic Real Estate Partners

Dahlberg is co-chief investment officer at NREP, which is an independent firm that employs 40 professionals and has approximately €1 billion in assets under management. The firm works with focused investment strategies, aiming to produce the best risk-adjusted returns. Its most recent fund is NREP Nordic Retail II, a core/value-added offering for which the firm held a final close on €350 million in May. 

Dahlberg began his career in 1998 as a project manager for DTZ in Sweden before joining GE Capital Real Estate in 2004. He stayed at GE Capital for two years, working on joint ventures, loans and transactions, but left in 2006 for NREP.

Tomas Otterud
Custor Capital 

Otterud, along with Anders Åström, is a co-founder of Custor Capital. The pair founded the Stockholm-based advisory group in 2010, having previously been managing directors and global co-heads of the real estate segment of the Customized Fund Investment Group at Credit Suisse. Prior to joining Credit Suisse, Otterud was deputy managing director of the indirect real estate investment management business of Aberdeen Asset Management, which he also co-founded with Åström.

Otterud started his real estate career in 1996, when he joined the listed Swedish property developer JM. He then took on a position as an investment surveyor at Cushman & Wakefield with responsibility for direct investment transactions and valuations. Following this, he was the assistant fund manager of one of Prudential Financial’s pan-European property funds.

Johan Bergman
Chief executive officer

Bergman is the chief executive officer of Niam, the Nordic’s largest private equity real estate firm. Before joining the firm seven years ago, he was responsible for the real estate arm of Skanska, as well as the developer’s construction business in Russia and Poland.

Last year, Niam closed its largest opportunity fund to date, Niam Nordic V, on €719 million in equity commitments. The investor base of that fund is mainly North American, Asian and European institutional investors. The firm, which is owned by Sweden’s Stronghold Group, also branched out with the launch of a core-plus fund last year.

Daniel Andersson 
Head of capital markets
CBRE Group

Andersson is head of capital markets for CBRE in Sweden, based in the firm’s Stockholm office. He joined the global property services firm in 2010, having previously served as acquisition director in the Nordics for GPT Halverton. Prior to that, he was a consultant at Jones Lang LaSalle for its Nordic capital markets group. 

CBRE’s capital markets group in the Nordics celebrated an incredibly strong 2012, thanks to many large single-asset deals in the region. Some €20.5 billion of deals were agreed last year, which was 20 percent more than in 2011.

Tomas Svensson
Portfolio manager, real estate
First Swedish National Pension Fund

Svensson joined the First Swedish National Pension Fund (AP1) in 2011. In this role, he is responsible for building up and managing the real estate portfolio at the Swedish buffer fund. 

With a background in international real estate, Svensson has worked both on the advisor side and the principal side, most recently at Norway’s Storebrand group, where he was responsible for its Swedish real estate investment management arm. He started his career with DTZ in Stockholm and spent one year working in the Hong Kong office before joining GE Capital Real Estate as head of transactions in the Nordic region.