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THE FULL SERVICE PROPERTY HOUSE NEWSEC PROPERTY UPDATE AUTUMN 2011 S W E D E N | F I N L A N D | N O R WAY | D E N M A R K | E S T O N I A | L AT V I A | L I T H U A N I A DETAILED KNOWLEDGE MAKES THE DIFFERENCE EDITORIAL EDITORIAL E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( CONTENTS 2–3 EDITORIAL 4–5 EXECUTIVE SUMMARY 6–11 NORTHERN EUROPEAN REGION 12–15 RETAIL 16 LOCATIONS 17 WIND POWER 18–19 THE FULL SERVICE PROPERTY HOUSE 19 DEFINITIONS 20 CONTACT AND ADDRESSES Copyright Newsec © 2011 This report is intended for general information and is based upon material in our possession or supplied to us that we believe to be reliable. Whilst every effort has been made to ensure its accuracy and completeness, we cannot offer any warranty that factual errors may not have occurred. Newsec takes no responsibility for any damage or loss suffered by reason of the inaccuracy of this report. Editor: Marie Bucht, Newsec, Box 7795, SE-103 96 Stockholm, Sweden. Phone + 46 8 454 40 00, www.newsec.se. You may use the information in the Newsec Property Update but acknowledgement must be made for all quotations and use of data/graphics. Design production: Sjö & Berg Design direction: Liedgren Design Printing: Elanders ) The Nordic property market is prospering in a weak global economy THE NORDIC ECONOMIES – ISLANDS IN THE STREAM SLOW GLOBAL GROWTH GENERATES LOW INTEREST RATES The global economic turmoil of recent months was a rude awakening for most people. The two main reasons for the turmoil were that investors around the world began to doubt the political leadership of the Western world and started to realise that the ongoing economic recovery in the developed world may have been an illusion. This has generated slumping appetite for risk among investors, which in turn has resulted in substantial stock-market falls, a soaring gold price and dropping government bond yields for the core European countries, the USA and Japan. According to Newsec’s main macroeconomic scenario, politicians on both sides of the Atlantic will finally take responsibility during coming years and make the necessary decisions to avoid economic catastrophe – even if these decisions occur only when all other options have been exhausted. Despite this, however, the world economy is heading towards an extended period of slow growth. It is unlikely that today’s global growth engines, the emerging economies, can continue to grow at their current high speed indefinitely. Export dependence, corruption, undeveloped financial markets and political instability in emerging markets, combined with high debt in the developed world, mean that global growth is expected to be weak during coming years – with limited global investment demand as a result. Since the cost of capital is the result of the demand for investments and the supply of savings, this suggests that real interest rates will remain low for several years to come – thereby providing a continuous flow of cheap capital to the property market. The Nordic economies, however, have shown strong development during recent years, and the region seems to stand out from the rest of the developed world with its strong growth and stable macroeconomic fundamentals. Low sovereign debts, competitive export industries, transparent economies and consumers with sound personal finances give the region the rare combination of developed-world stability with emerging-market growth – characteristics that give the Nordic economies all the potentialities to keep on growing despite an uncertain global economy. E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( 3 “In the currently sluggish global economy the property market seems an increasingly appealing investment choice” THE NORDIC PROPERTY MARKET IS PROSPERING IN A WEAK