Handbook for the Norwegian commercial Real Estate Market
content
3
content General information
04
Foreign Investments
06
The macro outlook
08
the CRE market in Oslo
16
a “rough guide� to investing
30
legal framework
36
bank and bond financing
44
selected tax issues
48
management of cre
52
development of CRE
58
forward sale of property
60
publication partners
62
4
general information
General information As background to the key elements of the Norwegian commercial real estate market, the following is a summary of statistics about Norway, its population and economy. KEY INFORMATION
Population: 5.3 million Size: 385,186 sq. km. Languages: Norwegian and Sami (official language in six northern municipalities) Government: Constitutional monarchy & parliamentary democracy Member of: European Economic Area (not EU) & NATO DEMOGRAPHICS
Population growth Fertility rate Persons per household Life expectancy Home ownership Higher education Net immigration
0,9 % p.a. (SSB Q4 2016) 1.73 (SSB Q4 2016) 2.2 (SSB Q4 2016) Men 80.4 /Women 84.2 83 % (SSB Q2 2016) 32 % (SSB Q6 2016) 29,802 (SSB Q4 2015)
ECONOMY
Currency Norwegian krone (NOK) Interbank rate NIBOR Main industries Oil, gas, energy, fish, shipping GDP total NOK 3,059 billion / €337 billion (SSB Q3 2016e) GDP per capita NOK 582,411 per capita / €62,856 (SSB Q3 2016e)
GDP surplus NOK 108 billion / €11.930 billion (2016e) GDP growth 1.0 % (2016) CPI 3.5 % (Jan 2017) CPI-ATE 2.5 % (Jan 2017) LABOUR MARKET
Number of employed 2,647,000 (Dec 2016) Unemployment rate 4.7 % (Dec 2016) Rate of Employment 67.3 % (Dec 2016) (age 15–74) Employment growth -0,2 (Dec 2016) Public sector 34.3 % (Nov 2016) employment Average monthly salary NOK 43,300 / €4,765 (Dec 2016) TAXES AND DEPRECIATION
General Norw. tax rate 24 % of net income (2017) Depreciation Office buildings: 2 % Technical installations: 10 % Warehouse/industrial: 4 % Shopping centres: 2 % Hotels: 4 % Investments: 10 % Document tax 2.5 % of transaction volume Property tax Depends on municipality VAT 25 %
5
tromsø
Inhabitants: 75,762
trondheim
Inhabitants: 274,922
bergen Oslo region
Inhabitants: 411,965
Inhabitants: 1,344,368 stavanger
drammen
Inhabitants: 334,586
Inhabitants: 166,067 fredrikstad & sarpsborg
Inhabitants: 60,183
INTEREST RATES PER 27.02.17
AREA DEFINITIONS
3M NIBOR 3Y Swap 5Y Swap 10Y Swap 10Y Government bond
BTA BRA P-rom BYA
1.06 % 1.35 % 1.53 % 1.91 % 1.67 %
EXCHANGE RATES PER 01.02.17
EUR/NOK 8.85 USD/NOK 8.35 GBP/NOK 10.37 SEK/NOK 0.93 DKK/NOK 1.19 CNY/NOK 1.22
Gross area Usable area Living area-residential Foot-print of the building
ABBREVIATIONS
CBD Central business district CPI Consumer price index CPI-ATE CPI adjusted for tax changes and excluding energy products NOK Norwegian krone SSB Statistics Norway SPV Single purpose vehicle
6
Large Transactions
FOREIGN INVESTMENTS 2016 Largest transactions by international investors:
Date
Buyer
vendor
property
location
type
Mar. 2016
Closed ended fund by Arctic
Madison International Realty (USA)
Statoil Fornebu
Oslo
Office
price (mnok) 3,900 (€439)
Dec. 2016
UNION Real Estate Fund II
ICA Fästigheter (Sweden)
ICA portfolio
Regional
Retail
2,100 (€236)
Sept. 2016
Olav Thon Eiendomsselskap
Kléppiere/S&S (France) 49.9 %
Åsane Storsenter
Bergen
Retail
1,930 (€217)
Oct. 2016
Nordic IP Top Holding AS
Statoil
Mongstad and Vestbase offshore supply bases
Regional
Industrial
1,250 (€141)
Sept. 2016
Samhällsbyggnadsbolaget i Norden AB (Sweden)
Closed ended fund by NRP
Gullhaug Torg 4
Oslo
Office
1,180 (€133)
Oslo
Hotel
900–1,000 (€101–112)
Nov. 2016
Buyer confidential
Partners Group (Switzerland)
Karl Johans gate 12 / Kirkegata 34
Dec. 2016
Samhällsbyggnadsbolaget i Norden AB (Sweden)
Entra ASA
Entra portfolio in Kristiansand
Regional
Office
860 (€97)
Oct. 2016
Ragde Eiendom
Partners Group (Switzerland)
Christiania Qvartalet
Oslo
Office
800 (€90)
Nov. 2016
Nordea Liv
DREOF II Europe Holdings Limited (USA) (JV w/Union Eiendomskapital)
Verksgata 1A / Nykirkebakken 2
Stavanger
Office
780 (€88)
June 2016
Hemfosa Fastigheter (Sweden)
Closed ended fund by Pareto and Malling
20 % of Offentlig Eiendom AS (6 properties)
Regional
Office
730 (€82)
Dec. 2016
Citycon (Finland)
Tryg Forsikring AS
Folke Bernadottes vei 50
Bergen
Office
710 (€80)
Feb. 2016
Balder Fastigheter AB (Sweden)
Closed ended fund by Pareto
Terningen Arena
Regional
Office
700 (€79)
Regional
Office
650 (€73)
Logistics
585 (€66)
Apr. 2016
Kildare Partners (UK)
Storebrand Eiendomsfond
Parts of Storebrand Eiendomsfond portfolio
July 2016
Round Hill Capital (UK)
NLI Eiendomsinvest ASA
NLI Eiendomsinvest
Regional
Dec. 2016
v (USA)
OBOS Forretningsbygg
Vitaminveien 1
Oslo
Office
520 (€58)
Sept. 2016
Deka Immobilien (Germany)
Norwegian Property ASA
Stortingsgata 6
Oslo
Office
510 (€57)
Jan. 2016
Genesta Nordic Real Estate Fund II (Sweden)
Eksportfinans
Dronnings Mauds gate 15
Oslo
Office
500 (€56)
Aug. 2016
H.I.G. Capital (USA)
Closed ended fund by Pareto
Kongsberg Industripark
Regional
Office
475 (€53)
Apr. 2016
Tristan Capital Partners (UK)
Nordea Liv
Stoa Vest
Regional
Retail
440 (€49)
May 2016
AXA Real Estate (France)
Nordea Liv
Lille Grensen 7
Oslo
Office
420 (€47)
Scandinaviegaarden
Dorsay (Canada) (JV w/Union Eiendomskapital) 25.5 %
Karl Johans gate 8 / Dronningens gate 25
Oslo
Retail
415 (€47)
May 2016 Apr. 2016
Meyer Bergman (UK)
Nordea Liv
Slottspassasjen
Oslo
Retail
390 (€44)
Nov. 2016
Unknown
Partners Group (Switzerland)
Markveien 35
Oslo
Retail
340 (€38)
Dec. 2016
Wallenberg-family / EQT (Sweden)
Smedvig Eiendom
Property portfolio in Dusavik
Stavanger
Office
300 (€34)
Note that listed gros property value in many cases are estimates and not verified.
Arctic Securities / akershus eiendom
7
International investors are TRANSACTION MARKET significant buyers in Norway
International Increasing share of investors international investors
are significant buyers in NorwayOslo highly ranked
Buyers of real estate (% of total transaction volume)1
in the Investment Intensity Index Selection of international Selection of international investors in investors in Norway Norway
Buyers of real estate % of total transaction volume1
2 Oslo
19%
2016 2016
81 %
81%
Oil An n et
2015
45%
55%
55 %
45 %
27%
2014 Oi
l
n An
73%
et
2014
12%
73 %
27 %
2013 88% Oi
l
8%
n An
et
2012
2013
88 % 12 %
92% International investors
Norwegian investors
London
Oi
l
(1) Including deals larger than NOK 50 mill n An
Note:
1
3 Munich23 Oslo Munich 4 Sydney 4 Sydney 5 Honolulu 5 Honolulu 6 Copenhagen 7 Auckland 6 Copenhagen 8 Frankfurt 7 Auckland 9 Silicon Valley 10 Melbourne 8 Frankfurt 11 New York 9 Silicon Valley 12 Stockholm 13 Paris 10 Melbourne 14 Boston 11 New York 15 Dublin 16 San Francisco 12 Stockholm 17 Austin 13 Paris 18 Edinburgh Brisbane 14 Boston19 20 Berlin 15 Dublin • The index compares the volume of direct real 16 San Francisco investment in a city relative to the city’s 17 estate Austin current economic size. 18 Edinburgh • The index provides a measure of real estate 19 liquidity Brisbane as well as a useful barometer of a overall “health” 20 city’s Berlin
19 %
2015
Oslo top ranked in JLL’s Investment 1 London Intensity Index (March 2016)
et
2012
36
92 % 8 %
Oi
l
n An
et
norwegian investors
(1) Including deals larger than NOK 50 mill
international investors
• The index compares the volume of direct real estate investment in a city relative to the city’s current economic size. • The index provides a measure of real estate liquidity as well as a useful barometer of a city’s overall “health”
8
The macro outlook
Stein Bruun Chief Economist, Arctic Securities AS
The macro outlook:
Norway: finding its footing again
The setback for the Norwegian economy in the wake of slumping oil prices and sharply declining investment in the petroleum sector proved to be less severe than widely feared. Economic activity was indeed subpar in 2015-16, but a recession didn’t occur as stronger fiscal stimulus, lower interest rates and a sharply weaker NOK exchange rate provided important offsets. Growth gained some speed during 2016, and activity indicators and firmer sentiment in the business sector suggest an ongoing recovery which should result in more trend-like growth in 2018. Momentum in the Norwegian economy slowed following the sharp drop in oil prices starting in the second half of 2014 which eventually hit capital spending in the p etroleum sector. Measured in volume terms, such capital spending was cut by one third from the peak in Q3/13 and up to the final quarter of 2016.
Slowing, not slumping
As the drop rippled through to the rest of the economy, growth in mainland GDP – i.e. excluding oil/gas and shipping – eased from 2.2 % on average in 2013–14 to 0.8 % in 2016, the weakest full-year outcome since the recession in 2009 and the second slowest rate in 28 years. Nonetheless, considering the fact that petroleum spending measured against mainland GDP declined from 9 % in 2013 to 6 % in 2016, it’s probably s urprising that the economy avoided an even steeper setback. One key reason is that the economic policy set-up has allowed the authorities to deliver a strong dose of fiscal and monetary stimuli, while the NOK exchange rate depreciated sharply. Moreover, the hit from the slump in petroleum investment has largely been confined to a few counties along the southern and western coast of Norway most exposed to the petroleum sector. Although the increase in the LFS unemployment rate
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9
Executive summary The setback for the Norwegian economy in the wake of slumping oil prices and sharply declining investment in the petroleum sector proved to be less severe than widely feared.
