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"The third quarter witnessed a heightened focus on macroeconomics across the market. The severe recession we had been concerned about several months ago has not fully materialised, and inflation appears to be coming under control. It is evident that the Swedish commercial real estate market is displaying notable vulnerability, with a slow recovery outlook for the coming year."
The policy
As anticipated, the Swedish central bank raised its policy rate by 25 basis points on September 21st and indicated potential future rate hikes without an aggressive trajectory. The presented interest rate path suggests a possible increase in late 2023 or early 2024, with a 40 percent likelihood, reaching a peak of 4.10 percent by summer 2024. The first rate cut is likely to be deferred until summer 2025, contingent on a rate hike, otherwise, it might be postponed until late 2025.
Development of policy rate in Nordic countries 2023 Q3
CPI inflation is forecasted at 8.6 percent in 2023 and 4.6 percent in 2024, while CPIF, factoring in interest rate changes and Riksbank's inflation target, is expected at 5.9 percent and 2.5 percent for the same years. This suggests Riksbank's rate increases impact broad inflation, with CPIF nearing the 2 percent target by yearend.
The Riksbank's primary concern is the weak Swedish krona. They've announced a move to hedge their currency reserves, selling $8 billion USD and €2 billion EUR for Swedish kronor, starting September 25th. This aims to support the Swedish krona, but we deemed that the impact may be limited due to the relatively small volumes.
Inflation development in Sweden 2023
China facing a crossroad?
China Evergrande group’s ongoing liquidity crisis has awakened alarms throughout the global financial landscape. As one of the property giants in China, burdened by immense debt, struggled to meet its financial obligations, sparking concerns of a potential default. As the situation unfolds, Evergrande has faced increased scrutiny from both creditors and regulators in both the U.S. and China.
In August, Evergrande applied for Chapter 15 bankruptcy protection in a U.S. court, which allows a U.S. bankruptcy court to intervene in cross-border insolvency cases involving foreign companies that are undergoing restructuring from creditors. Several days ago, the group revealed that due to an investigation into one of its subsidiaries, it was unable to issue new notes under its debt restructuring plan.
Uncertainties persist as Evergrande’s financial troubles continue to cast a shadow over China’s broader economy. The situation remains dynamic, with potential implications for not only the real estate sector but also the stability of China’s financial system. As we are following further developments, the crisis serves as a clear reminder of the challenges posed by excessive corporate debt in China’s rapidly growing economy.
The Nordics stand out internationally
Office assets in Stockholm have demonstrated remarkable resilience among the Nordic countries, boasting an occupancy rate of approximately 80% of pre-pandemic levels.
This robust recovery trend sharply contrasts with larger international cities such as London and New York, where the occupancy rate remains at just half of its prepandemic level.
It is important to note that this contrast can be attributed, in part, to the distinct characteristics of office assets, especially in the Nordic region. In many respects, Nordic and U.S. offices are hardly comparable and can almost be considered separate asset classes.
In the Nordic region, most office spaces are found in mixed-use areas, blending offices with residentials, retail, restaurants, and parks. These areas are so wellintegrated that it's often hard to tell the difference. Unlike in many other places, there are very few places in the Nordics with only offices. Instead, Nordic offices are usually in attractive neighborhoods where people not only work but also want to live and spend time.
Nordic downtown areas are bustling both late into the evening and early in the morning. Plus, they are known for being safe and pleasant due to lower social exclusion and homelessness. Largely due to this, convincing employees to return to the office hasn't been a particular tough task.
Furthermore, when comparing downtown areas in the Nordics with those in larger U.S. cities, notable differences emerge. In the U.S., downtowns are typically characterized by towering office skyscrapers with limited retail and dining choices, often lacking residential components. Sidewalks in these areas often double as makeshift residences for the homeless population. Consequently, desirable places for residence and leisure activities are commonly situated in suburban areas, while downtowns primarily serve as workspaces and often become vacant after regular business hours.
In summary, the Nordics provide a more multifaceted and attractive office environment that extends beyond mere workspace functionality.
The Swedish property market
Despite the above advantages, the Swedish real estate market has mirrored Sweden's macroeconomic situation with decelerated growth rate and falling domestic demand. Raising interest rates and worsened financing conditions are having a clear effect on the real estate market with almost 50% lower transaction volume than corresponding figures in 2022, to the same level as late 2009, early 2010’s.
We have seen a clear trend that even though both yields and rents have continued to increase, net operating income for many real estate owners has begun to fall, in addition to the increasing pressure on the refinancing options. According to the statistics Newsec provided1), the share of foreign investors so far in 2023 have increased to 33% (compared to average 10-15%), which is significantly higher than historical average.
It is worth noting that in Cushman & Wakefield's Q3 Investor Confidence Index, two primary factors have a substantial impact on portfolio values: initial market yields and financing conditions. These have consistently been important in previous surveys. However, there’s an observed trend where rental development is increasingly becoming a determining factor, influenced by vacancy trends. The top two factors are somewhat beyond our control, but we can impact the rental and vacancy development. We've observed a growing trend among investors, including landlords, who are placing more importance on this.
With the new economic landscape, we foresee that there will be more all-equity transactions coming from a wide range of equity buyers in the Q4 2023 and first half of 2024.
1) Newsec https://www.newsec.se/insights/reports/newsec-property-outlook-hoest-2023
