Investing In Norway

Handbook for the Norwegian commercial Real Estate Market

ARCTIC

S E C U R I T I E S

content

3

content introduction

04

General information

06

Foreign Investments

08

The macro outlook

10

the CRE market in Oslo

18

a “rough guide� to investing

32

experiences of other investors

36

legal framework

40

bank and bond financing

48

selected tax issues

52

management of cre

56

development of CRE

62

forward sale of property

64

Green Buildings In Norway

66

publication partners

68

4

introduction

Stein Lier-Hansen CEO, The Federation of Norwegian Industries

Investing in Norway, safe and profitable

Norway became independent in 1905. Two years ­earlier, the entrepreneur Sam Eyde and professor and inventor Kristian Birkeland, created a method for using electricity to capture nitrogen from the atmosphere.

This was part of an industrial revolution, which ­ironically had stimulated global population growth, but had yet to create an adequate industrial farming system. Using Norway’s vast potential for hydro-­electric power, nitrogen-based industrial fertilizers could be created relatively easily and at a reasonable cost.

The main problem facing the founding fathers of Hydro, was capital. Norway in 1905 was among the poorest countries in Europe. Consequently, Eyde and Birkeland looked abroad for investors. They found them in France, they found them in Sweden. Very little capital was available in Norway.

In fact, the Swedish industrialist and banker M ­ arcus Wallenberg became the company’s first chairman of the board, a position he held for 37 years. During this ­period, Hydro developed into one of Norway’s first industrial giants. Today, Hydro is a global ­leader ­producing aluminium. The fertilizer part of the business is now run by Yara International, a company ­established in 2004.

The story of Hydro exemplifies that in the first years of its independence Norway was open for business and open for investors. It remains so today.

Norway is an open economy, relying on free trade and welcoming foreign investments. About 25% of ­Norwegian industrial companies are owned wholly or partly by foreign investors.

Innovation Norway

There are many reasons why foreign investors look to Norway: •N orway has a very strong economy and positive prospects • The country enjoys a stable and transparent ­political environment • Norway has a well organized public sector and (on the whole) quality infrastructure • The population enjoys a high purchasing power and the business environment is stable • Norway has a highly skilled labor force • Industrial relations are very good, strikes are few and far between • Norway’s unique resources include an abundance of renewable hydro-electric power • Other natural resources include oil/gas, fish, ­minerals, forests • Norway is the third largest exporter of natural gas, the fourth largest exporter of oil and the second largest exporter of fish in the world • Norway consistently ranks highly in many ­rankings about global competitiveness • For the 12th year running, Norway was in 2015 declared the best country to live in, by the UN Human Development Index My best advice for investors interested in Norway, would be: Come and see for yourselves. Check out our relatively small, but lively cities, our idyllic villages, our magnificent nature, go north and experience the Midnight Sun during

5

summer and the Aurora Borealis in the winter time.

Despite the drop in oil prices, Norway will be an oil producing nation for many years to come. But we are also fishermen, shipbuilders, mechanical engineers, telecommunicators, traders, bankers, academics and much, much more.

We focus on renewable energy and environmental technology. We want our industry to be the least ­polluting industry in the world. When it comes to ­climate change, Norway and Norwegian industry have a strong commitment to being part of the solution, not part of the problem.

Come and find out about Norway! But first and foremost: Get to know the people who are proud to call themselves Norwegians. You might be in for a positive surprise: A highly successful British industrialist told me this about his Norwegian work force: - I have worked in Asia, in America and in other European countries. ­Nowhere else have I found the same individuality and operationality as in Norway. If there is a problem, in most countries the workers will wait for supervision and orders from above. In Norway, the women and men on the floor fix it themselves.

It might be fruitful, profitable and interesting to look to Norway!

6

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: 5.2 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

1.0% p.a. (SSB Q4 2015) 1.73 (SSB Q4 2015) 2.1 (SSB Q4 2014) Men 80.4 /Women 84.1 84% (SSB Q3 2015) 30% (SSB Q2 2015) 29,802 (SSB Q4 2015)

ECONOMY

Currency Norwegian krone (NOK) Interbank rate NIBOR Main industries Oil, gas, energy, fish, shipping GDP total NOK 3,140 billion / €325 billion (SSB Q4 2015) GDP per capita NOK 603,730 per capita / €62,856 (SSB Q4 2015)

GDP surplus NOK 231.2 billion / €24.071 billion (2015) GDP growth 1.0% (2015) CPI 3.0% (Jan 2016) CPI-ATE 3.0% (Jan 2016) LABOUR MARKET

Number of employed 2,660,000 (Feb 2016) Unemployment rate 4.5% (Jan 2014) Rate of Employment 67.9% (Nov 2014) (age 15-74) Employment growth 0.1% (Nov 2015) Public sector 34.3% (Nov 2015) employment Average monthly salary NOK 42,300 / €4,855 (March 2016) TAXES AND DEPRECIATION

General Norw. tax rate 27% of net income Depreciation Office buildings: 2%

Warehouse/industrial: 4%

Shopping centres: 2%

Hotels: 4%

Investments: 10% Document tax 2.5% of transaction volume Property tax Depends on municipality VAT 25%

7

tromsø

Inhabitants: 74,970

trondheim

Inhabitants: 271,590

bergen Oslo region

Inhabitants: 407,206

Inhabitants: 1,323,244 stavanger

drammen

Inhabitants: 331,243

Inhabitants: 164,112 fredrikstad & sarpsborg

Inhabitants: 59,350

INTEREST RATES PER 25.02.16

AREA DEFINITIONS

3M NIBOR 3Y Swap 5Y Swap 10Y Swap 10Y Government bond

BTA BRA P-rom BYA

1.07% 1.91% 1.11% 1.59% 1.35%

EXCHANGE RATES PER 25.02.16

EUR/NOK 9.55 USD/NOK 8.66 GBP/NOK 12.08 SEK/NOK 1.02 DKK/NOK 1.28 CNY/NOK 1.33

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

8

Large Transactions

FOREIGN INVESTMENTS Largest transactions by foreign investors in 2015: date

buyer

Property

type

price MNOK (Meur)

May 2015

Citycon (Finland)

Sektor Gruppen

Retail

12,300 (€1,295)

June 2015

Meyer Bergman (UK)

Promenaden Property

Retail

5,300 (€558)

Jan. 2015

Partners Group (Switzerland)

Storebrand Property Fund (75%)

Office

3,700 (€389)

July 2015

Blackstone (USA)

Obligo (Norwegian assets)

Logistics

3,700 (€389)

Oct. 2015

AMF P (Sweden)

Oslo Areal (50%)

Office

3,300 (€347)

Nov. 2015

Steen & Strøm (Klépierre, France)

Oslo City shopping

Retail

3,300 (€347)

May 2015

Colony Capital (USA)

Statoil HQ, Forus

Office

2,500 (€263)

May 2015

Tristan Capital Partners (UK)

11 retail properties (FG- / COOP Eiendom)

Retail

1,800 (€189)

Nov. 2015

Tristan Capital Partners (UK)

8 retail properties (COOP Eiendom Norge)

Retail

1,200 (€126)

Oct. 2015

Wallenberg-family / EQT (Sweden)

Supply base at Mongstad

Industry

1,000 (€105)

June 2015

Hemfosa (Sweden)

Gardermoen Campus Utvikling

Healthcare

1,000 (€105)

Dec. 2015

CBRE Global Investors (UK)

Hieronymus Heyerdahls gate 1

Office

920 (€97)

May 2015

W.P. Carey (USA) / Winta Eiendom

Smalvollveien 65

Retail

815 (€86)

