Having focused exclusively on the residential sector for your first two funds, why did you decide to broaden your mandate for your third fund?
Niam Fund III, which is now almost fully invested, has been targeting offices, retail, logistics and light industrial assets. We're an opportunistic fund; we don't look at core assets at all. We buy properties and portfolios with a problem. We wanted to look at institutional properties that aren't institutional for the moment because of vacancies or they need refurbishment or you can work on the cost side. We said, ‘Where we can add value is through active management.’ Niam I and II bought blocks with rental apartments. Those were pure residential bets—where Niam bought portfolios of rental blocks in Sweden—and we made out very well. But then the yields were at eight or nine [percent] in certain areas, whereas now, in the same areas, the yields would probably be four or five [percent]. So I think that play is over.
So is adding value to residential properties in the Nordic region today too much of a difficult play?
Not always. What you can do in Sweden and Finland is develop a rental property for sale because then you're in the free market. If you develop apartments for rent, the rents are regulated so tightly in these countries you can't add value to them. But converting these properties for sale, I think that is an interesting market. And that's something we're looking at, especially in Sweden. It's quite advantageous when you take a property from the rental market and sell it because the ownership market of apartments is a free market. So you take it from a socialist system and put it into a capitalist system. One example is a project going on right now here in Stockholm: We bought a mixed-use block in a good city center location with residential, retail and office space. We created a multi-level property out of the residential part and sold it to the tenants. What we made was an office building with shopping on the ground floor and a storage area one floor below. It's in a good location in terms of subways and road access: There are lots of people moving around the area. So now we're transforming the storage area and the whole floor beneath the building into retail, and we're actually quadrupling the square-meter rent, because it used to be Skr800 ($119; €86) per square meter and now it's up to more than Skr3,000. That, of course, took some planning and zoning and permitting, but in the end it was well worth the effort. There are other opportunities in residential as well. Sweden is one of the few countries in Europe that has a growing population. We take quite a few immigrants, and the birth rate is quite good as well. So a growing population needs more apartments.
As foreign investors have increasingly moved into the Nordic market, are you feeling increased competition for deals?
Our competitors, as we see it, are really the local construction companies that have a development arm and the major local quoted property companies. Whereas the international players, we see them today as the natural buyers of our products once we fix them. We have some 20 locals on the spot here in the Nordic countries. Of course, we have an advantage having years of experience in this region. Also, being part of the Stronghold Group where [analyst] Newsec is a sister company gives us a big advantage over foreign investors. They are really the Jones Lang LaSalle of the Nordic countries. Of course, there are all kinds of Chinese walls between the two activities, but still, we can utilize their network for sourcing deals. They're in daily contact with the whole market, and they've put together this proprietary five-year model where they try to forecast yields, rents, vacancies, returns and so on. And that's not sold out to the market, that's kept within the group. Niam can then use that model when we form our strategies.
What are your main strategies for adding value to properties in this region?
It's along the whole line. Over the past nine years we've had a track record of 30.3 percent annual IRR. That's done through cost control. That includes actively managing the cost side, but even more so it's about managing the income side. We want to make all of the existing square meters pay more, and we do that through re-tenanting, renegotiation and adding more space. It also includes building more efficient units, as in portfolios. Of course we have had a passive yield shift—that goes for all of Europe. But we like to believe that we've actively been able to accomplish some of the yield shift, as well, by doing things better and by building portfolios.
Can value be added through greenfield product development?
Greenfield product development is well within our scope. We're in the midst of one major project now in central Stockholm, right next to Grand Central Station. It's a mixed-use hotel and office project with some 60,000 square meters. Today it's a derelict building that will be torn down. We've been taking it through planning, zoning and permitting and we will start physical construction later this year. Previously it was a postsorting terminal, but it's been abandoned for a number of years. It was city-owned. The city of Stockholm has wanted something to happen on that site for some time.
When you're looking to rezone like that, is that a difficult process in Sweden?
The processes here are quite efficient. It still takes time, but that's the story everywhere. It's predictable: You know pretty much what you're going to get. In Stockholm we have quite tight zoning and regulations in terms of height, but that can be good because you could say that that keeps the pipeline at a reasonable level, in terms of putting new square meters out on the market.
That's perhaps one of the real advantages compared with the foreigners, being able to move in that system and have the right contacts in the different municipalities. We like to believe we are quite good at handling the red tape.
Why is it that you've chosen to target light industrial properties for this latest fund? Is there significant opportunity there?
We have some logistics and light industrial properties which are predominantly in Sweden. The light industrial properties are involved in various kinds of manufacturing, but not the polluting kind, just assembling things. I think perhaps that's a difference between the Nordic countries and the rest of Europe. As an asset class, light industrial is quite primitive; it's less developed here than in most European countries. I think the foreign investors and the Swedish players haven't really thought much about it, but it's definitely coming up, especially as commerce increases.
Looking ahead, are you concerned that the global credit crunch is going to negatively affect your investing here?
We see the credit worries as a good thing for us. The spread has become too small between core properties and properties that need a lot of work to become core properties. So, as we go for the management-intensive opportunities, we want to see the yields coming up for those properties, because, of course, then we can buy them cheaper.