GLOBAL ECONOMY What then are the prospects for the future? The strong real economic fundamentals of the Nordic region will keep up domestic demand – and thereby economic growth and employment – despite the sluggish global economy. This will in turn generate stable cash flows for well–located properties of high quality in all the major cities. The property market also has an advantage over other types of asset in that it is more stable than the stock market while producing more attractive yields than the bond market. All in all, there are large amounts of capital around the world searching for safe returns. However, Office Yield/Interest Rate the options are few and investors have started to question old rules of thumb regarding what is safe and what is not. In this environment the Nordic property market seems an increasingly appealing investment choice. The Nordic property market will keep on performing, and the recent turmoil has only pinpointed the strength of our region. Marie Bucht Head of Advice [email protected] I Sweden Percent Source: Newsec 14 12 10 8 6 4 2 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011E 2013E Prime Office Yield - Stockholm CBD 5Y Gov. Bond EXECUTIVE SUMMARY EXECUTIVE SUMMARY E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( 4 E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( 5 EXECUTIVE SUMMARY MACRO DATA OFFICE YIELDS GDP Growth 3M Market Interest Rates Percent Source: Newsec Source: Newsec 15 15 10 I Nordic Region Office Yields CBD Percent Office Yields CBD Percent Source: Newsec Source: Newsec 15 8 12 I Baltic Region Percent 7 5 12 9 0 6 -5 6 9 -10 -15 -20 5 3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sweden Norway Finland Denmark K_\ nfic[$n`[\ \Zfefd`Z i\Zfm\ip \og\i`\eZ\[ X turbulent summer, with an increase in political risk premium as full realisation of the severe problems ahead led to deepening anxiety. The two main reasons for the development were that investors around the world began to doubt the political leadership in Estonia 2010 Latvia 2011E 2012E 0 the West and started to realise that global economic growth will be weak for years to come. K_\ 9Xck`Z Zfleki`\j Xi\ i\Zfm\i`e^ ]ifd X [\\g recession. Exports have been the single most important engine of recovery but domestic demand is now slowly starting to increase in importance. 2004 2005 Sweden Lithuania 2006 Norway 2007 2008 Finland/Estonia 2009 Denmark 9Xck`ZdXib\k`ek\i\jkiXk\j[\Zi\Xj\[jlYjkXek`Xccp during late 2009 and 2010 and are expected to converge further with the euro area as the economies recover. 2010 2011E Latvia 2012E 2001 2002 Stockholm E\nj\Z \og\Zkj `eÔXk`fe Xe[ j_fik$k\id `ek\i\jk rates throughout the Northern European region to remain low for some years due to the large output gap in the world economy and an intense global competition that puts strict limits on price increases. Recent developments further strengthen this scenario. OFFICE VACANCIES Office Vacancies 4 Lithuania 2003 2004 2005 Gothenburg 2006 Malmö 2007 Oslo EfinXp \og\i`\eZ\[ k_\ p`\c[ j_`]k Xj \Xicp Xj 2009 – sooner than the other Nordic countries – due to the gradual improvement of the financial market in combination with stabilised vacancy rates and recovering rents. Prime office yields in Oslo are now at 5.0%. 2008 Helsinki 2009 2010 2011E 2012E 6 Copenhagen 2002 2003 Tallinn K_\ i\Zfm\ip jkXik\[ cXk\i `e JkfZb_fcd Xe[ Helsinki, and the effects of an improving rental market in combination with low interest rates and gradual improvements on the financial markets generated falling prime yields during 2010 and the first half of 2011. 