June 2015

Astoria AB (Sweden)

Mosking Næring

Office

708 (€75)

Apr. 2015

Tristan Capital Partners (UK)

Grensen 5-7

Retail

635 (€67)

May 2015

Deka Immobilien (Germany)

Munkedamsveien 62

Office

550 (€58)

Nov. 2015

Bayerische Versorgungskammer (Germany)

Karl Johans gate 45

Office (Retail)

500 (€53)

Nov. 2015

Hemfosa (Sweden)

Statens Park Tønsberg

Office

445 (€47)

Nov. 2015

H.I.G Capital (USA)

16 retail properties

Retail

307 (€32)

Arctic Securities / akershus eiendom

International investors are significant buyers in Norway Increasing share of international investors Buyers of real estate % of total transaction volume

2015

55 %

2014

73 %

2013

88 %

2012

92 %

Selection of international investors in Norway

45 %

Oil n An

et

27 %

Oil n An

et

12 %

Oil n An

et

8 %

Oil n An

et

2011

98 % 2 %

Oil n An

et

norwegian investors

international investors

9

Oslo highly ranked in the Investment Intensity Index 1 London 2 Munich 3 Honolulu 4 Sydney 5 Oslo 6 Copenhagen 7 Auckland 8 Frankfurt 9 San Jose 10 Stockholm 11 San Francisco 12 Melbourne 13 Dublin 14 Paris 15 New York 16 Austin 17 Boston 18 Tokyo 19 Edinburgh 20 Seattle 21 Gothenburg 22 Brisbane 23 Warsaw 24 Washington DC 25 Denver Source: JLL - total real estate investment as proportion of city GDP

10

The macro outlook

Erlend Lødemel Chief Economist, Arctic Securities AS

The macro outlook:

Improving growth ahead The economic situation in Norway is currently ­characterized by the significant drop in oil prices that started in mid-2014. Lower prices for natural gas have also played a role. Yet an interesting fact regarding gas is that rising volumes of gas exports combined with a less pronounced drop in prices have sent the value of gas exports above that of oil.

Although petroleum investments are likely to ­continue to slide and unemployment is likely to rise, the brunt of the shock may already be behind us. Looking ahead, modest-to-moderate economic growth in 201617 seems likely, at least under the assumption that ­petroleum prices next year will be a good deal higher than they were in the first month of this year.

Despite the fact that a marked drop in petroleum p ­ rices has often been singled out as the key downside risk for the Norwegian economy, the economic slowdown that ensued last year can best be described as ‘­modest’. While there has been a significant drop in petroleum investments and a rise in unemployment in the oil-­focused regions, most other demand ­components in the economy have held up quite well. For example, private consumption rose by two percent in 2015. The economy has received important ­support from a ­weaker NOK and stimulative fiscal and ­monetary policy.

The Norwegian krone has weakened significantly from record levels in early 2013, as a result of lower oil ­prices and expectations of lower policy rates. The weak ­currency has functioned as an important shock ­absorber and supported exports of traditional goods and services while at the same time reducing imports. Regarding imports, it is worth noting that the import content in petroleum investments is significant. This means that lower petroleum investments will r­educe i­mports as well, boosting net trade. It is also worth n ­ oting that exports could receive a boost if global growth a­ ccelerates.

Arctic Securities

11

Norway: Main GDP components Q1 2014 = 100. 2016 data are Arctic’s forecasts 120 115 110 105

Exports of trad. goods

100

Public demand

95 90

Private consumption

85

Business investments

80 75

Housing investments

70

Petroleum investments

65 60 2009

2010

2011

2012

2013

2014

2015

2016

Another step up in Eurozone growth would be particularly helpful in this regard. It should be n ­ oted, how­ever, that not all traditional exports will do well, ­given that a significant portion is oil-related equipment and services to countries like the UK and Brazil.

the saving rate remains stable at the current high l­evel, consumption growth also will be modest this year. But we look for gradual improvement into 2017, as the brunt of the economic shock is laid behind and confidence improves.

Fiscal policy also helps lift economic activity. ­According to the national budget for 2016, the fiscal impulse will be quite significant, 0.7 percent of mainland GDP. Additional fiscal stimulus might be forthcoming, but monetary policy is still not exhausted and will remain the key defence against a further economic slowdown.

National house prices have held up well so far, ­although regional variations have been wide. Low ­i­n terest rates will continue to support prices, but the rise in ­un­employment, which is concentrated in the oil-­focused regions, looks set to play the ­dominant role in those­­regional markets. On a n ­ ational level, how­ever, we ­expect prices to continue to hold up well.

Besides the development in petroleum prices, a key question mark also hovers around household consumption. Downside risks stem from the potential rise in unemployment, slowing wage growth and more costly imports. However, consumers’ disposable incomes will receive a boost from factors such as tax cuts, increased public transfers and the reduction in policy rates. ­Regarding policy rates, it is worth mentioning that the high level of household debt - which amounts to two times disposable income - combined with the extensive use of floating-rate loans enhances the effect of Norges Bank’s policy decisions. The upshot is that growth in real disposable incomes will be modest. Assuming that

The key risk for the economy seems to be the p ­ otential for petroleum prices to remain very low on a more permanent basis. If that were to happen, the improvement in growth that most forecasters project for 2017, ­assuming a modest 2016, may not occur. Part of the reason would be the likelihood for consumers and businesses to “hunker down”.

Given that petroleum prices have fallen to levels well below what we think are sustainable in the long run, there may well be upside risks to the economic outlook

12

The macro outlook

Norway: Spending from petroleum fund 2016 budget, in billion 2016-NOK 250 200 150 100 50 0

06

07

08

09

10

11

Fiscal guideline

12

13

14

15

16

17

Actual spending

if oil and gas prices can stage a lasting rebound towards the levels observed a few years ago.

Core CPI inflation hovered slightly above the central bank’s 2.5 percent target at the start of 2016. While the weak NOK has temporarily boosted import prices (which weigh 30 percent in the CPI basket), the ­inflation outlook for 2017-18 looks quite benign. And that’s what matters for Norges Bank, which follows a medium-term inflation target.

Given the outlook for modest economic growth and b­elow-target medium-term inflation, there is ­potential for lower policy rates in Norway. One of the ­deter­mining factors may well be developments in oil prices. Low oil prices would likely translate into ­lower policy rates, while higher oil prices would dampen the need for additional stimulus. The currency ­ usually tends to follow these developments, in other words strengthen if oil prices turn up.

In sum, while it seems reasonable to expect petroleum investments and higher unemployment to continue post a drag on economic activity, modest-to-­moderate growth in 2016-17 should still be well within reach. At the start of 2016, the consensus among economists was to expect Norwegian economic growth to s­ lightly outpace that of the Eurozone over the two-year ­period 2016-17. Time will tell whether that forecast proves correct.

Strong population growth and centralisation trend

The Norwegian population has been rising rapidly for many years, roughly twice as fast as the average for the other Nordics, which in turn have grown twice as fast as the five largest European countries. At the start of 2016, Norway’s population was estimated to be 5.2 million ­people, up from 4.6 million a decade ­earlier. This translates into an annual growth rate of 1.2 ­percent. In 2015, the population grew by 1.0 p ­ ercent, just slightly below the ten-year average. Details show that this strong growth has been driven by immi­ gration, accounting for 2/3 of the increase, while net births make up the remainder.

