Download Macro tailwind will turn in 2016 – but property remains attractive

catella market view january 2016
Macro tailwind will turn in 2016 –
but property remains attractive
Properties worth SEK 130 billion changed hands in Sweden during 2015. This is not quite as much as in record-breaking 2014, but it is well in line with the years before the financial crisis. In total, properties worth
around SEK 17 billion were sold in December, compared with SEK 33 billion in the same month 2014.
Arvid Lindqvist, Head of Research
[email protected]
The December volume reinforces the falling
trend in the rolling twelve-month volume
that we have seen since the summer, and is
set against the highs in July and August of
almost SEK 160 billion respectively. The drop
in volume has been evident in the office,
residential and public property segments,
while retail and logistics have continued their
strong growth.
Institutional investors increased their
market share significantly during December,
and accounted for almost half the volume
during the month. The institutions therefore
overtook real estate funds for the full year
and, together with private and listed property
companies, these now dominate the market.
Foreign investors kept a relatively low profile
towards the end of the year, and accounted
for just over 20 per cent of the market for
the full year. Although the market share of
foreign investors has increased for three
consecutive years, it is still only slightly above
the range of 10–20 per cent that has been the
case since 2009. However, there is intense
international interest in Sweden and we
will probably see some more major foreign
investments during the first half of 2016.
How will the property market evolve in
2016 and beyond? Yields and yield spreads
between A, B and C locations are both at
historically low levels. Yields in 2015 were
considerably compressed by strong economic growth in Sweden, coupled with increasingly expansionary monetary policy. Since
the start of the year, however, the slowdown
in the world economy has become ever more
pronounced. The global economy is being
hampered by high debt and weakening
growth in emerging countries, the stock market has had a difficult start to the year and the
VIX index (volatility index for US S&P 500)
indicates declining risk willingness on the
financial markets. Credit spreads between
US corporate bonds with high credit ratings
and those with lower credit ratings continue
to widen, and interest rates have surged on
the US high-yield market. This was also
apparent in the latest Catella Real Estate Debt
Indicator (CREDI), which measures debt
market sentiment in the property market.
The indicator switched in December from
expansion to contraction.
However, the trend in the world
economy is not directly downward. We are
seeing broad economic recovery in the euro
area, and US household consumption may
be strong in 2016. The turmoil in financial
markets could also lead the Federal Reserve
to pause rate hikes during the spring, which
might cause the equity markets to temporarily bounce back. Similarly, Swedish inflation is
stubbornly low and the Riksbank has threatened to intervene in the currency market,
which would further stimulate the economy.
In the somewhat longer term, however,
the direction is unequivocal – we are heading
towards a global downturn that is likely
to have a negative impact on the Swedish
economy from the second half of 2016. This
at a time when fiscal policy is already highly
expansionary and the scope for further
monetary stimulus is limited, to say the least.
The average yield in the transaction market
is highly correlated with GDP growth, and a
weaker economy will lead to higher average
yields on the property market. A significant
portion of this increase, however, will take
place through the standard deviation, i.e.
yield spreads between A, B and C locations,
rising while transaction volumes contract in
secondary locations in the major cities and in
smaller municipalities. However, continued
zero real interest rates and turbulence in the
stock market will make high-quality properties in prime locations very attractive.
The strong growth in Sweden compared
Property will remain
an attractive investment because it can
provide strong and
stable real yields in
an uncertain environment.
with other countries may also mean that
we will see more major investments by
international parties. Property will remain
an attractive investment because it can
provide strong and stable real yields in an
uncertain environment. However, investors
in secondary locations in major cities, and
in smaller towns, must remain vigilant as
the macroeconomic tailwind of recent years
could rapidly turn into a headwind.
catella market view january 2016
Yields on finalized office and retail transactions**
STDAV in yields (%-points)
Yield (%)
Total transaction volume
BSEK
Swedish GDP growth and the stock market
GDP growth (%) / Total return, FTSE Sweden (%)
Office and retail yield spread and the VIX
CBOE Volatility index
STDAV in yields (%-points)
Yields on office and retail transactions and GDP growth*
Yield (%)
GDP growth (inverted scale, y/y, %)
The average yields on historical office and retail
transactions have fallen significantly since the end
of 2012. There is a correlation between standard
deviation of yields on the Swedish property market
and volatility on the US equity market (measured as
the CBOE Volatility Index) – where the VIX seems to
be a leading indicator for the property market with a
6–9 months’ time-lag. Volatility increased significantly on the equity marked since the summer 2015. If
this development resumes, the result may be lower
liquidity and higher standard deviation on the Swedish
property market from mid–2016 and onwards.
* Calculated index based on the standard deviation of yields from historical transactions, in combination with measures of the over-all market liquidity.
** Yields are based on historical transactions in Sweden. Yields are either verified or estimated by Catella.
Source: FactSet and Catella.