Momentum has built slowly over the past year and activity indicators and firmer sentiment in the business sector suggest an ongoing recovery, which should result in more trend-like growth in 2018.
Admittedly, mainland GDP – excl. oil/gas and shipping – gained only 0.8 % in 2016, the weakest outcome since the recession in 2009 and the second slowest rate in 28 years.
from 3.5 % in 2014 to 4.7 % in 2016 was very sharp by Norwegian standards, the geographical narrowness helped lessen the impact on aggregate demand. In fact, apart from the drop in petroleum investment, growth in final domestic demand was actually much stronger in 2016 than in the previous two years and the strongest since 2012. More to Norway than oil (and gas)
It’s thus worth emphasizing that there’s more to the Norwegian economy than petroleum: activity in the mainland – or non-petroleum – economy is the primary basis for production, employment and income. Among other things, non-oil business investment has for years surpassed capital spending within the petroleum sector, and in terms of denting GDP, the drop in non-oil business investment in 2009–10 was actually larger than that in petroleum investment in 2015–16.
That’s not to say that activity within the petroleum sector is of little importance. To the contrary. For one thing, the central government’s petroleum revenues made up roughly a quarter of the total in 2014. At the time, gross value added within petroleum and shipping (very volatile) accounted for almost 22 % of overall gross domestic product, while petroleum investment and exports corresponded to 24 % of GDP on the demand side. Moreover, while direct employment in the sector is relatively limited, Statistics Norway has estimated that by 2013 almost 9 % of overall employment was directly and indirectly dependent on petroleum activities when one includes not only suppliers of goods and services to the sector but sub-suppliers as well (private estimates have put the figure higher.) Since then, some 50,000 of such jobs have been lost, according to Statistics N orway, corresponding to almost 2 % of overall employment.
10
The macro outlook
WORKING AGE POPULATION (15–64) AVERAGE ANNUAL GROWTH (%) 1990–2030 1.6
1.6 Advanced economies Norway
1.2
1.2
0.8
0.8
0.4
0.4
0
0
−0.4
−0.4 1990
1995
2000
2005
2010
2015
2020
Policy response providing powerful offsets
As mentioned, economic policy has been strongly counter-cyclical since oil prices started diving from mid-2014 on. This is to a large extent the result of changes to the economic policy mix made in 2001. In particular, a “golden rule” for fiscal policy links the non-oil budget deficit to the Government Pension Fund Global, Norway’s sovereign wealth fund, which is entirely invested abroad. Net petroleum revenues have for many years been set aside in the Fund where assets at end-2016 amounted to NOK 7,510bn, corresponding to 274 % of mainland GDP. The fiscal policy rule states that the non-oil budget deficit over a cycle might correspond to the assumed real return on the Fund, originally set at 4 % but recently reduced to 3 %. As such, the rule effectively shields fiscal spending from volatility in oil prices. To wit, the central government’s net petroleum income – taxes, income from direct holdings and dividends – was cut by two thirds in 2014–2016, or fully 7 % of overall GDP. In almost any other country, such a shortfall in revenues would have resulted in belt-tightening measures. In Norway, the fiscal policy rule allowed the government to provide a fiscal impulse which averaged
2025
2030
Source: Norges Bank
0.7 %-point of mainland GDP in the three-year period (while the non-oil budget deficit over this period averaged 2.7 % of the Government Pension Fund Global and thus less than what the rule allowed for). It should be noted that the non-oil central government budget deficit in 2016 (estimated at almost 8 % of mainland GDP) for the first time exceeded net petroleum revenues. The shortfall was covered by transferring some of the interest income and dividends received by the GPFG while not withdrawing any of the fund’s assets which are still expected to increase. (Including overall interest and dividend income in the two pensions funds, the overall budget balance was still in surplus.) Meanwhile, Norges Bank cut its key deposit rate by 100 basis points from late 2014 to March 2016, at times despite that inflation was overshooting the 2.5 % target. As a “flexible inflation targeter”, the central bank thus aimed at stabilizing the economy and w eakening the NOK exchange rate to mitigate the demand blow from oil-sector investment, and to facilitate the transition of the economy to become less dependent on the petroleum sector.
Arctic Securities
11
there’s more to the Norwegian economy than petroleum: activity in the m ainland – or non- petroleum – economy is the p rimary basis for production, employment and income.
As more than 90 % of households’ mortgages are on floating-rate terms, changes in short-term interest rates (beyond a certain size) tend to have quite an impact in Norway. Lower policy rates thus contributed to lessening the moderation in private consumption growth. Moreover, as overall inflation was very elevated through 2016, real short-term interest rates were very negative and more so than among some European peers where nominal policy rates are lower.
Exploration activities and spending on field developments have been cut back sharply in the past two years, but investment in existing fields – though declining – has capped the downside as it makes up more than 40 % of the aggregate. Finally, the drop in oil prices has had very little impact on petroleum production as the marginal production cost is very low at existing fields. In all, nominal investment in the petroleum sector in 2016 was the fifth highest on record.
In addition to lower policy rates, the NOK dropped some 18–20 % on the trade-weighted index between mid-2014 and early 2016 (to an all-time low for the index dating back to 1992). The TWI has since recovered some of the loss in part reflecting e.g. recovering oil prices, while one key reason for Norges Bank’s continued easing bias has been to keep NOK from appreciating too rapidly.
Capital spending within petroleum should see a more modest decline in 2017 and turn somewhat firmer in 2018, in part due to accelerating spending on the vast Johan Sverdrup field where production is expected to start in late 2019. Including the phase 2 of the development, the field will at peak production account for some 25 % of overall oil and gas output from the Norwegian continental shelf. More g enerally, operators’ cost-cutting and efficiency measures thus far have vastly improved project economics and significantly cut the level of break-even oil prices, which among other things has resulted in a number of smaller field developments. In addition, the final investment decision for the Johan Castberg field in Barents Sea (with resources of approximately ¼ of the Johan Sverdrup field) is very likely before end 2017. More gener-
Petroleum investment should rise modestly in 2018
The drop in capital spending within the petroleum sector has been sharp, but investment hasn’t collapsed in the face of the more than 70 % plunge in oil prices between June 2014 and January 2016.
12
The macro outlook
Non-oil business investment has for years surpassed capital spending within the petroleum sector.
ally, the wide-spread adjustments made by operators in the past couple of years have made them much more robust in case of any relapse in oil prices. The tide has turned
The Norwegian economy has been on a slow recovery path since a low point was reached late 2015/early 2016. At the time, the year-on-year growth rate in mainland GDP was a lacklustre 0.3 % but the subsequent improvement lifted annual growth to 1.2 % by the fourth quarter of 2016. Momentum should gain speed in 2017 while 2018 should see a more trend-like growth in mainland GDP of slightly more than 2 %. Firstly, the drag from the petroleum sector is waning which among other things should help stabilize labour markets. Secondly, following a period of markedly higher inflation of 3.6 % on average in 2016 fuelled by the
revious drop in the exchange rate, a marked modp eration will improve households’ purchasing power; hence, real wage growth should turn positive again. One downside risk, though, is if existing home prices which have been r ising strongly should turn abruptly weaker, which likely would hit consumer confidence and presumably consumption as well. (Note, though, that growth in private consumption held up way better in 2015–16 than what very, very negative sentiment would suggest.) Thirdly, markedly higher existing home prices in the wake of historically low mortgage rates have already spurred stronger residential investment (which in 2016 actually added almost as much to aggregate GDP as declining petroleum investment subtracted). Finally, exports of non-petroleum goods should stabilize after a very surprising and steep drop in 2016 with the better part of it due to a few special factors.
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Favourably fundamentals
The fact that the Norwegian economy avoided a recession in the face of plunging oil prices, petroleum revenues and capital spending serves to underscore an underlying resilience which to a large extent is due to a flexible economic policy framework. At the same time, the welfare system provides a very important cushion for households/homeowners/consumers in case of adverse developments, while in addition there’s very high social mobility and income inequality is one of the lowest among OECD countries. Moreover, in a longer-term perspective income growth has been healthy for a prolonged period of time. In addition, population growth is stronger than among most European peers. Admittedly, Statistics Norway expects annual population growth to slow from 1.2 % on average in the ten years to 2015 to 0.9 % on average in the 2016–25 period, which still is well above the historic norm (0.5 % in 1970–2005).
13
Meanwhile, centralization continues. Since 2000, almost 40 % of overall population growth has been concentrated in the capital of Oslo and the s urrounding county of Akershus, and more than 60 % including the counties of Rogaland and Hordaland. For Oslo and Akershus, which together already hold one quarter of the Norwegian population, Statistics Norway’s projections (from June 2016) see an aggregate population growth of almost 30 % from 2016 to 2040. Finally, it should be added that the political system in Norway is stable. While a change of government has been frequent at general elections over the past 50 years and various form of coalitions have become the norm, there’s a broad consensus on the main features of economic policy and major reforms among the dominant parties.
14
transaction
Vitaminveien 1
Acquired by H.I.G. Capital (USA) for NOK 520 million (€ 58 million)
15
Photo: Nyebilder.no
16
The commercial Real Estate Market in Oslo
Ragnar Eggen
Tor-Øyvind Skjelvik
Partner – Head of Research, akershus eiendom
Analyst, akershus eiendom
THE COMMERCIAL REAL ESTATE MARKET IN OSLO The office building stock in the greater Oslo market today stands at around 8.5 million sq.m. Of this, roughly 3.3 million sq.m are situated within the city centre, marked on the map as the CBD-area.
last ten years, and Fornebu and Nydalen have seen the highest activity. The area marked as Rest of inner Oslo, is mostly used for residential, university and retail purposes.
Since 2007, the city centre has seen major urban redevelopments. Two new neighbourhoods on the water front, Tjuvholmen (the extension of Aker Brygge) and Bjørvika (by the central station), have been developed to become mixed residential and commercial areas. Bjørvika still has potential for further large development projects, and in the longer term, Filipstad just west of Tjuvholmen will be redeveloped, with up to 440,000 sq.m of new residential and commercial space.
The west of Oslo contains high-end residential areas with lower density. The northeast of Oslo and towards Oslo Airport Gardermoen is the core logistical area, with many distribution centres for retail, wholesale and third party logistics companies. Eastern and southern areas mainly consist of residential areas with varying degrees of d ensity.