Along with strong national population growth, there is a clear trend towards centralization. People are g­enerally moving into the cities and the larger ­regional centers. As a result, 60 percent of ­population growth takes place in Oslo, Akershus, ­Rogaland and ­Hordaland. The c­ apital of Oslo has seen its ­population grow at an average a­ nnualized rate of 2.0 percent, nearly twice as fast as the ­national ­average. Last year’s 2.1 percent growth was in line with the ten-year average. According to Statistics Norway, the population of Oslo can be expected to grow by more than 30 percent in the period 2011-2040. This makes it one of Europe’s fastest-­ growing ­c ities.

Arctic Securities

13

population growth in oslo & akershus vs. national 3,0 2,5 2,0 1,5 1,0 0,5 0,0 ‘03 ‘04

‘05 ‘06 ‘07 ‘08

oslo

‘09 ‘10

‘11

‘12

‘13

‘14

‘15

akershus

national

1,6 1,4

population 1,2 growth, % yoY 1,0 Norway versus Europe 0,8 0,6 0,4

1,6

0,2

1,4

0,0

1,2

‘01

‘03

‘05

‘07

‘09

‘11

‘13

‘15

‘17

1,0 0,8

norway

0,6

germany, france UK, Italy, spain

0,4

nordics

0,2 0,0 ‘01

‘03

‘05

‘07

‘09

‘11

‘13

‘15

‘17

norway germany, france

Why the ­ economy canUK, weat­ Despite the plunge in petroleum prices, the Norwegian Italy, spain her low oil ­ prices ­ better ­economy seems to be holding up better than one might nordics than generally ­assumed expect. Why is that?

Petroleum activity and petroleum revenues have been of great significance for the Norwegian economy during the past few decades, and still are. In 2014, petroleum activity accounted for as much as 13 percent of mainland GDP1. In addition, fiscal spending is receiving a big boost from the petroleum revenues. The sum of government expenditures that is being financed with petroleum revenues is estimated to account for 7.1 ­percent of mainland GDP this year2. As much as ­16 ­percent of the government budget is stemming from petro­ leum revenues.

Firstly, the drop in oil prices will have little effect on the level of petroleum production over the next few years. The reason being that the high development costs for fields on the Norwegian continental shelf are now ­either sunk costs, or too late to reverse. Put ­differently, the marginal production costs on existing fields are very low. Only new investments can be delayed or stopped, and they accounted for just eight percent of mainland GDP in 2014, much less than the 13 percent total demand from petroleum activity. Investments

14

norwegian economy: importance of oil

have fallen and are now down to around 6 1/2 percent.

Secondly, while petroleum investments are ­certainly falling, they are unlikely to collapse completely. A large share of planned field investments is profitable even at very low oil prices. This is particularly true for maintenance investments, which account for about 40 percent of total ­petroleum investments. Within field developments, the giant Johan Sverdrup field has a very low break-even price. The i­nvestment phase for this project is well advanced, and will continue for several years. Other projects that have been s­tarted will continue well into 2017. We suspect that several other ­projects will also be started. Investment decisions are usually based on longer-term price expectations, not the volatile spot prices.

Thirdly, and as already noted previously, the drop in oil investments is dampened by a weaker currency and stimulative fiscal and monetary policy.

Finally, it is fortunate that a large share of Norway’s total ­petroleum wealth has already been extracted and converted into financial wealth. Most of the government’s profits from petroleum production over the past couple of decades have been saved in the Government Pension Fund Global (GPFG), which is now one of the world’s largest sovereign wealth funds. At the ­beginning of 2016, the value of the fund was estimated to be €750 billion, which amounts to 275 percent of

2015 mainland GDP. To ensure a prudent approach to fiscal spending, politicians have agreed on a spending guideline that states that only the expected real return on the fund, estimated at four percent annually, should be spent over the budget each year. Importantly, the level of spending should be tailored to the economic situation, which means lower in good times and higher in bad times. In effect, this policy adds an additional ­layer of economic stabilization, significantly reducing the risk of major downturns. The advantage of ­having the wealth fund was displayed during the financial crisis, when a major fiscal stimulus, along with other measures, helped prevent a major recession of the kind that hit most other European countries. In 2016, however, the budget entails spending less than three­ percent of the fund, well below the four percent guideline.

The fact that the Norwegian government does not spend any of the current petroleum revenues, only the ­expected real return on the petroleum fund, ­insulates government spending from short-term changes in ­petroleum prices. In a way this makes the level of fi ­ scal spending, as determined by the guideline, ­relatively more dependent on changes in the value of the G ­ PFG’s financial assets (international stocks, bonds and ­property). A good year in the world’s financial markets may easily outweigh the drag from a year or two with low oil prices.

Arctic Securities

15

norway: petroleum investments, share of mainland Gdp 6,5 %

93,5 %

petroleum investments

everything else

General government overall balance % of GDP

Norway: Strong government finances Government balance vs. net wealth as % of GDP (2015e) 8%

6% norway

4%

2% germany

0% denmark italy

-2 %

sweden

portugal

-4 %

finland

france greece

-6 % -8 % -300 %

USA

-200 %

spain

-100 %

uk

100 %

General government net wealth

200 % as % of GDP

300 %

16

transaction

Promenaden Property AS

Sold to Meyer Bergman European Partners III (UK) for NOK 5.3 billion (â‚Ź 558 million)

17

18

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 3.05 million sq. m. are situated within the city centre, marked on the map as the CBD-area.

Since 2007, the city centre has seen major urban redevelopments. Two new neighbourhoods on the waterfront, 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.

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 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. The west of Oslo contains high-end residential areas with l­ower density. The north-east 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 density Oslo office rents

Real office rents in Oslo have varied a lot over the last 20 years. Over the last 3–4 years, there has been a slow and steady increase; however, during 2015, rental growth stagnated and we have even experienced a slight fall in rents in some submarkets.

akershus eiendom

19

OUTER OSLO WEST

REST OF INNER OSLO

OUTER OSLO NORTH/EAST/ SOUTH

CBD

Office rents, real 2014 NOK, 1995-2015: 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 1995

2015

prime

rest of inner oslo

outer oslo north/east

outer oslo west

average rent

Source: Dagens NĂŚringsliv leieprispanel

20

The commercial Real Estate Market in Oslo

5,5%

6,5%

7,5%

8%

7%

6,5%

7%

8% 5%

4,5%

500,000 400,000

7%

m2 office

700,000 600,000

9%

900,000 800,000

8%

11%

1,000,000

13%

13%

oslo office vacancy, SQM and %

300,000 200,000 100,000 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10

‘11

‘12

‘13

‘14

‘15 ‘16E ‘17E ‘18E Actual

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 negative net supply of office space over the next two years due to low construction levels and a high amount of office space being ­converted for other use. The take-up level has been strong and is believed will stay strong going forward, despite the slowdown in the oil industry. Thus, we believe the vacancy level will decrease over the coming years.

at Fornebuporten which will be Aker Solutions’new HQ, Sundt-kvartalet developed by Entra and ­Skanska, which will accommodate Manpower and Skanska among others. Furthermore, a new building at Hasle­ Linje, a Hasle/Økern office park developed by Höegh Eiendom and AFGruppen, will be finished in 2017 housing amongst others Securitas..

Regional markets

New commercial real estate in Oslo

The regional property markets typically revolve around the 3 other larger cities in Norway; Bergen, S­ tavanger and Trondheim. Stavanger is the undisputable “oil capital” of Norway and has historically been the 2nd 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. Bergen and Trondheim are also linked to the oil sector to some extent, but have a more diversified ­business sector and as such the impact is less here.

In general, construction starts appear to follow the ­cycles of the economy. There was a significant peak in construction starts prior to 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 the A building

In general, all these 3 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.

Oslo office vacancy measured as floor space available per January 2015 and within 3 months stands at 7.5%, or approximately 640,000 sq. m. The vacancy level is expected to decline to below 7% over 2016 and 2017.

