Sweden cooling

Having been through two property crises in the past 20 years, Sweden could be about to enter another difficult part of its history. Robin Marriott takes the temperature of a country that has attracted legions of foreign investors in recent years and discovers the heat has gone.

In the early 1990s, Stockholm, was not the best place to be a leasing agent. Sweden was in a home-spun financial crisis created by the 1980s credit bubble and property speculation, and by 1993, rising interest rates and rampant price inflation had led to property companies going broke and the Swedish banking system on the verge of collapse.

“Everyone has spoken of the Nordics as the leading growth opportunity countries in Europe, outside of Central and Eastern Europe in terms of GDP, but what is interesting is those growth forecasts are being revised downwards.”

Little wonder then that Leif Andersson would celebrate leasing a centrally located Stockholm office in those darkdays at a rent of just 1,200 Swedish krona (SEK or sometimes referred to as “crowns”) per square meter. According to report by Jones Lang LaSalle office rents in Stockholm's central business district reached SEK4,400 per square meter in the second quarter of this year. “People think you are joking if you tell them that today,” he says, adding that the only way you could get a tenant was to “steal one” from a nearby building. “Everyone was doing it,” he says, only half jokingly.

Nowadays Andersson runs his own Stockholm-based property fund and advisory business, AREIM AB, which counts The Blackstone Group and ING Real Estate among its clients.” Lars Almquist, Nordic head of London-based Protego Real Estate Investors, is another real estate professional who was working in Sweden during the crisis. At the time, he worked for an investment/private equity firm which was dissolved by the owners due to huge losses. Like Andersson, Almquist says the real estate market in Sweden today bears no resemblance to the early 1990s.

Almost everybody in Sweden will relate the same tale when prompted. The Nordic country, the largest of the region and the most dominant, is undoubtedly in a better position today than almost two decades ago. The Swedish banks are relatively stable having stayed out of the US subprime market and the riskier debt investments that have since weakened other European banks. The economy has been one of the best performers in Northern and Western European, and the void in property investment left by Swedish institutions in the wake of the internet bubble at the start of the millennium has been filled by German, UK and US investors, to name the most prevalent. Rents have been growing too, though not quite returning to the peak of the tech boom when commercial office space was going for SEK6,000 per square meter.

Nordic slowdownSweden's economy has been strong, but it is entering a slowdown phase

Economic data Sweden Norway Denmark Finland EU
GDP 2007 (%) 2.7 3.7 1.8 4.3 2.8
GDP 2008 (%) 2.4 3.0 1.5 2.8 1.9
Infation 2007 (%) 2.2 0.7 1.7 2.5 2.3
Infation 2008 (%) 3.5 3.1 3.0 3.2 3.4
Unemployment rate (%) 5.1 2.5 2.6 6.3 7.3
Number of employees (million) 4.7 2.4 2.8 2.4 n/a
Employment growth 2007 (%) 2.2 2.5 1.8 2.2 n/a
Employment growth 2008 (%) 0.8 1.2 0.2 1.2 n/a

Feeling the pinch
Competition for property assets in Sweden since the credit crunch has not caved in, but it has significantly reduced. Andersson says two years ago, there would have been be 10, 15 or 20 buyers for every transaction. But this has changed. Today there are far fewer.

The nature of debt providers has changed too. Instead of international banks supplying the debt to Blackstone and Goldman Sachs, it was three Nordic banks and one German bank that financed the offer, according to him. So, though the Swedish market is not going through a home-spun crisis of 1990s proportions, it is being affected by the current global turmoil.

According to some real estate managers, sentiment in the real estate market in Sweden is deteriorating at a faster pace than it has done in the past 10 years. Julian Gabriel, a senior principal at London-based Doughty Hanson Real Estate says the market “is changing very quickly. Everyone has spoken of the Nordics as the leading growth opportunity regions in Europe outside of Central and Eastern Europe in terms of GDP, but what is interesting is those growth forecasts are now being revised downwards,” he says. “What we have seen happen in the UK is now starting to happen in the Nordics.”

Though no one knows whether the downturn will be nearly as severe as previous ones, Gabriel says property values could fall by as much as those seen in the 1990s. He argues this is due to the fact there wasn't such significant yield compression in Sweden in the run-up to previous crises as there was in the run-up to the current crunch.