Most of the office building stock is concentrated in densely built areas. Office zones outside CBD are generally found along the outer ring road from Lysaker through Nydalen, Hasle-Økern and Helsfyr-Bryn to Ryen. All areas have seen new development over the
Real office rents in Oslo have varied a lot over the last 20 years. During 2015, rental growth stagnated and we experienced a slight fall in rents in some submarkets. However, rents bottomed out last year and increased during the second half of 2016.
Oslo office rents
akershus eiendom
17
OUTER OSLO WEST
REST OF INNER OSLO
OUTER OSLO NORTH/EAST/ SOUTH
CBD
OFFICE RENtS, REAL 2016 NOK, 1985-2016: 5 000 4 500 4 000 3 500 3 000 2 500 2 000 1 500 1 000
1985 Q2
1990 Q2
prime
1995 Q2
2000 Q2
2005 Q2
rest of inner oslo
outer oslo north/east
2010 Q2
2016 Q2
outer oslo west
average rent
Source: Dagens Næringsliv leieprispanel
18
The commercial Real Estate Market in Oslo
5.5%
‘16
5.5%
‘15
6%
7% ‘14
7%
6.5% ‘13
7,5%
7%
8%
8%
‘12
5%
500,000 400,000
4.5%
700,000 600,000
7%
m2 office
800,000
8%
900,000
11%
1,000,000
13%
oslo office vacancy, SQ.M and %
300,000 200,000 100,000 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10
‘11
‘17 ‘18E Actual
‘19E ‘20E Forecast
vacancy level AT the start of the year net new office space added change in demand (absorbed space)
Vacancy levels in Oslo
Vacancy levels in Oslo today are in a very controlled phase. There has been little speculative building in recent years, and there is a very low net supply of office space over the next years due to low construction levels and a high volume of office space being converted to other uses, mostly residential. The take-up level has been strong and is believed to stay strong going forward. Thus, we believe the vacancy level will decrease over the coming years. Oslo office vacancy measured as floor space a vailable per January 2017 and within 3 months stands at 7.1 %, or approximately 595,000 sq.m. The vacancy level is expected to decline to below 7 % in 2018, and below 6 % in 2019 and 2020. Vacancy for the city centre is expected to remain 2–3 % points lower than the market average. New commercial real estate in Oslo
There was a significant peak in construction start-ups until the financial crisis in 2008 and an even sharper decline during 2009. In the last three years, quite stable levels have been seen for all real estate classes. Noteworthy new projects being finished within the next three years are two buildings in the Spikerverket
development in Nydalen by Avantor, which will accommodate Elkjøp Nordic and The Norwegian Tax Administration. The National Criminal Investigation Service (KRIPOS) will be moving into a new building at Bryn developed by Pecunia. Two new developments in Bjørvika, Diagonale and Eufemia, will be finished in 2018/2019, developed by HAV Eiendom and Olav Thon, and Oslo S Utvikling respectively. TV2 will move into Diagonale while the 21,600 sq.m. Eufemia will accommodate PwC and Microsoft. Regional markets
The regional property markets typically revolve around the three other larger cities in Norway, namely Bergen, Stavanger and Trondheim. Stavanger is the indisputable “oil capital” of Norway and has historically been the second most liquid commercial real estate market in Norway. The slump in oil prices and the gloomy outlook for investments are obviously having a severe impact on the region, with vacancy rates increasing and rents falling. Most of the companies in the Stavanger oil industry are situated at Forus, just south of Stavanger. Thus, this area has experienced a more severe setback than the Stavanger CBD. Bergen and Trondheim are also linked to the oil sector to some extent, but have a more diversified business sector and as such, the i mpact is less here.
akershus eiendom
19
Regional office rents, NOK/sq.m/year, 2006-2016: 2 400 2 200 2 000 1 800 1 600 1 400 1 200
2016 H1
2016 H2
2015 H1
2015 H2
2014 H1
2014 H2
2013 H1
2013 H2
2012 H1
2012 H2
2011 H1
2011 H2
2010 H1
2010 H2
2009 H1
2009 H2
2008 H1
bergen
2008 H2
2007 H1
2007 H2
2006 H1
2006 H2
1 000
trondheim
stavanger - cbd
Stavanger - forus (oil)
Source: Dagens Næringsliv
Regional office vacancy, 2006-2016:
12 10 8 6 4 2 0 ‘06
‘07
bergen
‘08
‘09
‘10
‘11
trondheim
‘12
‘13
‘14
‘15
‘16
stavanger
Source: Eiendomsmegler1 Midt-Norge, Eiendomsmegler1 Rogaland, Kyte Næringsmegling
In general, all these three cities are considered liquid, attracting capital from both pension funds and closed-ended funds. International capital has typically
been driven towards long lease objects with blue chip companies in the Stavanger region, and not towards Bergen and Trondheim.
20
transactions and yield levels
Transactions and yield levels Transaction market
The transaction market had a strong development until 2006/2007, with the peak volume in 2006. The market recorded a setback during the financial crisis in 2008, and 2009 saw the lowest volume of t ransactions of the last decade. However, the market recovered quite rapidly, and much faster than elsewhere in Europe, and was stable in the period from 2010 to 2013. In 2014, volume picked up further, and in 2015 there was a record high transaction volume of approximately NOK 120 billion (€13.5 billion) with international investors accounting for 41 % of the total volume. The transaction market in recent years has been assisted by low interest rates, coupled with good availability of bank funding, as well as a large amount of corporate/ portfolio transactions and international investors taking a larger share of the market. The high a ctivity
level we saw in 2015 continued through 2016, and the number of transactions surpassed the 2015-level, however, the transaction volume for 2016 amounted to approximately NOK 73 billion (€8.2 billion), down from the record volume in 2015. The reduction is mainly due to fewer large corporate/portfolio transactions. International investors stand for approximately 19 % of the total volume. Yield
As can be seen from the graph, office yields in Norway have been falling since the financial crisis in 2008, following the development in long interest rates. During 2016, prime office yields in Oslo fell from 4.25 % to 3.75 %, and we experienced yield compression for other long-lease properties. The downward pressure on yields is mainly driven by low interest rates, foreign activity and market participants financed solely by equity.
akershus eiendom
21
Interest rates and transaction yields, 2002-2016: 8,00% 7,50% 7,00% 6,50% 6,00% 5,50% 5,00% 4,50% 4,00% 3,50% 3,00% 2,50% 2,00% 1,50%
10y swap interest rate
10y gov. bond
transaction yield
jul. 16
jul. 15
jan. 16
jul. 14
jan. 15
jul. 13
jan. 14
jul. 12
jan. 13
jul. 11
10y prime yield curve
jan. 12
jan. 11
jul. 10
jan. 10
jul. 09
jul. 08
jan. 09
jan. 08
jul. 07
jul. 06
jan. 07
jan. 06
jul. 05
jul. 04
jan. 05
jan. 04
jul. 03
jul. 02
jan. 03
0,50%
jan. 02
1,00%
Source: The Central Bank of Norway, Akershus Eiendom
Transaction volume per year (MNOK) and share of international investors, 2006-2016: 120 000
60%
100 000
50%
80 000
40%
60 000
30%
40 000
20%
20 000
10%
0
0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Domestic Entra
Foreign Share of international investors
22
The retail market
Remi N. Olsen Senior advisor retail, akershus eiendom
The retail market The Norwegian retail market in general has seen stable growth over the last decade, except for a slight setback in consumption in late 2008/early 2009, and retail sales volumes have seen a slightly negative trend since the beginning of 2015. However, Statistics Norway expects to see growth rate in consumer spending, based on expectations of improved general economic conditions, from 2017 onwards. Historically, the Norwegian retail market has been driven by shopping centre expansion with domestic and Nordic brands as the drivers. With the highest density of shopping centres per capita at a pproximately 470 sq.m (compared to the average in Europe of approximately 275 sq.m) growth in shopping cen tre trading is now flattening out and in many cases has turned negative. Consumers are becoming more demanding and seek brands and products they find when travelling abroad. This has resulted in a revival of growth in the high street market and many international brands have sought locations in the centre of Oslo - where the potential turnover and footfall are highest. We expect to see a lot of leasing activity the next five to ten years where international brands are expanding in Norway, even though 2016 was a year with very low activity.
Rents have increased significantly during the last 10 years in the high street market in Oslo, and in the last three to four years the increase has been tremendous, reflecting the trend we have seen not only in cities like London and Paris, but also in Copenhagen and Stockholm. High street prime rents levelled out in 2015 after a slight decrease. We believe the decrease is only temporary, and that prime rents will stabilize around NOK 25,000 per sq.m. The luxury market is still performing best, followed by sports/outdoor brands. The strong market has attracted international retailers but also international investors looking for properties in which to invest. Due to the limited supply of good retail properties the competition among retailers, as well investors, to secure the best sites has been strong. Whereas 2015 had many large transactions, 2016 lacked large portfolio deals, but noteworthy transactions were the sale of Lille Grensen 7 by Nordea Liv to AXA Real Estate and the sale of Slottspassagen from Nordea Liv to Meyer Bergman, both high street retail properties. Large shopping centre transactions included Nordea Liv and Steen & Strøm’s (Klépierre’s) sale of Åsane Senter outside Bergen to Olav Thon and the sale of the M44 centre outside Bryne on the western coast. COOP Eiendom bought Felleskjøpet’s 50 % share of the property.
akershus eiendom
Prime rents retail, NOK, 2006-2016:
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Prime yield retail, NOK, 2006-2016:
27 500
1 750
7,5 %
25 000
1 700
7,0 %
22 500
1 650
20 000
1 600
17 500
1 550
15 000
1 500
6,5 % 6,0 % 5,5 % 5,0 %
2016
2015
2014
2012
2010
2009
Unit shops
2013
4,0 %
2011
4,5 %
1 350 2008
1 400
7 500 2007
1 450
2006
12 500 10 000
q1 2006
q3 2007
q1 2009
q3 2010
Unit shops
Shopping centres
q1 2012
q3 2013
Shopping centres
q1 2015
q3 2016
Big box
Big Box (right axis)
10,0 %
120
8,0 %
115
6,0 %
110
4,0 %
105
2,0 %
100
0,0 %
2016M09
2016M01
2016M05
2015M09
2015M01
2015M05
2014M09
2014M01
2014M05
2013M09
2013M01
2013M05
2012M09
2012M05
2012M01
2011M09
2011M01
2011M05
2010M09
2010M01
2010M05
2009M09
2009M05
2009M01
2008M09
2008M01
2008M05
-6,0 %
2007M09
85
2007M05
-4,0 %
2007M01
90
2006M09
-2,0 %
2006M01
95
Retail year-on-year growth
125
2006M05
Retail volume index
NORWEGIAN RETAIL VOLUME INDEX, SEASONALLY ADJUSTED, 2010=100, 2006-2016:
Retail sales year-on-year growth (r.h.s) Retail sales volume index: Excluding motor vehicles and petrol (l.h.s)
Source: Statistics Norway
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The hotel market
The hotel market
The average Norwegian hotel occupancy rate has been stable over the last 10 years, averaging Âapproximately 54 % in 2006 and 2016. However, the occupancy rates are considerably higher in Oslo, Bergen, Stavanger and Trondheim. In Oslo, the average occupancy rate is nearly 70 %, and a centrally located business hotel might have close to 100 % occupancy on weekdays. We have seen a stable development in the average RevPAR in Norway, while the development has been slightly negative in the Oslo market.
