Nordic focus: strong investor demand for prime while momentum rises in residential sector

Political uncertainties such as Brexit and the global trade war have the potential to weaken the economic development among the Nordic countries. But, according to Catella Research, these external forces have not yet impacted Nordic activity where markets continue to see strong investor demand for prime properties, cross-border activity and rising momentum in the residential sector.

Investor interest in Nordic markets by volume shifted from commercial to residential in 2018, as overall transaction volumes rose 2% year-on-year to €44.3 billion.

Highlights include:

  • Sweden reached the highest transaction volume of all Nordic countries with a total of €14.86 billion while Norway registered the highest growth rate, at 25% compared to 2017, and also represented the second strongest market in 2018 (€10.63 billion transaction volume). Although Finland achieved a slightly decline, the result of €8.9 billion is still the second highest of all time.
  • In Denmark, transaction volume decreased by 18 % to €9.86 billion, due to lower activity of foreign investors and a lack of larger portfolio deals, especially in the retail sector. Overall, property fund and institutional investors were the most active, contributing with approx. 69 % of the transactions. Danish investors were the most active in 2018 with a share of 55 %. Swedish investors were the most active players in Denmark, while US-headquartered companies could increase their investment activity compared to 2017.
  • The share of international investors decreased by 25% compared to 2017, mainly due to reticence of US and Asian investors. By contrast, foreign investment volumes in the residential sector increased significantly, by approx. 66%, the highest result which was ever recorded.
  • The most popular asset class remains the office sector, followed by residential real estate with steadily rising demand and transaction revenues. Retail properties follow in third place.
  • Stockholm is the most expensive office and residential location among the Nordic cities, with prime net yields of 3.50 and 1.5%, respectively. Highest prime yields can be found in Turku at 6.75%, both in the office and retail sector. 
  • Diversification potential across the Nordic countries remains high due to heterogeneous yield structure. There is a current yield gap of 525 basis points between the office, retail and residential sector in the different countries.

Thomas Beyerle, Head of Group Research at Catella, explains:

“Over the course of the year, we expect roughly stable or slightly increasing office rents in almost all North European markets. Because of continuously high demand for office space and a lagging development pipeline, a slight decrease of vacancy rates can be expected in most cities.”