NORDICS ROUNDTABLE: Pickin’ and grinnin’

There’s plenty to like about Sweden. According to the country’s English-language newspaper, The Local, Sweden is the best place to grow old, it has the most generous paternity leave in the world, it has the best healthcare system and it exports the most pop music per capita. It also was the setting of this year’s annual Nordic-focused roundtable.
Present for discussion were CBRE Global Investor’s Rik Eertink, newly promoted to head of Nordics at the giant real estate investment firm; Tomas Beck, portfolio manager for real estate at the First Swedish National Pension Fund (AP1); Rickard Dahlberg, chief investment officer of regional investment firm Nordic Real Estate Partners (NREP); and Tomas Otterud, co-founder of Stockholm-based advisory group Custor Capital.
Historically, the great appeal of the Nordics – Sweden, Norway, Finland, Denmark and Iceland, although only the first four figure in a real estate context – has been their political and economic stability. It is no surprise, therefore, when Eertink alludes to this quality at the outset of the discussion.
“We have seen stable performance over the last year in terms of the region’s macroeconomics and very promising figures looking forward, especially for Sweden and Norway,” says Eertink. “In that context, there are no problems, only opportunities. On a pan-European basis, there are some really impressive numbers with regard to capital raising, and we see a lot of equity flowing into real estate.”
As country manager for the Nordics, Eertink is responsible for the performance of the regional management platform servicing three separate funds. As fund manager, he also is directly responsible for one of these funds, the CBRE Nordic Property Fund, which has almost €1 billion in assets under management, two-thirds of which are located in Sweden with the remainder in Finland. In addition, the firm’s Pan European Core fund owns a high street retail block in Oslo and the CBRE European Shopping Centre Fund manages a property in Stockholm. 
“The year 2013 was really about raising capital,” says Eertink, “so you see a lot of managers like us with deep pockets and a new key issue – where can we find the right product and deploy our capital? That is one of the key challenges, especially here in the Nordics.”
Relative appeal 
Before anyone can ask whether the Nordics are in danger of being eclipsed by more modish investment destinations like the recovering markets of Spain and Italy, Eertink pre-empts the question. “There is a lot of appetite in the southern part of Europe, where yields are dropping almost every week,” he says. “That also will have a positive effect on Nordic appetite going forward because we forecast that investors will want to balance that with more northern European investments. There are a couple of global investors in our platform bringing this up.”
Indeed, the Nordics remain popular enough that NREP was able to raise €148 million for the first closing of its new Nordic Strategies Fund in May. “It is not only the rebalancing issue,” Dahlberg argues. “People were starting to see the Nordics as a bit expensive compared to other markets. However, after the market slowed down a bit on a relative basis, the yields you get here all of a sudden are not that bad compared with southern Europe, where you have some extra risk. That is pushing investors this way.”
Dahlberg believes investment volume in the Nordics, which was up on the long-term trend last year, is likely to maintain similar levels in 2014 despite a relatively slow start to the year compared with 2013.