Vacancy for the city centre is expected to remain 2–3% points lower than the market average.

akershus eiendom

21

Regional office rents, NOK/sqm/year, 2006-2015:

bergen

2015 H1

2014 H2

2014 H1

2013 H2

2013 H1

2012 H2

2012 H1

2011 H2

2011 H1

2010 H2

2010 H1

2009 H1

2009 H2

2008 H2

2008 H1

2007 H1

2007 H2

2006 H2

2006 H1

2 000 1 900 1 800 1 700 1 600 1 500 1 400 1 300 1 200 1 100 1 000

trondheim

stavanger - cbd

Stavanger - forus (oil)

Source: Dagens Næringsliv

Regional office vacancy, 2003-2015:

12 10 8 6 4 2 0 ‘03

‘04

‘05

bergen

‘06

‘07

‘08

‘09

trondheim

‘10

‘11

‘12

‘13

‘14

‘15

stavanger

Source: Eiendomsmegler1 Midt-Norge, Eiendomsmegler1 Rogaland, Kyte Næringsmegling

22

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 set back during the financial crisis in 2008, and 2009 saw the lowest volume of transactions of the last decade. However, the market recovered quite rapidly, and much faster than elsewhere in Europe, and was fairly 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 approxi­ mately NOK 115 billion (€12.2 million), a­ ssisted by low interest rates, coupled with good availability of bank funding, as well as a large amount of corporate/portfolio transactions, amounting to close

to NOK 45 billion. There was also a substantial increase in f­­ oreign investment in the Norwegian market in 2015, accounting for 45% of the total transaction volume (27% in 2014) – a trend that is expected to continue Yield

As can be seen from the graph (above), office yields in Norway have been falling since the financial crisis in 2008, following the development in long interest rates.

Even though yields are down, the current yield gap is higher than what has been seen historically; suggesting that the (prime) yield might fall even lower. During 2015 prime office yields in Oslo fell from 4.75% to 4.25%, and we also experienced yield compression for other long-lease properties.

jan. 02 feb. 02 apr. 02 mai. 02 jul. 02 sep. 02 okt. 02 des. 02 jan. 03 mar. 03 mai. 03 jun. 03 aug. 03 okt. 03 nov. 03 jan. 04 feb. 04 apr. 04 jun. 04 jul. 04 sep. 04 okt. 04 des. 04 feb. 05 mar. 05 mai. 05 jun. 05 aug. 05 okt. 05 nov. 05 jan. 06 mar. 06 apr. 06 jun. 06 aug. 06 sep. 06 nov. 06 jan. 07 feb. 07 apr. 07 jun. 07 jul. 07 sep. 07 nov. 07 des. 07 feb. 08 apr. 08 mai. 08 jul. 08 sep. 08 okt. 08 des. 08 jan. 09 mar. 09 mai. 09 jul. 09 aug. 09 okt. 09 nov. 09 jan. 10 mar. 10 mai. 10 jun. 10 aug. 10 sep. 10 nov. 10 jan. 11 feb. 11 apr. 11 jun. 11 jul. 11 sep. 11 nov. 11 des. 11 feb. 12 apr. 12 mai. 12 jul. 12 sep. 12 okt. 12 des. 12 feb. 13 mar. 13 mai. 13 jul. 13 aug. 13 okt. 13 des. 13 jan. 14 mar. 14 mai. 14 jul. 14 aug. 14 okt. 14 nov. 14 jan. 15 feb. 15 mar. 15 mai. 15

2006 2007 2008 2009 2010

2011

2012

2013

2014

10y prime yield curve 10y swap

10y gov. bond transaction yield

足

2015

0 % mai. aug. nov.

Jan. JUl.

14 14 14 15 15

des. 13

jul. 13

sep. 12

nov. 11

jan. 11

mar. 10

mai. 09

jul. 08

sep. 07

nov. 06

jan. 06

mar. 05

jun. 04

aug. 03

okt. 02

jan. 02

akershus eiendom 23

Interest rates and transaction yields, 2002-2015:

8,00 %

7,00 % 7,50 %

6,00 % 6,50 %

5,00 % 5,50 %

4,00 % 4,50 %

3,00 % 3,50 %

2,00 % 2,50 %

1,00 % 1,50 %

Source: The Central Bank of Norway, Akershus Eiendom

Transaction volume per year (MNOK) and share of foreign investors, 2006-2015:

120 000 60 % Domestic

100 000 50 % Foreign

80 000 40 % Entra

60 000

30 %

40 000

20 %

20 000

10 %

Share of international investors

24

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 ten years, except for a slight setback in consumption in late 2008/early 2009, and retail sales volumes have been positive in 2015. ­Statistics N ­ orway expects to see moderate growth in ­consumption s­pending until the end of 2016, there­ after a slightly higher growth rate, based on expectations of improved general economic conditions from 2017 onwards.

The Norwegian retail market during the last d ­ ecades 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 470 sq. m. (compared to the average in Europe of a­ pproximately 275 sq. m.) growth in shopping centre 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.

On the other hand, 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 will see a lot of leasing activity the next five to ten years where international brands are expanding in Norway.

Rents have increased significantly during the last 5-7 years in the high street market in Oslo, and in the last three 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. In 2007, a significant AAA lease in Oslo was signed at NOK 14,000 per sq. m., whereas in 2015 the highest rent achieved was NOK 28,000 per sq. m.

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 as investors, to secure the best sites has been strong. In 2015, Citycon bought Sektor Gruppen taking ­control of 34 shopping centres spread throughout Norway, while Meyer Bergman acquired the Promenaden portfolio from Søylen and Madison containing 11 of Oslo’s best high street shopping properties.

akershus eiendom

Prime rents retail, NOK, 2006-2015:

25

Prime yield retail, NOK, 2006-2015:

27500

7,50

25500 7,00

23500 21500

6,50

19500 6,00

17500 15500

5,50

13500 5,00

11500 9500

4,50

Unit shops

Unit shops

Big box

Big Box (right axis)

135

14 %

130

12 %

125

10 %

120

8 %

115

6 %

110

4 %

105

2 %

100

0 %

jul. 15

jan. 15

jul. 14

jan. 14

jul. 13

jan. 13

jul. 12

jul. 11

jan. 12

jan. 11

jul. 10

jan. 10

jul. 09

jan. 09

jul. 08

jan. 08

jul. 07

jan. 07

­4 % jul. 06

90 jan. 06

­2 %

jul. 05

95

Retail year­on­year growth

16 %

jan. 05

Retail volume index

Norwegian retail volume index, season adjusted volume index, 2005=100, 2005-2014: ­

140

2015

2015

2013

Shopping centres

2014

2012

2012

2011

2010

2009

2009

2007

2008

2006

Shopping centres

2006

4,00

2015

2015

2014

2013

2014

2013

2012

2011

2012

2011

2010

2010

2009

2009

2008

2007

2008

2007

2006

2006

7500

retail year­on­year growth (right axis) retail volume index

Source: Statistics Norway

26

The hotel market

The hotel market

The average Norwegian hotel occupancy rate has only increased slightly over the last 10 years, varying from approximately 51.5% in 2005 to around 53.5% in 2015. 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 slightly positive development in the average RevPAR in

­ orway, while the development has been very positive N in the Oslo market.