The Norwegian hotel market is typically characterised by a high portion of long lease contracts with revenue-Â based rents and substantial, guaranteed minimum rents. Thus, Norwegian hotel owners usually have much better downside protection than one finds in many other countries.
akershus eiendom
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OCCUPANCY RATE, SEASONALLY ADJUSTED, 2006-2016:
90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% JAN. ‘06
MAY ‘07
Sept. ‘08
jan ‘10
occupancy (oslo)
may ‘11
sept ‘12
jan ‘14
may ‘15
sept ‘16
occupancy (norway)
Source: Statistics Norway
REAL REVPAR, SEASONALLY ADJUSTED, 2006-2016: 1 100 1 000 900 800 700 600 500 400 JAN. ‘06
MAY ‘07
Sept. ‘08
jan ‘10
revpar (norway)
may ‘11
sept ‘12
jan ‘14
may ‘15
sept ‘16
revpar (oslo)
Source: Statistics Norway
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The logistics market
The logistics market
The map to the right shows where the main clusters of logistics properties are situated around Oslo. Most logistics properties are situated to the north east towards Gardermoen Airport, to the south towards Vestby and south east towards Drammen. The leasing market for logistics properties in the Greater Oslo region is strong, and demand for Âmodern storage space and cross-stock buildings within the next 2–4 years is forecasted to remain at a high
level. Vacancy in the Greater Oslo region, measured as floor space available now and within 3 months, stands at 3.8 % as of January 2017. Observed rent levels are high in the area stretching from just east of Oslo and south towards Vestby, as hubs in this area are very popular. Their closeness to effective intersections with the main highway E6, the short driving distance to Oslo and the availability of vacant land plots makes these hubs a good alternative
akershus eiendom
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GARDERMOEN
OSLO
VESTBY
to the relatively fully developed area around the Alnabru national cross dock terminal (east of Oslo). The Norwegian logistics market is mostly based on logistics buildings for retail purposes and not so much for industrial purposes. Thus, the yield levels have a certain correlation to the development in the retail market and might be considered low compared to many international markets.
Moreover, building costs for logistics properties, and thus rents, in Norway are high due to restrictions and regulations such as: • Fire regulations put restrictions on the sizes of the fire cells within a building. • The Norwegian climate dictates the need for more insulation and heating systems. • The climate also means structures and roofs have to be strong enough to withstand the weight of snow in the winter.
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The residential market
The residential market
The Norwegian housing market has seen e xtraordinary growth since the Norwegian banking crisis at the beginning of the 1990s. Thus, people buying homes in the last two decades have seen values increase substantially, making owner occupation lucrative and popular, with many buying a second home as an investment. Tax incentives have also contributed to this. As a result, there are only a few professional investors operating in the residential market, and few portfolios become available. As can be seen from the graph, housing prices in all major cities increased rapidly after a setback in 2008
due to the financial crisis. While all markets have experienced significant growth, the Stavanger market has struggled after the downturn in the petroleum industry since 2013, although market sentiment reversed during the second half 2016. Price growth in Oslo residential market stands out in 2016 with an increase of as much as 23 %, fuelled by a low level of new construction, low interest rates, and an increased amount of private investors buying property. However, 2016 also had a record volume of sale of new homes, which will be completed over the next 1–2 years, which might dampen the price increases in this period.
akershus eiendom
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RESIDENTIAL HOUSING PRICES (ALL TYPES), NOK/SQM, 2006=100, 2006-2016:
240 220 200 180 160 140 120
oslo trondheim
bergen
jan. 16
aug. 15
mar. 15
mai. 14
okt. 14
des. 13
feb. 13
jul. 13
sep. 12
nov. 11
apr. 12
jun. 11
jan. 11
aug. 10
mar. 10
okt. 09
mai. 09
des. 08
jul. 08
feb. 08
sep. 07
apr. 07
nov. 06
jan. 06
jun. 06
100
stavanger
national average
Source: Eiendom Norge/Real Estate Norway, Finn.no, Eiendomsverdi AS
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“rough guide”
Mads H. Syversen
Lisa F. Wold
CEO, Arctic Securities AS
Partner, Corporate Finance, Arctic Securities AS
A “rough guide” to investing in the Norwegian commercial real estate market Practical issues to be aware of for first-time investors
Introduction
The commercial real estate (CRE) sector in Norway is very well developed and supported by the strong Norwegian economy and government finances. The sector has developed rapidly over the last couple of years in terms of international investments. Although the share of international capital decreased from 45 % of the total transaction volume in 2015 to 20 % in 2016, the general interest from international investors is still just as high as it has been over the last years. The main explanation for the lower share is the fact that
no large portfolios shifted hands and fewer core a ssets were o ffered in the market throughout 2016. The Norwegian CRE market has most definitely become more competitive with the huge amount of international capital that has entered the market. International investors have challenged standard Norwegian market practice, increased transparency and liquidity, as well as further professionalized the local advisors (arrangers, lawyers, brokers, accountants etc.) through their thorough due diligence processes, various negotia-
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Right now the yield gap in N orway (…)results in the Norwegian CRE market appearing attractive to both domestic and international investors.
tion- and d ecision making procedures and requirements in terms of p urchase- and shareholders agreements. The fact that the demand side increased as international investors entered the market has resulted in the last three years’ historically high total transaction volumes. There are only a few listed Norwegian real estate companies. These listed companies, together with the life insurance companies, pension funds, family o ffices and private equity firms, dominate the Norwegian CRE market. The international investors have been a competitive and educational – as well as warmly welcomed - supplement to a strong local market. Right now the yield gap in Norway, combined with a well functioning financing market ensuring sound and relatively high leverage, results in the Norwegian CRE market appearing attractive to both domestic and international investors. The latter also profits from a
sound competition between local and international banks with appetite for Norwegian assets, combined with a very active bond market. The Norwegian macro backdrop also looks favourable. The Norwegian economy has not suffered from a recession despite the drop in oil prices. The low point was passed late last winter – now momentum is slowly building. The oil market is rebalancing as global s upply growth remains well below growth in demand, and operators have made substantial adjustments to adapt to the new market conditions. The fact that Norway is not a member of EU has previously been considered a disadvantage by international investors. However – recent European unrest together with upcoming elections in France, the Netherlands and Germany - further strengthens Norway’s relative attractiveness.
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“rough guide”
Some practical issues
The majority of international investors entering the Norwegian real estate market use local buy-side advisors. Some of the experiences from these buy-side advisory services are summarized below: 1. Finding assets: International investors entering the Norwegian market very often have highly specific investment criteria. Finding assets matching their criteria takes time in a relatively small economy. At first glance, the market seems somewhat less transparent than what is the case for other jurisdictions. The local market is strong, and there is no real “need” for international investors. But once investors get into it, it is found to be smooth and efficient, and the barriers to entry are not at all as high as initially perceived. Advisors are set up to work under great time pressure, and the response time is remarkably good. 2. Swift processes: A key word to understanding the Norwegian market is that the society in general is not very hierarchical – hence; decision-making processes take less time than in most jurisdictions. This also applies in the commercial real estate market. Investment and divestment decisions are made swiftly, which has been a surprise to many foreign, institutional investors. However, this is currently changing, and more and more of the sellers and their a dvisers are taking into account that the international investors have investment committees and thorough processes that take longer than for most of the domestic buyers.
3. Bids: When being introduced to an investment opportunity, the first encounter with Norwegian business culture is in the LOI/indicative bid. Whereas internationally, market practice is to mark already in the heading of the letter that the bid is to be considered a “non- binding, indicative bid”, to a Norwegian seller this gives the impression that the interested party is without any obligation. Norwegian market practice is to simply state in the headline that this is a bid, and then make sure all reservations/conditions are thoroughly described in the content of the bid. So as a practical advice – never submit an indicative bid with the aforementioned heading. 4. Data room and due diligence: In most of the sales processes over the last years, complete data rooms have been prepared in English. In general, because the Norwegian market is smaller and the same parties tend to meet in transactions, our standard due diligence reports might be perceived as less institutional than what is the case in other countries. All main points are addressed, but the conclusions are not always very resolute in terms of what measurements must be undertaken. Another practical advice is to thoroughly describe report requirements in the initial definition of scope. 5. Financing: Loan documents are less comprehensive than in most other jurisdictions (perhaps with the Danish as an
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Because of the tax on capital gains and the real estate transfer tax (i.e. stamp duty) of 2.5 %, the vast majority of trans actions are carried out as share deals.
e xemption). Loan agreements are rather slim, but most of the provisions, as opposed to other jurisdictions, are covered thoroughly by the general background legislation. Bond loan documents are even shorter, limited to only 8–10 pages (see also chapter Financing). The local banks are eager to finance the asset class, but will have a thorough credit approval process for new, international investors, so be prepared to supply them with company presentations, business plans, an overview of investors as well as investment track records. 6. Negotiations: As in all other jurisdictions, negotiations vary a lot depending on the chemistry between the parties, the kind of parties are involved and whether the contem plated transaction is a share deal or an asset deal. B ecause of the tax on capital gains and the real estate transfer tax (i.e. stamp duty) of 2.5 %, the vast majority of transactions are carried out as share deals, as opposed to asset deals (see also chapter Legal framework). Hence, one does not negotiate only on the gross property value, but also on adjustment elements such as the discount for reduced tax depreciations (latent capital gains tax), discount for property tax and the v alue of any tax loss carried forward. Note, there could also be off balance items that need to be taken into account. 7. Standardized documentation: As opposed to other markets, most agreements are standardized and “everyone” uses the standard forms. This applies to loan documentation, lease agreements,
SPAs (regular transactions, forward transactions, development cases etc.). Many international investors have commented that this makes it easier to invest in Norway than in other markets. Summary
As a leading indicator, the prime yield in Oslo (by far the dominant market in Norway representing half of total transaction volume) has decreased by some 200– 225 percentage points since 2010, and per the first quarter of 2017 is around 3.75 %. However, not many assets have been traded at these levels. The decrease in yield has had an impact on other/ secondary locations as well, but not as much as one might have anticipated. The consensus in the market among leading analysts is that the yield compression will not continue into 2017 due to higher long term interest rates, less upside connected to the Norwegian currency and a risk/reward trade off that needs to remain aligned with the rest of the European CRE market. International investment appetite remains strong, and international institutional investors now exert an active asset play in the Norwegian market. Close to 10 % of the total sales volume 2016 was accounted for by international investors, whereas they constituted 20 % of total acquisitions. The Norwegian CRE market is small, but relatively safe and predictable, and international investors will continue to be an important part of the market.