Otterud contends that, up until now, steep pricing only has been true of the core markets, where domestic institutions are active. “If you look at the risk premium on yields between core assets in Stockholm and secondary cities or submarkets, then they are still high,” he says. He believes that the aggressive pricing of recent real estate-related IPOs, such as that of Swedish property company Hemfosa Fastigheter (see IPO as indicator), prefigures yield compression in markets outside the national capitals as well as for secondary assets. 
Beck decries the herd mentality that has seen investors rush to buy in southern Europe, suggesting that such a situation is unlikely to happen in the Nordics. “People come here for good fundamentals, not bargain hunting,” he says. “They haven’t fled the region entirely, but they haven’t piled into the region either. Some people have found the currency a bit strong and a bit too expensive, which probably has been the strongest deterring factor combined with the comparatively keen pricing.”
Cross-border capital 
The strength of the Swedish krona can be an issue for some outside investors. “One of the issues for at least a couple of our foreign clients that want to buy core real estate in Sweden is currency risk,” Eertink admits. “They want to hedge themselves against the currency, which makes it difficult to compete with local equity.”
Nonetheless, there are indications of increased interest in the Nordic region from international investors, particularly from the US. In November, for example, Greenwich, Connecticut-based Starwood Capital Group paid SEK3.9 billion ($586 million) for a portfolio of Swedish retail properties (see Supermarket Star).
Although the cornerstone investors in the first close of NREP’s new fund are mid-sized Danish pension plans, Dahlberg notes that there also is significant interest from American institutional investors. The fund, for which he aims to raise €325 million in total equity, is a departure from NREP’s past practice of single-sector funds, focusing primarily on modern logistics, necessity-driven retail and residential. 
“In the past, we have had lots of good conversations with sophisticated American investors that appreciated the merits of specialization and focus. For them, the Nordics is enough of a niche in itself and they typically found a single strategy within the Nordics to be too narrow,” observes Dahlberg. “This time around, there is a lot of interest, but they want to see that local institutions have signed up for the strategies first.”
The transatlantic trend also applies to AP1, but in reverse. Indeed, the Swedish buffer fund, which manages SEK250 billion in total assets, is looking to invest globally, including in the US. Beck says it is looking to increase its real estate weighting from just under 9 percent to at least 10 percent, which could mean some €500 million to €750 million of new real estate investment over the next three years. 
“The US will be the focus for the next year,” Beck reveals. “We have been there on the listed side but not the direct fund side. [The market] represents half of the realistic investment universe, and we need to be there to fully be able to use real estate as a diversifier to equities and bonds.”
Custor Capital, meanwhile, is seeking to bring international players together with domestic co-investors to form partnerships. High returns are difficult to find in the Nordics, so local knowledge is important. 
“There are opportunity funds circling, but they are struggling to find their 20 percent return,” Otterud says. “Core-plus and value-added returns of 10 percent-plus definitely are achievable, but getting opportunistic returns is very difficult.”
One region, several markets 
With plenty of capital available, bank funding comparatively plentiful and limited opportunities, local expertise takes on increased significance. “Don’t make the mistake that a lot of people from outside the Nordics make and look at it as one region,” advises Eertink. “It is four markets with their own characteristics and way of doing business. You need a local presence and understanding of the market to be successful.” 
Dahlberg says there is very little low-hanging fruit for investors in the central business districts of the main Nordic cities, but there are still good opportunities off the beaten track in the submarkets. “You need a local presence to be able to enter those pockets of interesting investments,” he argues.
This strand of thinking leads Dahlberg into a dissection of the varying characteristics of the Nordic markets. “They are quite different and move in different synch. Sweden traditionally moves the quickest, lagging the UK by nine to 12 months, then Finland lags Sweden by another nine to 12 months,” he says. 
While Sweden and Finland are the most accessible and familiar markets for foreign investors, the Danish and Norwegian markets have quirks that have made them tough for outsiders to penetrate.
Until recently, the Danish market was dominated by small domestic investors buying property through tax-efficient structures. Foreign investors found it difficult to compete. However, Denmark was the Nordic nation most affected by the global financial crisis, which led to a meltdown in its banking sector. Consequently, many local investors have found themselves over-leveraged and over-exposed, which has opened up many opportunities.
“Outside traditional core, we think Denmark is an extremely interesting market at the moment and we are focusing a lot on it, but it is a market where you need to be truly local,” says Dahlberg. “While surprisingly few investors looked at Denmark in the past, you now can see that there are a lot of Swedish companies looking into it and also a lot of international players, but few have a significant local presence, if any.” 
At the same time as international interest is growing, a number of institutions have been forced to sell assets in Denmark and further properties have been released by the country’s ‘bad bank’, Finansiel Stabilitet. For its part, NREP has followed a variety of strategies in the country, including purchasing logistics properties, developing residential and bankrolling supermarket development in growth areas.