2004 Riga 2005 2006 2007 2008 2009 2010 2011E 2012E Vilnius @e:fg\e_X^\ep`\c[jXi\jkXYc\`egi`d\cfZXk`fej due to the improved financial market, the limited supply of office premises and expectations of a general economic recovery. @e k_\ 9Xck`Z Zfleki`\j p`\c[j _Xm\ Zfek`el\[ kf decrease during the first half of 2011 due to the clear signs of an economic recovery, significantly lower interest rates and an improving credit situation. The continued fall in vacancies and rise in rents for Baltic CBD office properties will further strengthen this development. RETAIL – NORDIC REGION I Nordic Region Office Vacancies Percent Source: Newsec 20 I Baltic Region Prime Retail Rents Percent Source: Newsec 35 I Nordic Region Prime Retail Yields Exchange rate – August 2011 I Source: Newsec EUR/m2 I Nordic Region Percent Source: Newsec 7 2,000 30 15 1,600 25 10 5 15 800 10 5 4 400 5 0 6 1,200 20 2001 2002 Stockholm 2003 2004 Gothenburg 2005 2006 Malmö 2007 Oslo K_\ Jn\[`j_ cXYfli dXib\k klie\[ Xifle[ `e \Xicp 2010 and employment is expected to continue to grow throughout 2011–2012. 2008 Helsinki 2009 2010 2011E 2012E Copenhagen 2001 2002 2003 Tallinn CBD EfinXp_X[X_`^_iXk\f]ZXgXZ`kplk`c`jXk`fek_ifl^_out the recession, with low unemployment and only a minor decline in employment. The labour market then bottomed out in late 2010, resulting in a slight increase in unemployment for the year, but during 2011 employment started to grow again. =`ecXe[\og\i`\eZ\[Xjc`^_kcpcXk\i\Zfefd`Zi\Zfmery than Sweden. Employment stabilised during 2010 and has shown growth during 2011. 0 2004 Riga CBD 2005 2006 2007 2008 2009 2010 2011E 2006 2007 Stockholm ;\edXib nXj _Xi[ _`k Yp k_\ i\Z\jj`fe# Ylk j`eZ\ then the labour market has somewhat stabilised although growth in employment has not yet occurred. @e k_\ 9Xck`Z Zfleki`\j gi`d\ f]ÓZ\ mXZXeZ`\j _Xm\ decreased substantially since the end of 2009 due to low overall supply of high-quality office premises. E\nj\Z\og\ZkjmXZXeZ`\j`eXcck_\Efi[`ZZXg`kXcjkf decrease in 2011 as a result of increased demand for office premises caused by the employment growth. 2008 Gothenburg Malmö JkXYc\ `ek\i\jk iXk\j n`cc Y\e\Ók gi`mXk\ Zfejldgtion and in combination with the ongoing urbanisation process are generating strong fundamentals for high-quality retail premises during coming years. @eJn\[\ek_\`ek\i\jk`ei\kX`cgifg\ik`\jYp]fi\`^e investors has increased significantly during 2011. OFFICE RENTS Office Rents CBD 3 0 2012E Vilnius CBD 2009 Oslo 2010 Helsinki 2011E 2012E I Nordic Region Office Rents CBD Exchange rate – August 2011 I Source: Newsec I Baltic Region Prime Retail Rents Exchange rate – August 2011 I Source: Newsec EUR/m2 300 600 500 @eEfinXpgifjg\Zkjf]XZfek`el\[_`^_[\dXe[ for prime retail space from tenants and a strong rental market contributed to a significant number of retail transactions which represented nearly a third of the total property transaction volume in the first half of 2011. I Baltic Region 200 300 150 200 Stockholm Malmö 2009 Oslo @e =`ecXe[ c`hl`[`kp fe k_\ kiXejXZk`fe dXib\k _Xj been quite low and only a few transactions have been completed in the first half of 2011. 2010 Helsinki 2011E 2012E Copenhagen @em\jkfi `ek\i\jk _Xj `eZi\Xj\[ efk fecp ]fi gi`d\ retail but also for shopping centres and big-boxes in regions other than the big three cities of Sweden. However, financial providers still appreciate secure cash flows and also place increasing emphasis on residual value and alternative usage. @e;\edXib#kiXejXZk`feXZk`m`kpjkXik\[kfg`Zblg in the fourth quarter of 2010 with a number of significant transactions closed at the beginning of 2011. 2003 2004 Gothenburg 2005 2006 Malmö K_\Efi[`Zi\ekXcdXib\kjXi\`dgifm`e^n`k_JkfZbholm and Oslo in the lead as vacancies in the CBDs are decreasing due to a high demand for prime office premises. Prime office rents increased in Stockholm, Oslo and Helsinki in 2010 and the first half of 2011 and are expected to keep on rising throughout 2011 and 2012. 