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transaction
Stortingsgata 6
Acquired by Deka Immobilien GmbH for NOK 510 million (â‚Ź 57 million)
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Photo: Nyebilder.no
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legal framework
Anne Sofie Bjørkholt
Stig Bech
partner, ba-hr
partner, ba-hr
Legal framework Background legislation and industry standards play a key role
The market both for the sale and purchase and for leases of commercial real estate in Norway is from a legal perspective characterised by the important role of background legislation and a broad use of industry standards as a basis for negotiated agreements. Most of the background law can be waived in agreements between professionals. However, background legislation will be used to fill in unregulated areas in the agreements and will also affect the interpretation of the wording of an agreement. The Norwegian contracts for both leases and the sale and purchase of real estate are less comprehensive than their equivalents in, for instance, Anglo-American jurisdictions. Most of both lease and sale and purchase contracts are based on industry standards, although with individual adjustments as a result of negotiations. Key real estate organisations such as the Real Estate Agents Associa-
tion and the Landlords’ Association, together with, among others, the law firm BA-HR, issue a set of standard agreements for both leases and for the sale of property every two to three years in accordance with market practice, legislative amendments etc. These standards are used as a basis for 80–90 % of all leases and real estate transactions. This chapter gives an outline of the main legal aspects related to an investment in real estate in Norway, starting with relevant issues related to the purchase of real estate followed by a description of commercial leases. Purchase of real estate
Share deals as the practical main rule Capital gains on a corporate shareholder’s sale of shares in a limited liability company (Norwegian: Aksjeselskap) are tax free for a corporate shareholder. This is contrary to a sale of assets that are taxable at 24 % of the gain. In addition, a share deal will assume no stamp duty on the property, as opposed to a real estate asset deal. Stamp duty is 2.5 % of the market value of the
BA-HR
37
Executive summary • Transactions are normally structured as share deals (SPVs). The purchase price for the shares is based on the property value, with addition of the company´s assets, less liabilities.
• As a main rule, an SPV owning property under development/construction cannot grant security over its real estate in connection with the financing of its acquisition.
• Standard sale purchase agreements (SPAs) are widely used and contain
• There are standard lease agreements for (i) new-built/newly refurbished properties/ premises, (ii) as is properties/premises and (iii) triple net leases for properties. These templates are widely used and must be said to represent market practice.
- “as is” clauses implying that it is the buyer that is taking a risk on the quality of the property, shares or parts,
- basic representations and warranties,
- warranty period of 1 year after closing, caps on claims for defects and breach of warranties of 10 % of the agreed property value
property. Thus, around 90 % of commercial real estate transactions are carried out through the sale of the shares in property owning companies (single purpose vehicles (SPVs)).
Having said that, there are also a considerable number of real estate transactions structured otherwise – both as asset sales or through a sale of parts in general partnerships (Norwegian: Ansvarlig selskap), limited partnerships (Norwegian: Kommandittselskap) and silent partnerships (Norwegian: Indre selskap).
and with deduction of • all liabilities on the balance sheet of the company • around 9 % (normally, based on practice from 2016) of the difference between the property v alue after the deduction of the estimated market value of the land (because the land does not q ualify for any depreciations) and the basis for tax depreciation on the property as per closing.
Calculation of purchase price in share deals The seller and the purchaser agree on the property value that forms the basis for the calculation of the purchase price of the shares in the target company. The purchase price is normally broadly calculated as follows: Property value with the addition of • t he cash and receivables on the balance sheet of the company
• an agreed compensation for losses carry forward (to the extent the buyer is willing to pay for this) • any other assets in the company´s balance sheet that the parties agree to include
The rationale behind the latter deduction is that in a share deal, the buyer does not obtain a step up in the tax basis for the property, but takes over the tax basis in the target company. Thus, the buyer will not be able to depreciate with tax effect the difference between the agreed property value and the tax basis in the target company.
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legal framework
Most of both lease and sale and purchase contracts are based on industry standards, although with individual adjustments as a result of negotiations.
There is no depreciation on the land, but the building can be depreciated by 2 % and the fixed technical installations (elevators, ventilation system etc.) by 10 %. Often, the fixed technical installations will amount to around 40 % of the building’s total tax value for a newly built building. Warehouses, hotels etc. are depreciated by 4 % on the building and 10 % on technical installations. The net present value of the lower depreciation can be calculated individually, but is normally defined as a lump sum being around 9 % of the difference between the agreed property value of the building and the basis for tax depreciations. This is the case if the building is depreciated by 2 % annually. For a building depreciated by 4 % annually the deduction is normally agreed at 12–15 %. The lump sum equals the percentage reached by using a discount rate of 6 %, and assuming a 60/40 split between t he building and technical installations.
Under Norwegian market practice, the buyer is thus not compensated for the full latent capital gains tax on the property, i.e. the total tax saving for the seller. Such compensation would have equalled the net present value of 24 % of the difference between the taxable value of the building and land and the agreed property value, discounted over the gain and loss account by 20 % each year (declining balance method). The rationale behind this market practice is that the market assumes that the buyer will also sell the property as a share deal, and assumes that the tax rules will stay in force, i.e. that the buyer will trigger no capital gain on the later sale. Given the prevailing tax rules, it will normally not be an option for the buyer to sell the property as an asset deal as the full latent tax will be triggered. In a later sale, the buyer will have to grant the new owner a price reduction based on the same calculation method. The size of the price reduction will under normal circumstances increase, as the gap between the tax value and the market value will increase over time. The tax value will steadily decrease due to annual tax depreciation, while the property value will develop according to the development in the market.
Because of a decrease in the tax rate, we assume that we might see a decrease in the percentage going forward. The market value of the land is subject to discussions/ That part of the discount to a new buyer exceeding the negotiations, but is often agreed as being 20–30 % of discount received from the seller will be a cost for the the property value for properties in central areas. buyer on a new sale.
BA-HR
The standard contracts – defects, warranties and indemnities The standard sale and purchase agreements cover a direct sale of a property, a sale of shares in a property holding limited company and a sale of interests in a property holding partnership (general partnership, limited partnership or silent partnership). There is also a new standard agreement for sale with M&A insurance. Updated standard contracts were published in October 2015. With regard to defects, warranties and indemnities, one should note the following: • The standard agreements contain a so called “as is” clause, implying that the buyer takes the risk on the quality of the property and shares. The buyer is entitled to conduct a due diligence review before the purchase; but if any hidden defects are discovered after the purchase, the buyer as a general rule has no recourse against the seller – unless the seller has failed to disclose information or given incorrect information. • The standard contracts contain basic warranties, such as the seller’s ownership of the shares and his right to sell the property, shares or interests; that the target company owns the property; that the
39
accounts have been adopted in compliance with the accounting rules and that the target company does not have liabilities and debt that should have been recognised in the balance sheet other than those presented to the buyer. Further, the b uyer will usually require certain warranties or indemnities, covering special risk factors identified through the due diligence process. • The warranty period is normally 1 year after closing. However, the time limit is usually 3 years or longer for breaches of warranties that comprise the target company’s ownership of the property, the seller’s ownership and right to sell the shares in the target company, and those related to the company’s tax and VAT liabilities and documentation related thereto. • Claims regarding defects or warranties are subject to caps, baskets and thresholds. Normally, the cap will be around 10% of the property value.
A growing trend in the Norwegian market is to take out M&A insurance in the name of the buyer to protect against breaches of warranties under the sale and purchase agreement. Normally the insurance premium is covered by the seller, but we have also seen it agreed that the premium shall be covered by the seller and purchaser with 50 % each.
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legal framework
Registration of the title is not required by Norwegian law in order to transfer ownership but is necessary in order to obtain legal protection of the owner ship of the property.
Establishment of title and security in real estate
Registration of new title holder and stamp duty Transfer of shares or parts does not trigger any requirement to register a new title holder nor stamp duty. In an asset deal, however, registration of the title to the property in the Land Register is the legal act to grant the new owner security against the former owner’s creditors. Such registration triggers stamp duty of 2.5 % of the market value of the property. Registration of the title is not required by Norwegian law in order to transfer ownership but is necessary in order to obtain legal protection of the ownership of the property. Mortgages in real estate are perfected by registration with the Land Register. The registration fee to the Land Register for mortgages is approximately NOK 500. The fee is fixed and not dependent on the secured amount. No stamp duty or other taxes accrue with respect to the registration of the mortgage. Notarisation is generally not required in Norway in connection with establishing a security interest. Security for the financing of the acquisition in a share deal – financial assistance restrictions The Norwegian Act relating to Private Limited Companies (Norwegian: Aksjeloven) (the “Compa nies Act”) section 8–10 has certain financial assistance
restrictions that will apply to a target company’s granting of security for its parent’s obligations in connection with an acquisition of shares in the company. However, the Ministry of Trade and Industry has proposed to amend this provision, as further described below. Today, a Norwegian company may only grant financial assistance in connection with an acquisition of its shares within the limits of what the company may distribute as dividends, provided that the security is based on commercial, arm’s length terms and principles, and that adequate security is given for the c ompany’s recourse claim against the principal of the secured obligations. In addition, certain procedures apply prior to granting such credit. However, there is an exception to the restrictions in section 8–10 of the Companies Act for acquired companies where the main assets are real estate. Pursuant to a regulation under the Companies Act, a real estate company may grant security over its real estate if the following conditions are fulfilled: • The company must be a real estate SPV. This is defined as a company whose sole activity consists of owning and operating real estate. The property cannot be under development/construction as the exemption applies to cash flow properties only. However, the SPV may own shares in other real estate SPVs.