Norway remains a difficult market to crack, however, because of the strength of the domestic investment market. “Norway is a special case. There are pockets you can invest in, but that market is the hardest to get into without really having well-connected people on the ground,” warns Dahlberg. “It is interesting, but it will remain a fringe market in the Nordic context.”
CBRE’s Pan European Core Fund acquired its high street retail property in Oslo two years ago, and Eertink, a retail specialist, admits that similar core assets are very difficult to find in the Nordics. “If you want to find something on the best high street in Stockholm, then good luck,” he quips. CBRE’s European Shopping Centre Fund currently is deploying the last of its equity and is hoping to close a deal on a Swedish mall. “After that, we are going to launch a new European Shopping Centre strategy with exposure not only to the core markets but the southern part of Europe as well,” he says.
Funds vs. joint ventures 
One prospect for increasing the supply of investment stock is the maturation of existing funds, according to Custor’s Otterud. “Quite a few funds raised in the good old days of 2004-07 are maturing,” he says. “Some of those funds are liquidating, so there are sales and assets coming out of those vehicles.”
That could provide work for Custor, as it seeks to design investment structures based around the portfolios of assets coming out of maturing funds. “We are very much focused on indirect real estate, trying to customize various vehicles and partnerships,” says Otterud. “We have done quite a few recapitalizations and like thinking outside the box. We recapitalized a logistics structure at the end of last year, which we and an investment bank listed on the NASDAQ OMX as a capital participating debenture and a bond. We already help funded international funds get exposure to the region through operating partnerships, helping them identify transactions through local partners whereby the partner is a specialist in a sector or country but may lack the capital.” 
As in other global real estate markets, structures that provide investors with a greater degree of liquidity and control currently are more popular in the Nordics than traditional funds. “If someone asks us to help raise a traditional fund, we say: ‘It’s very hard. We recommend you take another route’,” Otterud says. “There are institutions still going down the fund route, but there also are those who are saying we are doing joint ventures, co-investments and clubs.”
The perception of greater liquidity may in part account for the current popularity of the Nordic listed property sector. Beck warns that, if Otterud’s prediction proves correct and yields in the direct real estate market follow pricing in the listed market, it will become overpriced. “The pricing of some of the debentures and instruments that are being listed today are just outrageous, if the investors realized what risks they are taking,” he says. “People are so concerned about committing to blind-pool funds where they have no visibility of the future assets that they are happy buying something that they wouldn’t necessarily want to hold for the long term but you know what your income stream is for the coming years, provided nothing unexpected happens. You get that perceived certainty, and you are willing to pay a premium for it.”
Beck advises caution when considering joint ventures because business strategies that are well-aligned initially may become less compatible over time. “When you invest, you need to give up control to someone,” he says. “I would rather give up some control to an aligned fund manager that I am paying for their knowledge rather than a fellow investor that I have no idea what their intentions will be in 10 years’ time.”
Looking forward 
As the discussion draws to a close, the participants offer predictions, observations and warnings about the future. Eertink believes there still is a place for funds in the market. “Maybe not for the biggest institutional players, but for medium-sized and smaller investors that still want diversification,” he suggests. “A post-crisis fund model is something completely different from the pre-crisis model, with modernized terms, clear co-investment alignment with the manager and better liquidity possibilities. So, I don’t think there is a problem with the fund model, rather I think there is a problem with the perception of the fund model.”
Otterud points to the growth of pan-Nordic investment. “Until recently, Nordic institutional investors were focused on their domestic markets through direct investments and invested internationally through funds,” he notes. “Now, for instance, there are Finnish investors that are classifying Sweden as their domestic market, which is a new phenomenon.”
Population growth and buoyant economies across the Nordic nations will underpin growth in the property market, predicts NREP’s Dahlberg. “If you look at the urbanization rates in the capital regions, plus the largest university and provincial cities in each country, we do have a positive trend in terms of population growth, which is great for backing real estate investments,” he says.
Beck cautions against bargain-hunting in the Nordics. “Too much very short-term capital is not good for any market,” he says. “I hope that the froth that is created by short-term investors is not taking away the belief in this being a region that should be a core market for any global institutional investor.” 
Tomas Beck 
Portfolio manager for real estate
First Swedish National Pension Fund
Beck joined the First Swedish National Pension Fund, commonly known as AP1, in 2011. The ‘buffer fund’ provides a cushion between incoming tax revenues and payouts for the national pension system, and he is responsible for building up and managing its global real estate portfolio.  