The Norwegian hotel market is typically ­characterised by a high proportion of long lease contracts with revenue-based rents and substantial, guaranteed ­ ­minimum rents. Thus, Norwegian hotel owners ­usually have much better down-side protection than one finds in many other countries.

akershus eiendom

27

Occupancy rate, seasonally adjusted, 2003-2015:

90 85 80 75 70 65 60 55 50 45 40 ‘03

‘04

‘05

‘06

‘07

‘08

‘09

occupancy (oslo)

‘10

‘11

‘12

‘13

‘14

‘15

‘15

occupancy (norway)

Source: Statistics Norway

Real RevPAR, seasonally adjusted, 2003-2015

1 000 900 800

500 400 300 200 100

norway

oslo

15 Jan

14 Jan

13 Jan

12 Jan

11 Jan

10 Jan

09 Jan

08 Jan

07 Jan

06 Jan

05 Jan

04 Jan

03 Jan

RevPAR

700 600

Source: Statistics Norway

28

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 t­ owards 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 modern storage space and cross-stock buildings within the next 2–4 years is forecasted to remain at a high level.

­ acancy in the Greater Oslo region, measured as floor V space available now and within 3 months, stands at 4% as of January 2016.

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

29

GARDERMOEN

OSLO

VESTBY

to the relatively fully developed area around the Alna­ bru 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.

30

The residential market

The residential market

The Norwegian housing market has seen extraordinary 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.

The construction and completion of new dwellings ­increased significantly during the period between 1994 and 2008. In the same period, housing prices rose ­rapidly. As can be seen from the graph above, from 2003 to late 2007, prices almost doubled in S­ tavanger and increased significantly for all cities. However, ­during 2008/2009, both prices and construction fell before picking up again in 2009/2010. In fact, housing prices recovered to the 2007 level before the end of 2009, and are now at an all-time high.

akershus eiendom

31

Residentail housing prices (all types), NOK/sqm, 2003-2015:

50 45 40 35 30 25 20 15 ‘03

‘04

‘05

‘06

oslo trondheim

‘07

‘08

bergen

‘09

‘10

‘11

‘12

‘13

‘14

‘15

stavanger

national average

Source: Eiendom Norge/Real Estate Norway, Finn.no, Eiendomsverdi AS

32

“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

The commercial real estate (CRE) sector in Norway is very well developed and supported by a healthy ­Norwegian economy and government finances. The sector has developed rapidly over the last couple of years. Five years ago, the strong market was totally ­dominated by Norwegian investors, whereas international ­investors now represent about half of the annual transaction volume involving properties within all segments.

A number of listed Norwegian real estate companies,

together with life insurance companies, pension funds, family offices and ­private equity firms, dominate the Norwegian CRE market. Furthermore, the significant inflow of international capital has made the Norwegian CRE market among the more professional and efficient m ­ arkets in Europe.

Norway, with its second ­highest GDP per capita, low unemployment rates, histori­cally low interest rates, a weakened NOK and strong purchasing power, attracts real estate investors looking to find profitable invest-

Arctic Securities

33

According to a survey ­published

by Atrium CBRE, Norway was the fifth ­largest ­European sub-­ market IN 2015

ment opportunities with acceptable risk profiles. In addition, Norway is among the world’s easiest countries to do business in (according to the World Bank).

Transactions in the Norwegian CRE market tended to proceed at a relatively leisurely pace, compared to what international investors experienced in other European countries. However, things have changed in this area, with transaction advisors being more f­ocused on presenting timelines acceptable to international i­ nvestors, as well as preparing thorough investment memorandums,

vendor due diligence reports and data rooms in English. Oslo was ranked Nr. 5 in JLL ­Investment Intensity Index for 2015, another proof of the Norwegian CRE market being well positioned for international investors in the future.

In 2015, international investors were involved in ­almost 50% of the entire transaction volume on the acquisition side. Several of these were investing in ­Norway for the first time.

34

“rough guide”

Swift ­processes - decision-­making processes take less time in ­Norway than in most other ­jurisdictions

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:

ing, and more and more of the sellers and their a­ dvisers are taking into account that international ­investors have investment committees and thorough processes that take longer than most of the domestic buyers.

1. Finding assets: Foreign 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, the process is smooth and efficient, and the barriers to entry are not at all as high as initially perceived. Advisors are set up to work under high time pressure, and the response time is remarkably good.

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 an i­mpression of the interested party being without ­obligation, bordering on not to be taken s­ eriously at all. N ­ orwegian 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 practical advice – ­never submit an indicative bid with the before mentioned heading.

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 chang-

4. Data room and due diligence: In most of the sales processes over the last years, ­thorough 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 con-

Arctic Securities

clusions are not always very resolute in terms of what action must be undertaken.

5. Financing: Loan documents are less comprehensive than in most other jurisdictions (perhaps with the Danish as an ­exception). Loan agreements are rather slim. Most of the topics are, as opposed to other jurisdictions, covered thoroughly by the general background legislation.

The 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 make thorough checks of 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, ­ what kind of parties are involved and whether the ­contemplated transaction is a share deal or an asset deal. Because 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, you do not negotiate only about the gross property value, but also on adjustment elements

35

such as the discount for reduced tax depreciation (latent capital gains tax), discount for property tax and the ­value of tax loss carried forward. Note, there could also be off balance items that need to be taken into account.

7. Standardised 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 expressed that this makes it easier to invest in Norway than in other markets.

Summary

2015 has been the year when new records were b­ roken over and over again: record low prime yield levels, ­record low interest rates, record weak currency – and record high transaction volume with a record high share of international capital entering the market. ­International ­investors acquired more CRE in Norway during 2015 than in the ten years before aggregated.

According to a survey published by Atrium CBRE, Norway was the fifth largest European sub-market.

We expect the market going forward will continue to ­develop positively, and that the interest from international investors will continue to be strong.

36

EXPERIENCES MADE BY OTHER INVESTORS

EXPERIENCES of OTHER INVESTORS A few international investors have been asked to comment on their experiences of investing in the Norwegian real estate market.

The questions posed were as follows: 1. W hat has surprised you the most after entering the Norwegian commer­ cial real estate market?

2. W hat are the most dis­ tinctive characteristics of the Norwegian com­ mercial real estate mar­ ket compared to others?

3. W hat advice would you give to future inter­ national investors in ­Norway?

37

Cherine Aboulzelof

Manuel W. Böcher

90 North Real Estate Partners LLP 1. We started looking at the Norwegian market in early 2014, and completed our first acquisition near Oslo in November. As a new entrant, the flexibility of the financing market and general ease and standardisation of the transaction framework and transparency of information made our entry into Norway smooth when compared with other, even larger, markets in Europe. Our second transaction was even more efficient. I was pleasantly surprised by the professionalism of everyone involved from advisors to sellers.

2. Fast-paced execution; developed and attractive bond financing market; upfront negotiation of terms vs. tail-end negotiations; smaller market therefore the word spreads quickly; 3. Given the fast pace of transactions, to be able to compete with local players, international –­especially first time – investors, need to have done their home work on the sub-market, locations, lease structures, and the deal system and lined up their advisory and financing teams early on. Getting good advisors/ partners is key in this market and will give credence to foreigners.

Deka Immobilien GmbH 1. The Norwegian real estate market is quite similar to the German market. Surprising was the small market with its focus on Oslo and a lot of local investors. The sales process is very well structured and effective, which is good for the typical German investor.

2. The market and the people are very professional.

Deals get done quite fast.

3. It is good to have a professional team on the other side as well, to handle the necessary speed of transactions. It is really important to have a good advisor in Norway which can help you a lot to achieve the best results in the end.

Siegmut Böhm

AM alpha GmbH 1. Having been active in the market for many years, we had some surprises on both sides: On the buyside, there are often local competitors which won’t perform any due diligence; in some cases, domestic players are willing to sign unconditional contracts, even before the official bidding process has started. As a seller, you might receive offers “subject to ­equity” – which is uncommon in many other ­European countries 2. It is a small and very efficient market with a lot of professional players and advisors 3.

