Direct investment enjoys Nordic upswing

Interest in direct investments in Nordic real estate is growing, especially from international investors. Large institutional investors looking for geographical diversification often choose local property funds to manage their money, and competition from pension money is strong.

“In the Nordics, and in particular in Sweden, a lot of pension money owns many of the core properties in the major cities,” says Helena Olin, head of real asset investments at the Second Swedish Pension Fund AP2. “That can make it hard to compete for some newcomers. For some international investors, it still is a small market, but looking at return figures, they should have already been here a few years ago.”

In specialised areas in particular, it can be more difficult for new investors to enter the market, for example in retail parks, where real estate company Svenska Handelsfastigheter operates.

“We have seen competition going down, as widespread uncertainty around retail properties makes it more difficult to get financing for new investors, [though] this is not a problem for us,” says the company’s chief executive Lennart Sten.

On the list

Nevertheless, international private equity funds are increasingly pushing into the Nordic property market.

“There is a lot of interest from international investors in Nordic real estate, especially in direct investments,” says Max Barclay, head of full-service Swedish property firm Newsec Advisory. “But the individual deal sizes are still too small, so investors are turning to buying listed companies.”

The approach by US investment house Starwood Capital is a prime example. In early April, the investor in global real estate made a bid to take private Victoria Park, the sixth largest Nordic property company by market capitalisation, as of trading data on March 29.

The private equity fund has locked in 31.5% of the shares and communicated that it needs at least 35% approval of its offer to go through with the purchase, according to Mikael Söderlundh, head of research and partner at Pangea Property Partners, which advises Starwood. However, Victoria Park’s board have recommended shareholders not to accept the deal. The acceptance period ends at the end of May.

“If you would like to invest Ä2bn or Ä3bn, you can do this slowly by adding assets or quickly,” says Mr Barclay. “But as the stock market is trading at a discount, we will probably see more mergers, larger deals and take privates in the near term.”

Another big firm with big plans in the Nordics is US private equity fund Blackstone. One of the buyers behind the largest takeover in the sector in 2017, Blackstone, together with local fund Areim, acquired all shares in Finnish retail and office owner, leaser and developer Sponda for an estimated €3.8bn, before delisting the company.

Among other transactions, Blackstone also sought to buy out the shareholders of residential property owner and developer D Carnegie in 2016, and as of the end of 2017 held 64% of the voting rights in the business.

“The region is one of the wealthiest in Europe, with growing populations, strong urbanisation trends and a liquid and transparent real estate market supported by significant domestic and international capital,” says James Seppala, head of European real estate at Blackstone. “Our Ä7bn office, retail, residential and logistics portfolio continues to perform strongly and we look forward to investing further in the region.”

Advisories are reacting to the international push. To serve this growing market and potential new client base, Newsec is looking to set up an office in London, which is expected to open at the back end of 2018.

A currency play

According to Pangea Property Partners research, the most active investors looking to add Nordic real estate exposure in 2018 are institutional investors, property funds and international investors. According to Pangea’s Mr Söderlundh, crossborder transactions in particular have been picking up.

“Net we have seen almost Ä10bn of crossborder investments in 2017 and expect this trend to continue this year,” he says. “We have never seen such a high number before.”

Some of this money is related to pan-Nordic cashflow, but about 60% comes from outside the region, notably Germany, the UK and US. “For a lot of Anglo-Saxon investors, the local currencies in the Nordics are quite attractively valued,” says Mr Söderlundh.