Throughout his career, Beck has worked as both an advisor and principal. Before joining AP1, he was responsible for the Swedish real estate investment management arm of Norway’s Storebrand Group. He began his career at DTZ in Stockholm and spent a year working in Hong Kong before becoming head of transaction for the Nordic region at GE Capital Real Estate. 
Rickard Dahlberg 
Chief investment officer and co-founder
Nordic Real Estate Partners
Dahlberg is co-chief investment officer of Nordic Real Estate Partners, which employs 40 people across three offices in Stockholm, Copenhagen and Helsinki. The private equity real estate firm has raised eight funds with equity under management totalling around €800 million. The latest of those, its Nordic Strategies Fund, achieved a €148 million first closing in May. 


Before co-founding NREP in 2005, Dahlberg worked for GE Capital Real Estate and was a project manager for DTZ in Sweden. 
Rik Eertink 
Head of Nordics
CBRE Global Investors
In February, Eertink was appointed head of real estate investment management for CBRE Global Investors’ Nordic business, which has more than 20 people and works out of offices in Stockholm and Helsinki. He also serves as fund manager for the CBRE Nordic Property Fund and is a member of the firm’s EMEA management board.  

Eertink began his career at ING Real Estate Investment Management, where he managed Dutch retail property portfolios and held the position of director for the firm’s European retail platform. After ING’s takeover by CBRE Global Investors in 2011, he moved to Stockholm as head of asset management for the Nordic region.  
Tomas Otterud 
Custor Capital
Otterud co-founded Custor Capital, an independent advisory firm focused on customized real estate solutions, in 2010 together with business partner Anders Åström. The pair previously had worked at Credit Suisse, where they were responsible for the global Real Estate Customized Fund Investment Group. Before that, the pair built the indirect real estate business at Aberdeen Asset Management into a leading European and Asian indirect real estate manager.  

Otterud started his real estate career in 1996, when he joined the listed Swedish developer JM. He later worked as an investment surveyor at Cushman & Wakefield in Stockholm and then as assistant fund manager of one of Prudential Financial’s pan-European property funds. 

IPO as indicator 
Hemfosa’s successful public debut may auger yield compression 
Hemfosa Fastigheter is a developer and investor in offices and logistics warehouses as well as community service properties, which include schools, pre-schools, healthcare and elderly care facilities. It owns commercial real estate in Sweden with a total value of around SEK 18.5 billion, if the company’s share of properties held through joint ventures is included.
In January, the Swedish property company went public. Hemfosa’s leadership stated that the initial public offering was aimed at providing better access to the capital markets and generating a broader base of Swedish and international investors. The successful offering saw shares priced at SEK 93 on the NASDAQ OMX exchange, with the total value of the company’ shares amounting to some SEK 6.1 billion. 
Custor Capital’s Tomas Otterud believes that the strong pricing of Hemfosa’s shares indicates that Nordic real estate yields are likely to come in further. “They were buying assets at above 8 percent over the last few years, and recently listed the portfolio at an average yield of around 6.5 percent, since when the share price has gone up by 10 percent,” he says. “If the listed market is anything to go by, which historically it has been, and you look at how the listed market now is pricing secondary assets compared to the direct market, then one could expect yield compression in submarkets and secondary locations.”
Supermarket Star  
Starwood’s purchase of a portfolio of Swedish shops demonstrates the growing demand for Nordic investments by international investors 
Near the end of last year, Starwood Capital Group teamed up with Stockholm-based asset manager Vencom Property Partners to buy a retail portfolio from Swedish retail group Kooperativa Förbundet for SEK 3.9 billion (€430 million). It consisted of seven properties in Sweden’s four largest cities –Stockholm, Gothenburg, Malmo and Uppsala – and comprised 205,000 square meters of retail space plus building rights for around 70,000 square meters spread across three of the locations.
The portfolio is a mix of shopping centers and retail parks – each anchored by Coop, Sweden’s second-largest supermarket chain – and is 96 percent leased. Starwood and Vencom negotiated extensions to the Coop leases at four of the seven locations, nearly doubling the weighted average unexpired lease term.
When the deal was done in November, Jeff Dishner, senior managing director at Starwood, said the assets showed ‘attractive fundamentals’. “The balanced and steady growth of the Swedish economy, the prime location of these assets and the strong tenant profile fit perfectly with our investment focus,” he added.
Reflecting on the transaction, Nordic Real Estate Partners’ Rickard Dahlberg notes: “That is the largest transaction in the direct market by an international player. Kooperativa Förbundet had been trying to unload the properties off its balance sheet for some time, but there are not many players that can take down such a sizeable transaction.”