Act fast ! Never underestimate the speed and ­execution capabilities of the domestic competitors.

If you want to do a deal: Get your act together as quickly as possible.

38

transaction

Munkedamsveien 62

Sold to Deka Immobilien GmbH (Germany) for NOK 550 million (â‚Ź 58 million)

39

40

legal framework

Anne Sofie Bjørkholt

Stig Bech

partner, ba-hr

partner, ba-hr

Legal framework Background legislation and standard agreements 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 standard 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.

­ roperty every two to three years in accordance with p 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 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 the sale of shares in a limited lia­bility company (Norwegian: Aksjeselskap) are tax free for a corporate shareholder. This is in contradiction to the sale of assets that are taxable at 25% 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 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)).

Most of both lease and sale and purchase contracts are based on standard texts, although with ­individual ­adjustments as a result of negotiations. Key real ­estate organisations such as the Real Estate Agents Association and the Landlords’ Association, together with, among others, the law firm BA-HR, issue a set of­ Having said that, there are also a considerable number standard agreements for both leases and for the sale of of real estate transactions structured otherwise – both

BA-HR

41

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.

• Standard sale purchase agreements (SPAs) are widely used and contain

- ‘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, baskets and thresholds on claims for defects and breach of warranties on 10%

as asset sales or through sale of parts in general partnerships (Norwegian: Ansvarlig selskap), limited partnerships (Norwegian: Kommandittselskap) and silent partnerships (Norwegian: Indre selskap).

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 calculated as follows: Property value with the addition of • t he cash and receivables on the balance sheet of the company • an agreed share of the deferred tax benefit represented by any loss carry forward (to the extent the buyer is willing to pay for this)

of the agreed property value • As a main rule, a SPV owning property under development/construction cannot grant security over its real estate in connection with the financing of its acquisition • 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.

• any other assets in the company´s balance sheet that the parties agree to include and with deduction of • all liabilities on the balance sheet of the company • 9-10% (normally, based on practice from 2015) of the difference between the property value after the deduction of the estimated market value of the land (because the land does not qualify for any depreciation) and the basis for tax depreciation on the property as per closing.

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

42

legal framework

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

property value and the tax basis in the target company.

There is no depreciation on the land, but the building can be depreciated by 2% and 10% on the fixed technical installations (elevators, ventilation system ­ etc.). 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 9-10% of the difference between the agreed property value of the building and the basis for tax depreciation. 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 1216%. The lump sum equals the percentage reached by using a discount rate of 6%, and assuming a 60/40 split between building and technical installations. Because of a decrease in the tax rate, we assume that we might see a decrease of the percentage going forward. The market value of the land is subject to discussions/negotiations, but is often agreed as being 20–25% of the property value for properties in central areas.

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 25% 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.

That part of the discount to a new buyer exceeding the discount received from the seller will be a cost for the buyer on a new sale. This cost is not a fiscal tax cost, but it is caused by tax reasons and may be deemed as a tax cost.

The standard contracts – defects, warranties and indemnities The standard sale and purchase agreements ­cover t­he direct sale of property, the sale of shares in a property

BA-HR

holding limited company and the sale of interests in a p ­ roperty holding partnership (general partnership, limited partnership and silent partnership). There is also a new s­ tandard 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 main 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 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 buyer will usually require certain warranties or indemnities, covering special risk factors identified through the due diligence process.

43

• The warranty period is normally 1 year after closing. However, the time limit is usually 3 years 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.

The buyer’s right to revoke the contract in case of significant defects or serious breach of warranties, will, however, rarely be waived, and will thus serve as a safety net for a buyer if the loss exceeds the agreed cap.

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.

Establishment of title and security in real estate

Registration of new title holder and stamp duty The transfer of shares or parts does not trigger any ­registration of a new title holder nor stamp duty.

44

legal framework

A growing trend in the Norwegian market is to take out representation and warranties insurance in the name of the buyer

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 owners’ 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 owner­ ship of the property.

A Norwegian company may only grant financial assi­ stance in connection with the 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 company’s recourse claim against the principal of the secured o­ bligations.

In addition, certain procedures apply prior to granting such credit.

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.

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. • 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,

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 “Companies 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 acquisition of shares in the company.

BA-HR

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 as a practical main 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: aksje­ selskap) which is acquired by another Private Limited ­Liability ­Company or Public Limited Liability Company (Norwegian: allmennaksjeselskap) shall be able to provide security for the acquiring c­ ompany’s obligations in connection with the acquisition of

45

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 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.

46

legal framework

According to the standard as-is agreement, the ­ tenant is responsible for indoor maintenance, while the lessor is ­ ­ responsible for replacements and outdoor maintenance.

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 2013. The standard lease agreements are expected to be updated and published during the second quarter of 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 refur­ bished 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 o­ bject meets with all public requirements, ­ unless these ­requirements are a result of the tenant’s b­usiness. ­Under the triple net standard, the tenant is r­ esponsible 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 or 10 years, and 3–5 years for smaller premises. Lease

BA-HR

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 main rule, not be terminated during the lease term. However, the tenant is normally entitled to terminate the lease agreement by 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.

47

Under the Tenancy Act section 4-3, after a lease period 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, however, 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 lessee In January 2015 Statsbygg, a public sector ­administration 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 govern­mental 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 p ­ ublic 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 for in our ‘Invest in Norway’ report from Mipim 2015, we expected the Norwegian CRE ­(Commercial Real Estate) lending market to ­continue to be attractive both for new transactions, as well as for ­refinancing. The Norwegian real estate market has been very active last twelve months with transactions v­ olumes ­rising above NOK 100 bn. Most interesting is the fact that ­ international investors accounted for more than 50% of the volume for the first time. More and more ­international investors find real estate in Norway as an ­attractive a­ sset class, and with the NOK depreciation over the last years, we now see a number of investors buying real estate in Norway unhedged. How is this financed?

We have seen some larger portfolio transactions (above EUR 1 bn.) by foreign investors in Norway, that have

been financed through syndicates of domestic and international banks. We have also seen single asset transactions above NOK 1 bn. that have been financed through the bond market, at attractive terms with long dated tenors at +/- 10 years.

CRE investors can still lock in an attractive yield gap ­between the all-time low interest rate levels in Norway and property yields. Long dated NOK interest rates have fallen another 0,10% last twelve months, h ­ owever we have seen volatile markets over the last year with 10y swaps trading between 1,60% (current level) and 2,42% (June 2015) The swap spreads between NOK and EUR are more or less the same with +/- 1,00% spread, however we have seen the spread increase for tenors below 5 years.

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49

3,5

2,5

1,8

1,6 3,0

2,0

1,4

2,5

1,2

1,5

2,0

1,0

1,5 0,8

1,0

0,6 1,0 0,4

0,5

0,5

0,2

0,0 0,0

0,0 3m 8m

1y

3y

5y

7y

9y 12y 15y

3m 8m 1y ­0,2

3m 8m

3y

1y

5y

3y

7y

5y

nok swap feb. 2015

nok swap feb. 2015

nok swap feb. 2016

nok swap feb.

2016 eur swap

Bank Financing

Norwegian and Scandinavian banks are still among the most well capitalized banks in Europe, but the Norwegian banks today face stricter capital requirements from local financial authorities than many ­other ­Scandinavian and European banks. These capital ­charges have ­resulted in the Norwegian banks being more stringent on what assets and what clients they would like to provide CRE lending to. Local real ­estate investors still obtain attractive funding, but internat­ ional SPV financing for single assets has not been their favourite. The total lending to the real estate sector from Norwegian banks and financial institutions stood at NOK 507 bn. as of November 2015, up from 4NOK 450 bn. in 2009. DNB – Norway’s largest bank - has more than NOK 200bn. in the real estate sector, corresponding to 13% of total lending. This indicates that CRE lending is an important part of the banks’ total balance sheet.