BA-HR
• The company must not have other creditors than those who are financing the acquisition. However, the SPV can have creditors whose claims relate to the day-to-day operations of the SPV, creditors which have satisfactory security for their claims, or which consent to the security in writing. • The company cannot have any employees other than its general manager. Moreover, the parent company must as a result of the acquisition be the owner of all of the shares in the SPV. The above-mentioned exception only applies to a mortgage over the real estate owned by the SPV. If the SPV is to provide security over other assets, an exemption application must be filed with the Norwegian Ministry of Trade and Industry, which may grant an exemption on certain conditions. The same applies to a mortgage over real estate under development/construction, cf. above. One should note that the Ministry of Trade and Industry is reticent about granting such dispensations, and collateral for the purchase price for the shares in companies owning such property must in general as a practical rule be organised otherwise. However, as mentioned above, the Ministry has suggested amendments to the Companies Act section 8–10. The Ministry proposes that any Private Limited Liability Company (Norwegian: aksjeselskap) which is acquired by another Private Limited L iability C ompany
41
or Public Limited Liability Company (Norwegian: allmennaksjeselskap) shall be able to provide security for the acquiring company’s obligations in connection with the acquisition of the shares in the company, as long as certain formal requirements are fulfilled, including a statement from the board and adoption by the general meeting of the company. If adopted, the changes will represent a substantial liberalization of today’s restrictions, which will simplify the financing and reduce the financing cost when acquiring a Limited Liability Company in Norway. For real estate transactions, the amendments will be important if the company is not covered by the exception mentioned above, e.g. companies owning property under development/construction. However, the change will also have effect for companies covered by the exception as the current exception only covers real estate security, while the suggested amendment will allow any kind of security. Lease agreements
The Tenancy Act The Landlord and Tenant Act of 1999 (the “Tenancy Act”) regulates leases of real estate in Norway and constitutes the background legislation also for leases of commercial property. The Tenancy Act forms a set of rules primarily protecting a (residential) tenant’s interest based on the legislator’s view of a tenant being
42
legal framework
the tenant is responsible for indoor maintenance, while the lessor is responsible for replacements and outdoor maintenance.
the lessor’s subordinate and thus having a stronger need for protection than the (presumably) professional lessor. Professionals are entitled to derogate from most of the provisions in the Tenancy Act. The standard lease agreements for commercial leases – the different versions There are standard lease agreements for (i) new-built/ newly refurbished properties/premises, (ii) as is properties/premises and (iii) triple net leases for properties. The standard agreements were last updated in 2016. There are two versions for new-built/newly refurbished properties/premises: one where the lessor shall deliver the lease object in accordance with the agreed requirement specifications, and one version where the tenant has an extensive right to require alterations during the construction period. This latter new built version is widely used in major new building projects. The tenant’s right to require alterations presupposes that the lessor is entitled to require the same changes/additions from its contractor under the construction contract for the new building, and that the tenant bears all costs related thereto. Main terms (a) Responsibility for technical building and construction requirements The parties normally agree that as at the handover date the lessor shall ensure that the leased object is in compliance with any technical building and construction
requirements applicable to the leased object, based on the activities to be conducted by the tenant. According to the triple net lease standard agreement, the lessor is not responsible for ensuring that the leased object is in compliance with the technical building and construction requirements that apply to the leased object. In the standard agreements for new-built/newly refurbished properties/premises, the lessor is responsible for delivering the leased object in compliance with any applicable technical building and construction requirements based on the activities to be conducted by the tenant. (b) Maintenance obligations According to the standard as-is agreement and the new built agreements, the tenant is responsible for indoor maintenance, while the lessor is responsible for replacements and outdoor maintenance. It is also the lessor’s responsibility to see that the leased object meets with all public requirements, unless these requirements are a result of the tenant’s business. Under the triple net standard, the tenant is responsible for all indoor and outdoor maintenance, as well as replacements. (c) Duration The normal lease term for commercial properties is a 10 or 15 years fixed term for new premises, often combined with options to renew on the same terms for 5
BA-HR
or 10 years, and 3–5 years for smaller premises. Lease agreements with the state or a municipality have normally a somewhat longer term than leases with private parties, but rarely more than 20 years. (d) Sub-lease and assignment As regards fixed-term leases, the tenant normally has the right to sub-lease for the remaining period subject to the lessor’s approval, which cannot be unreasonably withheld. Assignment of the lease agreement is usually subject to the lessor’s approval, which can normally be freely withheld. (e) Termination A commercial lease agreement can, as a general rule, not be terminated during the lease term. However, the tenant is normally entitled to terminate the lease agreement in the case of force majeure events. In triple net leases, the tenant often waives the right to terminate the lease agreement in the event of serious damage or destruction, however combined with an obligation for the lessor to provide a substitute lease object during the reconstruction period. (f) Rent The rent is normally a fixed amount and subject to annual adjustments in accordance with 100 % of the changes to the consumer price index. For retail properties, a turnover-based rent is widely used, but often combined with a minimum rent.
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Under the Tenancy Act section 4-3, after a lease p eriod of 30 months both parties may require, without terminating the lease agreement, that the rent is fixed at the “current level” of rent for similar properties on similar contractual terms, provided there have been no other changes in the rent than indexation. This rule is, h owever, derogated from in most commercial lease agreements, including the standard agreement. If not, it is considered a “red flag” finding in a legal due diligence review. Lease agreements with governmental entities as lessees
In January 2015 Statsbygg, a public sector admini stration agency responsible to the Ministry of Government Administration, Reform and Church Affairs, together with Difi, the Agency for Public Management and eGovernment, launched its own version of the standard lease agreement. Statsbygg intends to recommend g overnmental entities to use this version as a basis when they lease real estate in the commercial market. Some of the adjustments are necessary as the lessee is a public entity (termination rights in case of re-organisation, insurance-, and security clauses). However, most of the recommended adjustments are commercial, making the lease agreement more lessee friendly. A governmental entity is normally considered a much-coveted lessee, and Statsbygg’s recommendations must be viewed in this light.
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Bank and Bond Financing
Kristian Berg Partner, Corporate finance, Arctic Securities AS
Bank and Bond Financing for Norwegian commercial Real Estate An introduction to financing in the Norwegian commercial real estate market
As we stated in the previous versions of our “Investing in Norway” reports, the Norwegian CRE (Commercial Real Estate) lending market continues to be attractive both for new transactions, as well as for refinancing. The Norwegian real estate transaction market has been very active the last few years. More international investors have entered the Norwegian market, especially due to the fact that the sales processes are structured in a manner that suits the international investors. More and more international investors find real estate in Norway as an attractive asset class, and with the NOK depreciation over the last years, we now see a number of investors buying real estate in Norway unhedged. The USD:NOK exchange rate currently stands at 8.40 against an average for the last 10 years of 6.40. In this article, we would like to give an introduction into how real estate transactions can be financed in the Norwegian market.
We have seen some larger portfolio transactions (above 1 USD billion) involving international investors in Norway, that have been financed through syndicates of domestic and international banks. We have also seen single asset transactions above NOK 1 billion that have been financed through the bond market, on attractive terms with long dated tenors up to 10 years. As we see more portfolio transactions with cross border assets (Norway and Sweden), we are glad that we at Mipim 2017 we an offer both bank and bond financing for international investors for Scandinavian portfolios. Bank Financing
Norwegian and Scandinavian banks are still among the most well capitalized banks in Europe, but the Norwegian banks today faces stricter capital requirements from the local financial authorities than many
Arctic Securities
other Scandinavian and European banks. These capital charges have resulted in the Norwegian banks being more selective with respect to the assets and the clients for which they offer CRE lending. Local real estate investors still obtain attractive funding, but international SPV financing for single assets have not been their preference. The total lending to the real estate sector from Norwegian banks and financial institutions amounted to NOK 524 billion as of November 2016, up from NOK 450 billion in 2009. DNB – Norway’s largest bank has more than NOK 200 billion in the commercial real estate sector, corresponding to 11 % of total lending. This indicates that CRE lending is an important part of the banks total balance sheet. The chart on the next page is from the latest CRE lending report from UNION where the seven major banks were asked for their levels on loan to value and margins for a 5-year loan for a prime office building in central Oslo. The graph shows the levels for the last years. The all-in cost was at 3.95 % in Q4 2016 compared to 3.17 % in Q4 2015.
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What is important for the domestic banks when new international investors are coming to Norway: • Investors having good knowledge of the local market and the underlying property/tenant • Solid tenant, long lease contract and liquid/ attractive properties • Asset management of the property • Investors track record All the the parameters above will be important for deciding loan to value / gearing and margin. Bond Financing
We have seen a growing market for CRE financing through the bond market over the last few years, with more and larger institutions entering the market with good appetite for both domestic and international borrowers. These investors are mainly insurance companies and pensions funds. We have also seen a number of international insurance companies entering the Norwegian market, offering attractive terms through the bond market. International real estate investors
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Bank and Bond Financing
Q4 2011
Q4 2012
Q4 2013
Q3 2014
Q4 2015
Q4 2016
74 %
71 %
69 %
70 %
65 %
64 %
70–75 %
60–75 %
60–75 %
62–75 %
62–77 %
60–70 %
1.71 %
2.62 %
2.29 %
1.76 %
1.96 %
2.35 %
1.50–2.00 %
2.30–2.90 %
2.00–2.50 %
1.55–1.90 %
1.70–2.20 %
1.90–2.50 %
Loan to Value (average) Loan to Value (min–max) Bank margin (average) Bank margin (min–max)
6,0 5,0 4,0 3,0 2,0 1,0 0,0
q1 q2 2012 2012
q3 2012
q4 2012
q1 2013
q2 2013
q3 2013
bank spread new 5 y.
q4 q1 2013 2014
q2 2014
q3 2014
q4 2014
bank spread new 5 y.
normally want to borrow through SPV financing, and this is one of the strengths of the bond market against the local bank market. Bond investors continue to be more asset focused vs banks that prefer borrowing at corporate level. The process for bond issues and the covenants required are also superior to bank financing for the right assets. The three largest and most frequent bond issuers in the Norwegian bond market are still: Entra Eiendom: NOK 12,800 million, Olav Thon Group: NOK 8,900 million and Steen & Strøm: NOK 5,700 million. These numbers include both bonds and commercial papers. The largest CRE bond issued in Norway (Dec 2015) was when the DNB headquarters in Norway were sold. This was financed with a 65 % LTV 9-year senior bond for NOK 2,535 million, and a 65–75 % junior bond with 5-year tenor for NOK 390 million on attractive terms. Since MIPIM last year a total of NOK 29 billion of CRE lending has been issued through the bond market, and the total outstanding volume of CRE bonds in
q1 2015
q2 2015
q3 2015
q4 q1 2015 2016
q2 2016
q3 2016
q4 2016
5 year swap
orway today is NOK 77 billion (NOK 58 billion in N 2016) As mentioned, we expect the volume to increase further since the bond market now can offer attractive terms. We expect to see the bond market increase up to a 20–25 % market share in the years to come from current levels around 15 %. A new trend we have seen last few years, that we believe will grow in the years to come, is mezzanine bonds (junior bonds) being offered for CRE lending. Arctic Securities has executed a number of larger deals (NOK 1 billion +) in 2015 and 2016, with long dated senior bond financing at 65 % loan to value, and a mezzanine bond for the 65–75 % tranche. Compared to other markets the terms for the senior bonds, and especially the mezzanine debt are at attractive levels. Most of the CRE bonds that have been issued have been long dated fixed rate bonds (+/- 10 years), but we have also seen a number of inflation linked bonds (linked to Norwegian CPI), as well as two Shariah compliant bonds being issued out of Norway. Bond investors have also become more flexible on tenors; and offer both floating rate and fixed rate bonds.
