Scandinavian property investors happy to play at home and away

Property in the Nordic region saw a surge in total returns last year, in part driven by local economic hot spots such as Stockholm. But will this trend continue? And what of the regional peculiarities?

Nordic property values have more than doubled in the past decade, according to figures from Investment Property Databank (IPD). Its latest Nordic Annual Property index report, for the year ending December 2010, showed the trend continuing after a hiccup in 2008 and 2009.

Regional total return from property (capital growth and income) jumped to 8.5% against 2.8% the previous year in local currency terms.

Sweden, the biggest constituent in the index, provided total return of 10.4%. Norway recorded 8.2%, Finland 7% and Denmark 5.3%, according to IPD calculations.

Residential property leads the way, but there were also good returns seen in retail, office and industrial.

“Compared to the rest of Europe, returns were promising, showing the resilience of the Nordic property market,” said Christina Gustafsson, MD of IPD Norden, when the figures were released in April.

It is, of course, important to distinguish between direct investments in property and those in property securities.

This manifests itself in the different views of fund selectors and the way local distribution platforms are experiencing the client search for property as an asset.

Direct demand

Jim Rotsman, Stockholm-based head of Nordic Investment Management and responsible for investment proposition at Skandia, says that from where he sits, the level of interest in property has not been excessive.

But he believes this may be because most investors in Sweden are already heavily invested in property in a private capacity, away from their collective investments.

Certainly, evidence suggests individual Swedes have been piling into direct property at an alarming rate. The Swedish Financial Supervisory Authority (Finansinspektionen) introduced a mandatory home loan-to-value cap of 85% in October 2010. By April this year, it said reports from credit managers at seven banks suggested average LTV rates fell sharply.

Meanwhile, Riksbanken, the central bank, decided on 19 April to raise its key repo rate by 25 basis points to 1.75%, in part citing rising expectations of household inflation.

In contrast, Karolina Qvarnström, responsible for manager selection for internal funds at Länsförsäkringar Fondförvaltning, points to the popularity of the Länsförsäkringar Fastighetsfond in the context of the provider’s range of funds.

This SEK4.5bn (€503m) outsourced property fund is managed by Gunnar Lindberg, senior portfolio manager at Alfred Berg, the Nordic specialist at BNP Paribas Investment Partners.

Nordic property securities held by the fund last year benefited from a combination of yield demands falling slightly, higher valuations of property firms, and good dividends, he says.

The fund gained about 50% in the past year. It is up by about 500% over ten years, and by up more than 1,300% since launching in December 1990, figures from Fondförvaltning show. Lindberg says it was the most clicked-on fund last year on the internet-based Avanza and Nordnet fund distribution platforms for the Swedish market.

The main danger is monetary tightening that could run ahead of market expectations. “Prices are discounting market expectations of interest rate rises this year,” Lindberg says.

But if the Riksbank raises rates faster than expected, this could have an impact on prices of listed property securities.

This is because, generally speaking, there is a time lag before property firms can raise rents, as per leasing contracts, in response to unexpected rate increases. But higher interest rate hikes suggest a stronger economy, which is good for property firms. Lindberg is also able to respond in other ways – his mandate allows him to invest up to 30% in other Nordic markets should the monetary cycle in Sweden tighten excessively in relation to its neighbours.

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