The charts below are from the latest CRE lending ­report from UNION where the seven major banks were asked for their levels on loan to value and margins

9y 12y 15y

7y

9y 12y 15y

nok swap

on a 5 year loan for a prime office building in central Oslo. The chart shows the levels from 2012 to today.

The all-in cost stood at 3,17% in Q4 2015 compared to 3,60% in Q4 2014.

What is important for the domestic banks when new ­international investors are coming to Norway.

• Investors have 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 • Investor’s track record All the parameters above will be important for d ­ eciding 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, and this has accelerated since MIPIM 2015, with more and more larger institutions entering the market with good appetite for both domestic and international borrowers.

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Bank and Bond Financing

Q4 2011

Q4 2012

Q4 2013

Q3 2014

Q4 2014

Q1 2015

Q4 2015

74 %

71 %

69 %

70 %

70 %

70 %

65 %

70–75 %

60–75 %

60–75 %

62–75 %

62–75 %

62–77 %

62-77 %

1.71 %

2.62 %

2.29 %

1.84 %

1.76 %

1.65 %

1.96 %

1.50–2.00 %

2.30–2.90 %

2.00–2.50 %

1.60–2.00 %

1.55–1.90 %

1.40–1.80 %

1.70 -2.20

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

bank spread new 5 y.

q1 2013

q2 2013

q3 2013

q4 q1 2013 2014

bank spread new 5 y.

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 normally want to borrow through SPV financing, and this is one of the strengths of the bond market vs. the local bank market. Bond investors continue to be more asset focused ­compared to banks that prefer borrowing at corporate level. The process with arrangement of the bond issue and the covenants attaching to the bonds, are also ­superior to bank ­financing for the right assets.

The 3 largest and most frequent bond issuers in the Norwegian bond market are still Olav Thon Group (NOK 9,970 million outstanding), Entra Eiendom (NOK 8,400 million and Steen & Strøm (NOK 5,400 million).

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,

q2 2014

q3 2014

q4 2014

q1 2015

q2 2015

q3 2015

q4 2015

5 year swap

in an amount of NOK 2,535 million and a 65-75% LTV junior bond for NOK 390 million with a 5-year tenor on attractive terms.

Since MIPIM last year a total of NOK 22 bn. of CRE lending has been issued through the bond market, and the total outstanding volume for CRE bonds in N ­ orway is today at NOK 58 bn. (NOK 46 bn. in 2015) 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 its market share up to 2025% in the years to come from current levels around 12%.

A new trend we saw in 2015, that we believe will grow in the years to come is mezzanine bonds being offered for CRE lending. Arctic Securities executed two larger deals (NOK 1 bn. +) in 2015 with long dated senior bond financing at 65% loan to value, and a m ­ ezzanine 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.

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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

Most of the CRE bonds that have been issued have been long-dated fixed rate bonds (+/- 10years), 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.

NOK 1100 billion. Many of the new lenders and ­borrowers (and their lawyers) have been astonished by the ­quality work, and the standardi­sation of the Norwegian bond market. For more information see www.nordictrustee.com.

The Norwegian bond market in general has been ­attractive for international borrowers for many years.

A good part of this must be attributed to 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 and has played an important role in the securities market for over 20 years, with close to 2,200 active assignments to the value of more than

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

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Selected tax issues

Anne Sofie Bjørkholt

Ole Andreas Dimmen

partner, ba-hr

senior lawyer, BA-HR

Selected tax issues Property tax

Each municipality in Norway may at its 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.

In traditional triple net lease agreements the l­andlord can reclaim property tax outlays from the tenant. ­Further, it is not uncommon for new lease agreements to place this cost with the tenant, also when the lease is not on triple net terms. However, the standard solution is that property tax is an owner’s cost.

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 25%. 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, hotels and

­ roduction facilities the rate is 4%. In addition, fixed p technical installations in the building are d ­ epreciated at 10%. A part of the investment must be allocated to the land, which is non-depreciable. Because N ­ orwegian 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 d ­ epreciation, it is market practice with a reduction of the purchase price for the shares, calculated as a p ­ ercentage (9–10% for buildings with 2% depriciation rate) of the ­difference between the property value (after the d ­ eduction of the estimated market value of the land) and the basis for tax depreciation on the p ­ roperty as per closing.

Deductible expenses will for most practical p ­ urposes 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 connection be considered as an internal loan.

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53

Executive summary • Each municipality in Norway may at its own discretion levy property tax. The property tax rate is between 0.2% and 0.7%. Oslo introduced 0.2% property tax from 2016, but not on commercial property. However, it is suggested to introduce property tax also on commercial property from 2017.

• Net income deriving from real estate situated in Norway will be subject to Norwegian tax at a rate of 25%.

• A sale of shares is tax exempted for a Norwegian company shareholder, and is normally

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 financed with loans from the foreign investor as interest payments as a starting point are deductible, while N ­ orway 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

not taxable for a foreign shareholder, whereas an asset sale will trigger a 25% 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. A 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 25% taxation of the capital gain. The capital gain taxation may, however, be posted on the 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.

54

transaction

Karl Johans gate 45

Sold to Bayerische Versorgungskammer (Germany) for ~500 MNOK (â‚Ź 53 million)

55

Foto: nyebilder.no

56

MANAGEMENT OF commericial REAL ESTATE

Rune Mikaelsen vice president, OBOS 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

In general, management of real estate in Norway is 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.

Generalist management Foreign investors will find that there are few p ­ roperty management suppliers specialising in only 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

obos basale

property managers are within the office segment, but the same managers also handle retail, logistics and combination properties etc.

Facility management Most managers purchase facility services as an inte­ grated part of the property management service for multi-tenant buildings. Most properties in Norway are not large enough to justify separate facility manage­ment agreements covering total facility service ­packages. There are exceptions, especially with larger retail units. Some suppliers of facility services offer ­facility management to large tenants, especially single users of a property.

Facility services There is a wide range of facility service suppliers within different sectors such as caretaking, energy, fire protection, security, internal control and so on. Some ­property managers offer one or several of these services in-house, others purchase facility services from third party suppliers on behalf the owner or as sub-suppliers under the management agreements.

Service charges The owner may only charge the tenant for service costs to the extent that this is covered in the individual lease agreement.

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

57

a­ ctual costs accrued at the end of each calendar year.

The scope, annual adjustment and distribution of the service charges is defined in the lease agreements. It is common that the property manager hosts annual ­tenant meetings to present the service cost budget for the coming year, giving the tenants some influence on the service and cost levels.

The standard Norwegian lease agreement for com­ mercial 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.

Service charges applicable to vacant areas must be ­covered by the owner. To the extent that the service charges are reduced due to the vacancy, these savings may be deducted.

Service charges for multi-tenant office properties in Norway typically range from NOK 207/BTA (€22) to NOK 367/BTA (€38), with an average of NOK 291/BTA (€30) (based on statistics from the Basale report Dec 2015). For comparative reasons, costs for elevators, staff restaurants and services typical for retail properties are not included in these numbers.

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

58

MANAGEMENT OF commericial REAL ESTATE

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 handover inspections and a close dialogue with the ­tenants during the lease period with regards to the main­ ­ tenance ­obligations are key factors to avoid disputes and fi ­ nancial losses in this connection.

Health, safety and environ­mental require­ ments

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 49 SPVs with a total area of 485,000 sq. m. (office and retail only).