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Bond financing vs. Bank financing for international investors
• Flexible, can be refinanced at any time
• Floating credit spread – cannot be locked in
• Can be partly prepaid
• Short tenors 3–5 years
• Has traditionallybeen more attractive for corporate borrowing on shorter maturities
• Documentation and covenants
• Long-dated, with fixed interest rate and margins
• Cannot/expensive to be refinanced or prepaid during tenor of the bonds
• No amortisation
• Bond investors normally only want longer maturities (5 years +)
• Few and simple covenants, standard documentation
• SPV financing hard for new clients
• SPV financing • No ownership clause / guarantees – ideal for SPV’s
The Norwegian bond market in general has been attractive for international borrowers for many years. A good part of this must be due to the role of Nordic Trustee ASA. Nordic Trustee manages third-party contractual rights (bond agreements) on the basis of individual assignments. Their core business is to offer trustee services to bond investors. Nordic Trustee is the leading supplier of trustee services in the Nordic region with a 95 % market share, and has played an important role in the securities market for over 20 years. Today it has close to 2,400 active assignments to the value of more than NOK 1200 billion. For the real estate sector, they are now trustee for a record number of 840 assignments and a volume of NOK 107 billion. Many of the new international real estate investors (and their lawyers) have been impressed by the quality work, and
the standardisation of the Norwegian bond market. For more information see www.nordictrustee.com. What can the local bond market offer international investors, and what elements are important • Pledge in property owning company, and pledge in land and title number • LTV restrictions vs. dividend and Max LTV (Solvency II) • No ownership clause or guarantees needed • SPV financing • Long dated tenors (5-15 years) with no amortisation • Attractive margins vs bank financing for tenors above 3 years
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Selected tax issues
Anne Sofie Bjørkholt
Ole Andreas Dimmen
partner, ba-hr
senior associate, BA-HR
Selected tax issues Property tax
Each municipality in Norway may at their own discretion levy property tax. The property tax rate is between 0.2 % and 0.7 %. The value on which property tax is levied should in principle be the value of the property in question. The base for the property tax is, however, in most cases considerably lower than this. The default alternative in the new standard lease agreements is that property tax forms part of the common costs. This may, however, be subject to negotiations. Previously, most lease agreements placed this cost with the landlord, except in traditional triple net lease agreements. Tax on income from real estate in Norway
Positive income deriving from real estate situated in Norway will be subject to Norwegian tax at a rate of 24 %. This applies regardless of the way the investment is structured. The rate of depreciation on office buildings is 2 % on a declining balance method. For warehouses and production facilities the rate is 4 %. In addition, fixed
technical installations in the building are depreciated at a rate of 10 %. A part of the investment must be allocated to the land, which is non-depreciable. Because Norwegian real estate transactions are commonly structured as a sale of shares in property owning companies, the buyer does not obtain a step up in the tax basis for the property, but takes over the tax basis in the target company. To compensate for the loss of depreciation, it is market practice for a reduction in the purchase price for the shares, calculated as a percentage (often around 9 %) of the difference between the property value (after the deduction of the estimated market value of the land) and the basis for tax depreciation on the property as per closing. Deductible expenses will for most practical purposes be the owner’s maintenance costs, depreciation and interest on loans. However, for interest on internal loans (loans to/from shareholders etc. owning/controlling more than 50 %) there is a rule capping the deduction of interest at 25 % of an EBITDA calculated for tax purposes. Further, an external loan secured by a related party will in this relation be considered as an internal loan.
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Executive summary • Each municipality in Norway may at their own discretion levy property tax. The property tax rate is between 0.2 % and 0.7 %. Oslo introduced 0.2 % property tax from 2016 for residential property and will introduce property tax also on commercial property from 2017. • Net income deriving from real estate s ituated in Norway will be subject to Norwegian tax at a rate of 24 %. • A sale of shares is tax exempted for a N orwegian company shareholder, and is normally not
The structuring of inbound investments to Norway
A quite common way of structuring investments in Norway is to establish a Norwegian acquisition v ehicle in the form of a Norwegian limited liability h olding company. This holding company then acquires the shares of one or more property owning target companies. The acquisition vehicle will to a large extent be fi nanced with loans from the foreign investor as interest payments as a starting point are deductible, while Norway does not levy any withholding tax on outbound interest payments. The acquisition vehicle will incur tax losses as a result of deductible interest (see below). This tax loss can be utilized by group contributions received from the target company. The group contributions will be deductible for the target company and taxable for the acquisition vehicle. The group contributions will therefore serve to neutralize the taxable income from the property owned by the target company. The interest on the loan from the foreign investor to the acquisition vehicle will be deductible to the extent that the equity ratio and the interest rate are at arm’s length and the net interest amount is within the i nterest
taxable for a foreign shareholder, whereas an asset sale will trigger a 24 % taxation of the capital gain. • Norway has rules capping the right to deduct interest on internal loans (and external loans backed by an affiliated party). • Dividend payments from a Norwegian acquisition vehicle are not subject to withholding tax for shareholders in other EEA/EU states as long as such shareholders are limited liability companies or similar, conducting business within the EEA/EU.
deduction cap. The effect of the interest deduction cap will normally be that some tax will accrue. Capital gains upon realisation of real estate
The foreign investor may sell the property by way of selling the shares in the property owning company or the shares of the acquisition vehicle. The sale of shares is tax exempted for a Norwegian company shareholder, and is normally not taxable for a foreign shareholder. An asset sale will trigger a 24 % taxation of the capital gain. The capital gain taxation may, however, be posted to a gain and loss account where a minimum of 20 % of the gain will have to be taxed each year (declining balance method). Tax on dividends
Income may also be transferred to a foreign investor by way of dividend payments from an acquisition vehicle. In this context one should note that Norway does not levy withholding tax on dividend payments to shareholders in other EEA/EU states as long as such shareholders are limited liability companies or similar, conducting business within the EEA/EU. If the foreign company is tax transparent, taxation depends on the status of the investors in the tax transparent entity.
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transaction
The Statoil building
Sold by Madison International Realty for NOK 3.9 billion (â‚Ź 439 million)
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Photo: www.dmitry.photo
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MANAGEMENT OF commericial REAL ESTATE
Rune Mikaelsen executive director and head of property management, Newsec Basale AS
MANAGEMENT OF REAL ESTATE
Management of commercial real estate is complex and requires d edicated professionals within several fields of expertise. This article is primarily addressed to investors in need of outsourced asset services, property and company management. PROPERTY MANAGEMENT IN NORWAY
Historically, management of real estate in Norway has been characterised by a very relationship-oriented approach to partners and tenants, partly due to the relatively small size and transparency of the market. Traditional domestic investors often do not have the same approach with regards to property management that international investors do, meaning that the management agreements are less detailed and with much less reporting requirements than the average international agreements. Norwegian property managers often undertake responsibility for added value and risk issues, which in other countries would be considered asset management. The
basis of each instruction is however the management of lease agreements, liaison with tenants, maintenance obligations/requirements and accounting, handling of invoices, receivables, service charges, insurances etc. Please note that this article only covers management of commercial real estate properties. Letting and management of residential properties is subject to very strict mandatory legal regulations that differ considerably from commercial real estate and must be handled separately. The residential real estate letting market is also somewhat limited, since the home ownership rate in Norway is 83 % (Statistics Norway 2016). Generalist management International investors will find that there are few
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According to Norwegian standard lease agreements for commercial properties, tenants are obliged to pay their share of the property expenses. Service charges are invoiced on account either monthly or q uarterly based on a service charge budget, and are settled against actual costs accrued at the end of each calendar year. The scope, annual adjustment and distribution of the service charges are defined in the lease agreements. It is common that the property manager hosts annual Facility management Most managers purchase facility services as an integrated tenant meetings to present the service cost budget for part of the property management service for multi- the coming year, giving the tenants some influence tenant buildings. Most properties in Norway are not over the service and cost levels. large enough to justify separate facility management agreements covering total facility service packages. There The standard Norwegian lease agreement for commerare exceptions, especially with larger single t enant units. cial properties includes an administration fee of 5–7 % of the total service charges to cover costs for handling of the service agreements and property accounting. Facility services There is a wide range of facility service suppliers within different sectors such as caretaking, energy, Service charges applicable to vacant areas must be fire p rotection, security, internal control and so on. covered by the owner. To the extent that the service Some property managers offer one or several of these charges are reduced due to the vacancy, these savings services in-house, others purchase facility services from may be deducted. third party suppliers on behalf of the owner or as sub- Service charges for multi-tenant office properties in suppliers under the management agreements. Norway typically range from NOK 238/BTA (€26) to Service charges NOK 390/BTA (€43), with an average of NOK 310/ The owner may only charge the tenant for service costs BTA (€34) (based on statistics from the Newsec Basale to the extent that these are covered in the individual report Dec 2016). For comparative reasons, costs for elevators, staff restaurants and services typical for retail lease agreement. properties are not included in these numbers. roperty management suppliers specialising in only p one segment of the market - contrary to larger markets – with the exception of retail/shopping centres. Most commercial real estate properties that are managed by external property managers are within the office segment, but the same managers also handle retail, logistics and combination properties etc.
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MANAGEMENT OF commericial REAL ESTATE
Maintenance obligations – interface between lessor and tenant
According to standard Norwegian lease agreements, the tenant is responsible for the interior maintenance of its exclusive premises, while the lessor is responsible for exterior maintenance including the façade, windows, roofing etc. Furthermore the lessor is responsible for replacing technical installations when it is no longer possible to maintain these at an adequate cost level. At the end of a lease the tenant is required to vacate the premises in the same condition as they were on occupation, however taking normal wear and tear and the tenant’s maintenance obligations into consideration. If the tenant has not fulfilled its obligations, the tenant must either carry out necessary repairs or compensate the lessor financially. Detailed minutes from hand-over inspections and a close dialogue with the tenants d uring the lease period with regards to the maintenance obligations are key factors to avoid disputes and financial losses in this connection.
Health, safety and environ mental requirements
According to Norwegian law, the owner and the board of directors of a company have the sole responsibility for compliance with health, safety and environment laws and legislation. This responsibility is non-transferable and it is therefore vital that real estate investors in Norway secure professional handling, including documentation, of HSE routines and measures. Owner’s costs in Norway
The typical property related owner’s costs in Norway are insurance, maintenance and property tax (where applicable) as well as the costs connected to administration of the property company, to the extent that these are not covered by the service charges. The following overview (above right) shows the typical range of owner’s costs per sq. m. gross area for both property and company related costs, based on a selection of 77 SPVs with a total area of 753,000 sq.m (office and retail only).