In a bitter irony, some investors have actually been drawing comparisons between the economic meltdown in the US and the economic crisis that Sweden went through in the early 1990s. Last month in New York, The Consulate General of Sweden and stock exchange NASDAQ OMX teamed up to deliver a seminar called How to Tackle a Financial Crisis. At Park Avenue's Scandinavia House, the former Swedish minister of fiscal and financial affairs, Bo Lundgren, reminisced about the good old bad days. The event was designed to pass on lessons in how public policy could be used to manage a credit problem and stabilize a financial system. For Swedes it is a bit of cruel joke: while their former finance minister was in New York giving lessons to the US about how to manage a crisis, the problems created by the US are lapping up on Sweden's shores.

However, there have been real estate deals to speak of in Sweden. As well as the sale of Vasakronan this year, there has been the sale of retail property company Steen & Strom, the purchase of a €222 million office portfolio by Aberdeen Property Investors from Goldman Sachs' Whitehall Funds and Niam Fund III, and the €253 million purchase of an office portfolio by Australian fund manager Valad Property Group from pension fund Alecta. Other buyers in Sweden in the first half of the year included UBS Real Estate and Catella's Nordic Cities Fund.

More stable shores
Anders Malmström, head of private equity at law firm DLA Nordic, says that despite the crunch, the property markets of Sweden and its smaller Nordic neighbors have remained relatively “calm.” Malmström argues that the Swedish government's privatization program has been very good for the market. According to the lawyer, this is something that is continuing. Stockholm City and other municipalities are selling property, allowing the government to reduce debt and also to start new developments. In Stockholm, for example, some of the receipts from public property sales are being funnelled into student accommodation, which is undersupplied, and into converting industrial areas into residential use.

He also argues that property prices have not reduced as dramatically as they have done in the UK because there is still capital around. The Swedish banks, he says, are still lending and Swedish property companies still have money.

That the Swedish banks are active is quite a story in itself. Just over two years ago, German banks were extremely active lending in Sweden. After previous systemic banking implosions, Sweden's banks shied away from much involvement in US subprime investments. As a result, they are able to “keep the market going,” says Malmström.

In mainstream private equity, large Swedish firms such as EQT have also gone international, so large buyouts domestically have slowed down quite a lot. However, there are many mid-market deals happening. In the real estate sector, Malmström says Middle Eastern money is starting to arrive, as are some Chinese funds. “Though they haven't made any large purchases, we are seeing them a little bit,” he says.

And despite signs of economic slowdown, private equity real estate firms still believe there are interesting opportunities. Doughty Hanson's Gabriel says his firm sold the last of its Nordic investments at the end of last year. However, it is still looking at new investment opportunities where it can add value, including retail property as a “counter cyclical play.” Retail has been a massively popular not just in Sweden but across the Nordic region on the back of healthy consumer spending. It helps that tenants have no right to extend their leases, which Nordic retail funds such as Protego's have been able to capitalize on by ushering in new tenants on higher rental terms.

Now that the GDP forecasts are being downgraded, the case for buying shopping centers seems less compelling, but Doughty's Gabriel and Protego's European investment director David Turner point to the ability of their professionals and local partners to actively manage assets to add value. Gabriel says that nothing is going to make “dramatic money” but what you have to do is counteract those falling values in terms of the market generally. “People are worrying about consumer spending, but we think that means there are less people looking at shopping centers,” he says.

“Competition for property assets in Sweden since the credit crunch has not caved in, but it has significantly reduced.”

That may be true. But as Gabriel and Turner both acknowledge, their funds may not be acquiring assets any time soon. One of the problems for such firms, and opportunity funds in general, is that owners of real estate in Sweden are not under much pressure to sell. They have not really adjusted themselves to the reality that values have fallen, either. But as Andersson says, the picture is not nearly as bleak as it was for him in the 1990s. The leasing market still appears to be strong, though he admits there is a feeling that activity will weaken.

Real estate professionals are feeling less gloomy in general because the market is nothing like the financial crisis in Sweden in the 1990s. “I know exactly how it was then,” says Andersson. “People who have only been around for a few years don't have a clue. 1991 and 1992 were an anomaly. Everything went wrong at the same time. No one expects the same situation in Sweden again.” There are plenty of people who certainly hope not.