The figures in this overview should only be used as an indication, as they are based on a limited selection of properties.

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59

cost Category

Average

Low

High

Maintenance

NOK 69 / €6.9

NOK 5 / €0.5

NOK 173 / €17,3

Insurance

NOK 10 / €1

NOK 6 / €0.6

NOK 16 / €1.6

Local audit

NOK 3 / €0.3

NOK 1 / €0.1

NOK 12 / €1.2

Management

NOK 33 / €3.3

NOK 21 / €2.1

NOK 69 / €6.9

Legal fees

NOK 3 / €0.3

NOK 0 / €0.0

NOK 4 / €0.4

Technical consultants

NOK 17 / €1.7

NOK 3 / €0.3

NOK 47 / €4.7

Other costs

NOK 9 / €0.9

NOK 0 / €0.0

NOK 25 / €2.5

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/sq. m. BTA (€208), full interior refurbishment including ventilation, lights and a new layout, might cost up to NOK 10,000/sq. m.

BTA (€1044) 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 an 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.

Commencement of ­management

It is of substantial value for both the tenant and the

investor if the manager is involved as early as p ­ ossible in connection with a transaction and a subsequent management instruction. The reason is that many vital management issues fall to be considered in the p ­ rocesses leading up to a transaction. Furthermore t­ enants often respond negatively to a transaction and it is important to rebuild trust between the lessor and the tenants as quickly as possible.

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

60

MANAGEMENT OF commericial REAL ESTATE

there is normally a need for manage­ ment not only of the actual ­property, but also of the company owning the property

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 an annual rent) is covered by the lessor and recouped through an addition to the rent.

Management of residential real estate

The market for residential real estate is heavily ­regulated – primarily to protect residential tenants. The Housing Act forms a mandatory and strict foundation when it comes to lease agreements, maintenance obligations, property expenses and other terms. Additionally the market has, as previously mentioned, until now not f­avoured institutional investors. As a result external management of residential properties is currently not fully developed to meet the typical needs and requirements of foreign investors.

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 actual property, but also of the company owning the property. For foreign investors, there is no a­ lternative to management of at least one N ­ orwegian company and the various official requirements ­connected to that.

Company management services mainly consist of: • Norwegian GAAP accounting

– 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

obos basale

• 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 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 N ­ orwegian 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 person­

61

al 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 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,OBOS 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, v­ olatile ­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 s­ uperior guiding principles for property development in a ­municipality. For the City 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 p ­ rotective 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, ­kindergartens 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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A NEW MUNICIPAL PLAN WAS ADOPTED FOR THE CITY OF OSLO ON 23 ­September 2015.

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 15 building regulations. These regulations are ­intended to ensure that projects are planned, designed 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, the latest version was updated in 2015.

BREEM classified buildings require technical adaptations beyond the requirements in TEK 15.

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 appoint authorised professionals (Norwegian: ‘ans­ varlig søker’) 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. 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 lawyer, BA-HR

partner, BA-HR

Forward sale of property The rationale behind forward sales and the different models

in the modified model as the transaction is closed when the construction has been completed.

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 building(s) under construction and can be structured in two ways: the ‘proper forward model’ and the ‘modified forward model’.

The proper forward model is the most complex, but also the most common one. An outline of its main ­elements is set out below.

Under the proper forward model the shares in the target company are acquired at the start of 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 is covered by the buyer, while the seller normally finances the construction cost

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 been completed, the seller assumes the respon­sibility for constructing the building in accordance with the requirements in the lease agreement. Thus, the seller assumes the full risk for the final construction costs. A lower construction cost is for the benefit of, and excess costs must be covered by, the seller.

The purchase price for the shares is calculated based on

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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

Final settlement with contractor and adjustment of purchase price for the shares in the SPV

Lease term

On-going adjustment price adjustment

an agreed property value as if the building had a­ lready been completed, including a deduction to reflect that there is no lease income from the property 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 ensure payment of an amount equal to that deduction to a separate bank account in the name of the target company (the ‘security deposit account’ ).

This is normally arranged through a loan extended to the target company and negotiated in connection with the buyer’s acquisition financing.

The construction costs are then financed through withdrawals from the security deposit account, normally according to a pre-arranged payment plan and subject to a requirement that the payment/withdrawal leads to a corresponding added value to the property. The total value of the security deposit account and the building under construction will therefore be held constant

during the construction phase, and will both serve as security for the bank. Construction costs that do not have any corresponding ‘added value’ are financed by the seller providing bridging finance (through supplementary loans) to the target company.

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. If the final construction costs are lower than estimated, the buyer pays an amount equal to the difference 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.

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Green buildings in Norway

Kjersti Folvik Managing director, Norwegian Green Building Council

Green buildings in Norway Over the last few years there has been a growing focus on green ­buildings in Norway, and several major real estate companies have invested heavily in environmentally friendly buildings, development of green technology and expertise.

The primary drivers for environmentally friendly buildings in Norway have been the introduction of the certification system BREEAM-NOR and a growing sustainability awareness from tenants. New technical regulations and the development of advanced green technology have also been vital. ­Representing a consider­able amount of Norway’s total energy c­ onsumption and environmental footprint, the efforts of the real estate industry will be essential to the goal of achieving a sustainable society.

BREEAM-NOR CERTIFICATION

In 2010, the largest developers in Norway agreed to implement the BREEAM standard for green building certification, and Norwegian Green Building Council (NGBC) was established.

NGBC, now counting 250 member companies ­representing a large part of the Norwegian c­ onstruction

and real estate industry, is licensed to o­ perate BREEAM in Norway. BREEAM, developed by the Building ­Research Establishment (BRE) in 1990, is Europe’s most widely used certification scheme for sustainable buildings. In October 2011, NGBC launched BREEAM-NOR, a Norwegian adaptation of the internationally recognised environmental assessment ­ ­method.

A BREEAM-NOR certificate can be issued in five benchmark levels: Pass, Good, Very Good, Excellent and Outstanding, all of which have considerable documented qualities verified by a third party.

Since the launch of BREEAM-NOR, 46 projects have received a BREEAM-NOR certificate ranging from the lowest BREEAM rating, Pass, to the highest r­ ating, Outstanding. More than half of the certificates were

Norwegian Green Building Council

issued last year, and we expect continued growth. The vast majority of BREAM-NOR projects are office buildings located in and around the Oslo area. How足 ever, the use of BREEAM is also gaining ground in other parts of the country and on a variety of building types.

GREEN SUBSIDIES

There is a growing acknowledgement of the benefits of certification as a method of documenting high quality and sustainability.

GREEN LEASE AGREEMENTS

Recent reports show that certified buildings are e足 asier to let and sell. Tenants, especially large corporate tenants, are to an increasing degree requiring office space with documented sustainable qualities. Their reasons include corporate social responsibility (CSR), 足operational cost savings and securing a good work environment for employees.

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Through the government-owned organisation Enova, real estate owners and developers are able to apply for subsidies in connection with refurbishment works and new construction. The subsidies can range from just a few thousand to several million Euros.

Until today, the use of green lease agreements has been limited. However, the interest is growing from both tenants and lessors, especially from larger companies and public tenants. A standard green lease agreement has been issued by the real estate organisation Norsk Eiendom, a standard that has set the starting point for several negotiations on environmental improvements.

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publication partners

publication partners

ARCTIC

S E C U R I T I E S

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

basale

N•e

Norway’s leading media- and communication bureau for commercial real estate. www.naringseiendom.no

Norway’s largest and most professional real estate manager with a wide range of supplementary services. www.basale.no

Investing in Norway Handbook for the Norwegian commercial Real Estate Market