Interesting trends on the Swedish property market

Flip the switch

Public listed real estate companies which previously, to a large extent, drove the transaction volume and have been noted as net buyers in recent years are turning into sellers. More than half of the ten largest net sellers are publicly listed companies, while more than half of net acquirers are funds and institutions. Disregarding 2022, listed property companies were by far the largest net buyers in 5 out of the last 7 years since 2015. Private property companies, usually the second largest net buyers, have noted the same trend. This trend is expected to continue throughout 2023. The question remains how this trend will impact the transaction market. Newsec assesses that with large amounts of capital still floating around, willing sellers are likely to result in continued activity rather than an abrupt stop, but with a clear shift in who the buyers and sellers are.

Yield corrections and high foreign interest in light industrial/logistics

The logistics segment continued to see high interest, even at the end of the year. The segment has adapted rather quickly to new market conditions compared to other real estate segments and pricing in the latest deals often differs significantly from the peak. Activity also remains strong, and the segment was the second largest by the end of the year. International investors stood for over 50% of the logistics subsegment, which might be a reason for the quick adaptation to new market conditions. The prime yield has risen from ~ 3.20% at its lowest to 4.50% at year-end 2022. Although the market corrected quickly, it is worth noting that it was only a few years ago, in 2018-2019, when yields were at current levels of 4.50%. Thus, this leads one to the question if the last few years have been a temporary fluke for the segment, with yields as low as those seen in 2021 perhaps being unlikely to ever be seen again.

Market rent vs CPI adjusted leases on the office market

The leasing market for offices remained strong and active throughout the year and newly signed leases noted rental levels way above market. Newsec has not expected the market rent to follow CPI as market rents usually are less linked to inflation and more linked to GDP growth. Real rental growth is thus expected to be negative, even in the prime locations e.g. Stockholm CBD, although high nominal growth will be noted. In outskirt areas which are battling vacancies, rental growth is expected to be low and small businesses renting smaller spaces might also receive discounts until the situation stabilizes. Thus, offices with those characteristics will most likely not reap the full benefits of high inflation. As the economy also is heading for a possible recession in 2023, rental growth will be put to the test. Tighter leasing markets and stronger office markets will be better off, while opportunistic turn around office areas might find it even more difficult to keep up with the market’s rental growth.

The king is dead, long live the king

Though we touched upon the subject in the main text of this Newsec Property Outlook, it is worth underlining further. In Sweden, the residential segment has for many years been the largest on the transaction market, but interest dropped rapidly in 2022. By the end of 2021 and in 2022 the segment was hit twice, first with new regulation for new production apartments that restricted rental growth to half of the negotiated rental increase for the old stock. In practice, this means that real rental growth will be substantially negative in the high inflationary environment. Though rents are not CPI adjusted for housing, historically rental growth since 1969 has been more than twice as high as CPI. This suggests that the segment in practice will be well off in the long-run, despite rents not being CPI adjusted. For new production housing that is under construction, initial rental levels will most likely be attempted to be set at a higher level, and a lower increase will thus be priced into that rent. The low yielding residential segment has also been under pressure due to rising financing costs and the transformed macroeconomic environment, but as stated in the main text, Newsec assesses that the segment will continue to flourish in the long term.

SEK 220 billion

Total investment volume in 2022

SEK 180 billion

Total investment volume expected in 2023

–1.5% GDP contraction expected in 2023