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cost Category
Average
Low
High
Maintenance
NOK 67 / € 7.4
NOK 11 / € 1.2
NOK 159 / € 17.5
Insurance
NOK 8 / € 0.9
NOK 7 / € 0.8
NOK 15 / € 1.7
Local audit
NOK 3 / € 0.3
NOK 1 / € 0.1
NOK 12 / € 1.3
Management
NOK 30 / € 3.3
NOK 26 / € 2.9
NOK 75 / € 8.3
Legal fees
NOK 5 / € 0.6
NOK 0 / € 0
NOK 32 / € 3.5
Technical information
NOK 14 / € 1.5
NOK 5 / € 0.6
NOK 42 / € 4.6
Other costs
NOK 10 / € 1.1
NOK 1 / € 0.1
NOK 24 / € 2.6
The figures in this overview should only be used as an indication, as they are based on a limited selection of properties. Refitting and upgrades
Refitting and upgrades vary heavily based on the technical standard and layout of a building and the tenant’s requirements so it is difficult to give an indication of typical fit-out costs in connection with new lease agreements in Norway. While an upgrade of interior surfaces might cost around NOK 2,000/BTA (€220), full interior refurbishment including ventilation, lights and a new layout, might cost up to NOK 10,000/BTA (€1100) excluding VAT. Reliable estimates for a specific building will require a technical survey. In lease negotiations the lessor typically offers a rent based on the as-is standard or an upgrade to a ordinary modern standard. Cost-increasing special requirements and wishes from a tenant are normally added to the market rent, but can in some cases be defined as an investment rent or be paid directly by the tenant.
Letting Services
According to the Norwegian Estate Agency Act, letting services may only be provided by authorised estate agents (with the exception that property owners may let their own properties without using an external estate agent). Many property managers in Norway deliver letting services in-house through an affiliated company and can handle both re-lettings and new lease agreements, although it is also common to appoint a specialised estate agency, especially in connection with larger letting processes. A letting services agreement is mandatory for all assignments and normally includes a success fee of 15 % of the annual rent for a new lease agreement, while direct expenses are paid by the lessor. In most cases the agreements are exclusive and the appointed estate agent has the sole right to market the object. There is a widespread use of search agents in Norway – assisting the tenant in its search for new premises. Although they have not been appointed by the lessor, it is very often requested that their fee (often 15 % of
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MANAGEMENT OF commericial REAL ESTATE
International investors must place their Norwegian property portfolio in at least one Norwegian company and adhere to the various official requirements.
an annual rent) is covered by the lessor and recouped through an addition to the rent. Management of SPVs / property companies
As described earlier in this handbook, share deals are the most common transactions in the Norwegian real estate market and properties are mostly held in single purpose vehicles throughout their lifecycle. Hence, there is normally a need for management not only of the property itself, but also of the company owning the property. International investors must place their Norwegian property portfolio in at least one Norwegian company and adhere to the various official requirements connected to that. Company management services mainly consist of: •N orwegian GAAP accounting (or IFRS) - Bookkeeping, payments, reconciliation, financial statements
- An official authorisation to perform accounting services is required • Budgeting and reporting at company level • Annual closing - Preparation of annual accounts - Tax papers - Assistance to local GAAP audit • VAT - VAT return forms and settlements - VAT adjustment regulations - Compliance with VAT-regulations • Company administration - Company secretary services - Company files • Financing - Loan administration and assistance - Covenants reporting - Bank account administration
newsec basale
Most property managers in Norway also offer c ompany management and treat the two aspects as integrated parts. There is no clear-cut division in most Norwegian management agreements between company and property management. Board of directors and signatory rights
All Norwegian limited liability companies are obliged to appoint a board of directors, with at least one member. The members of the board carry personal liability for compliance with Norwegian law and legislation. The board of directors and/or a managing director hold the formal signatory rights on behalf of the company, either individually or jointly, depending on what is adopted in the Articles of Association and registered in the company register. Foreigners may be appointed as board members. However, a Norwegian ID-number is required to be
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registered as a director in Norwegian company. This number can be obtained by applying to the relevant Norwegian registry. An annual board meeting and ordinary general meeting is mandatory per year for approval of the annual accounts etc. The fiscal year follows the calendar year. Local company audit
Norwegian limited liability companies above a certain size are obliged to have a certified company auditor registered at all times. The company auditor performs an audit of the company’s annual accounts.
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DEVELOPMENT OF commericial REAL ESTATE
Gjermund Fossnes Executive director and Head of region South East/ greater Oslo Area, Newsec Basale AS
DEVELOPMENT OF REAL ESTATE As in other countries, real estate development in Norway is a dynamic business with rapid changes due to technological advances, new regulations, volatile markets, financing etc. This article gives a short introduction to the basic elements of real estate development in Norway.
Right of ownership and restrictive covenants
Before initiating development of a property, it is important to determine whether there are restrictive covenants on the property, and whether these limit the development of it or not. This information is normally registered in the land register, although non-registered agreements between the owner and third parties can also represent restrictions. Zoning
Zoning regulations are based on the Planning and Building Act. According to this, the Municipal Plan (Norwegian: “Kommuneplan”) represents the superior guiding principles for property development in a municipality. For the municipality of Oslo, a new
Municipal Plan was adopted on 23rd September 2015. The new plan has a stronger focus on the environment (green areas, surface water requirements etc) and protective measures for listed properties. Furthermore, municipalities may issue master plans for certain areas of development, with restrictions regarding density, utilisation, use and requirements for development. Such requirements may include area infrastructure, such as roads, street lights, kinder- gartens etc. Where the area master plan is detailed enough, developers can proceed straight to a building application. If not, or where there is no area master plan, individual zoning regulations for the property are necessary – a process that can take from 9 months to several years.
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the development phases:
Idea
Feasibility study
Application for general permission
Project phase/tender competition
Permission to start major construction works cannot be granted until the works are in accordance with approved zoning regulations for the property. The municipality may grant a dispensation from the current zoning regulations in cases where it is in the best interest of the municipality and not in substantial breach of the intentions of the zoning plan. The use of a property is governed by laws and regulations, and a change of use requires prior consent from the authorities. Technical regulations
In general, new construction and renovation need to fulfil mandatory technical requirements, the current TEK building regulations. These regulations are intended to ensure that projects are planned, d esigned and executed on the basis of good visual aesthetics, accessibility for all, and in compliance with technical standards for health, safety, the environment and energy. The “TEK” requirements are frequently updated. A new “TEK 17” is currently being prepared; the new version aims to make the regulations simpler and more flexible in order to reduce building costs for residential properties. BREEM classified buildings require technical adaptations beyond the requirements in TEK.
Contracting
Building phase
Completion
Building applications
The regulations regarding building applications are found in the Planning and Building Act. A building application can either be made in one or two phases, depending on the need for a preliminary acceptance to limit the risk of a rejection of the application. In order to clarify the terms of a building application as early as possible, a preliminary conference between the developer, the local authority and any other relevant authorities is often useful. To obtain building permission a developer must a ppoint authorised professionals (Norwegian: “ansvarlig s øker”) responsible for the application, design, execution and control of the construction works. The processing time for a building application varies between 3 and 12 weeks, depending on whether the project involves dispensations from the zoning plan, comments from affected neighbours, consent from other authorities etc. In pressure areas – such as Oslo – the processing time can be longer than 12 weeks due to the heavy workload of the building authorities in the municipality. Certificate of completion
The municipality is required to issue a certificate of completion within 3 weeks after completion provided all necessary documentation is in place.
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Forward sale of property
Ole Andreas Dimmen
Erik Langseth
senior associate, BA-HR
partner, BA-HR
Forward sale of property
The rationale behind forward sales and the different models
A significant number of transactions in recent years have been structured as so-called forward deals. A forward sale refers to a sale of the shares in a property company owning a building under construction, and can be structured in two ways: the ‘proper forward model’ and the ‘modified forward model’. In the proper forward model, the shares in the target company are acquired early in the construction period, whereas under the latter, the buyer acquires the shares when the building is complete and the lessee has moved in. The main differences between the two models relate to the financing of the construction cost. When the sale is carried out before or during the construction phase, the estimated construction cost in the c ompany
is financed by the buyer, while the seller normally finances the construction cost in the modified model as the transaction is closed when the construction has been completed. The proper forward model is the most complex, but also the most common one. An outline of its main elements is set out below. Proper forward – main elements
The target company owns a building site and has entered into a construction contract and a lease agreement that takes effect from completion of the building. To achieve a pricing of the target company as if the building had already been completed, the seller assumes the responsibility for constructing the b uilding in accordance with the requirements in the lease agreement. Thus, the seller assumes the full risk for the final construc-
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time line – proper forward
The SPV enters into 1: Lease agreement 2: Construction contract
The shares in the SPV are transferred from seller to buyer (‘closing date’)
Commencement date, lease agreement
Construction period
Final settlement with contractor and adjustment of purchase price for the shares in the SPV
Lease term
On-going purchase price adjustment
tion costs. A lower construction cost is for the benefit of, and excess costs must be covered by, the seller.
finance (through supplementary loans) to the target company.
The purchase price for the shares is calculated based on an agreed property value as if the building had already been completed, including a deduction to reflect that there will be no lease income during the construction phase (a lump-sum ‘lease substitute’). Further, a deduction equal to the estimated residual construction costs is made when the price of the shares is being calculated. At the same time, the buyer commits to finance the estimated residual construction costs.
When the building has been completed and the final settlement with the contractor has taken place, the purchase price is subject to adjustments based on the actual construction costs incurred and the actual lease obtained. Any final costs payable to the contractor exceeding the estimates lead to a corresponding reduction in the share purchase price, adjusted for tax effects. If the final construction costs are lower than estimated, the buyer pays an amount equal to the difference, adjusted for tax effects, as an additional part of the purchase price. Certain quantitative components or factors included in the actual construction cost will not necessarily be known as per the actual lease commencement date, and the parties normally agree that the purchase price is subject to on-going adjustments for a following agreed number of years.
The construction costs are then financed in a ccordance with a pre-arranged payment plan and subject to a requirement that the payment/withdrawal leads to a corresponding added value to the property. Construction costs that do not have any corresponding ‘added value’ are financed by the seller providing bridging
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publication partners
publication partners
Arctic Securities
Akershus Eiendom
An independent investment bank with an unparalleled track record within corporate finance real estate transactions. www.arctic.com
The leading commercial real estate agent in Norway, offering transaction, leasing, research and valuation services. www.akershuseiendom.no In association with:
ba-hr
BA-HR is the advisor you turn to when complicated legal matters need to be resolved. www.bahr.no
NEWSEC
estate media
Norway’s leading media- and communication bureau for commercial real estate. www.estatemedia.no
Newsec is by far the largest specialized commercial property firm in Northern Europe. With 1,000 professionals in 32 offices Newsec covers all parts of the commercial property market. www.newsec.no
blake.no
Handbook for the Norwegian commercial Real Estate Market
3rd edition 2017