2007 Oslo 2008 Helsinki 2009 2010 2011E 2012E Copenhagen @e:fg\e_X^\e#i\ekj]figi`d\cfZXk`fej_Xm\jkXY`lised due to the decreasing vacancy and are expected to rise slightly during 2011 and 2012. 100 13 275 12 250 11 225 10 200 9 175 8 Tallinn 2002 2003 Riga 2004 2005 2006 Vilnius I\ekj jkXY`c`j\[ `e KXcc`ee Xe[ M`ce`lj `e cXk\ )''0# while Riga followed suit with a rental stabilisation in 2010. Riga and Vilnius are now expected to see increasing prime rents in 2011 but Tallinn will see no increased rents before 2012. 2007 2008 2009 2010 2011E 2012E Source: Newsec 7 150 2001 I Baltic Region Percent 300 400 2002 2008 Gothenburg Prime Retail Yields Exchange rate – August 2011 I Source: Newsec EUR/m2 250 2001 2007 RETAIL – BALTIC REGION EUR/m2 100 2006 Stockholm Copenhagen 2008 Tallinn 2009 Riga 2010 2011E 2012E 8]k\i]Xcc`e^`e)''0#gi`mXk\Zfejldgk`feXe[[`jposable income in the Baltic countries stabilised in 2010 and started to rise in 2011. Although unemployment is still very high in all three countries, levels are forecast to decrease during 2011–2012. 8 jkXY`c`jXk`fe f] i\kX`c kliefm\i nXj \m`[\ek `e the market in 2010, and turnover has since shown continuous growth. 2008 Tallinn Vilnius 8m\iX^\mXZXeZpc\m\cj`ek_\dfjkjlZZ\jj]lcj_fgping centres on the Baltic retail market are now close to zero as demand is very high. On the other side of the coin are low-quality centres and retail in secondary locations which are struggling with high vacancies and no prospects of rising rents. 2009 Riga 2010 2011E 2012E Vilnius 8cfe^ n`k_ i`j`e^ i\ekj# cXe[cfi[j `e k_\ 9Xck`Z countries are removing the discounts for prime retail which were used to attract or keep their tenants during the recession. @ek_\Óijk_Xc]f])'((j\m\iXci\kX`cgifg\ikpkiXejactions with a total volume of over EUR 100 million were closed in Estonia by a mixture of local and foreign Scandinavian investors. In Latvia, a few retail property transactions with a total volume below EUR 5 million were closed by local investors in the first half of 2011. No significant transactions were closed in Lithuania during the same period. NORTHERN EUROPEAN REGION NORTHERN EUROPEAN REGION E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( Arvid Lindqvist Senior Analyst [email protected] Newsec’s primary markets. 6 NORTHERN EUROPEAN REGION E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( 7 “Politicians on both sides of the Atlantic will ultimately take responsibility and make the right decisions to avert a crisis” Towards a prolonged period of weak global growth and low interest rates The world-wide economic recovery experienced a turbulent summer, with an increase in risk premium as full realisation of the severe problems ahead led to deepening anxiety. Most of the world’s stock markets have dropped in value since the beginning of the year; interest rates on the “weaker” European countries’ government bonds have soared; and prices of safe assets such as gold, Japanese yen, Swiss francs and US government bonds (even though these last have been downgraded) are higher than ever. The two main reasons for the development were that investors around the world began to doubt the political leadership in the West and started to realise that global economic growth will be weak for years to come. Facts and events that helped trigger the downturn were the unsustainable high government debts in southern Europe, the increased American debt-ceiling, and the downgrade of US credit ratings. The process of raising the US debt-ceiling was largely a political farce between Republicans and Democrats. The austerity package they finally agreed on included savings in the short term, when the economy really needs stimulation, in combination with insuffi- cient measures to tackle public finances in the long term. Over the past year meanwhile, European leaders have not dared to tackle the major reform issues needed to get the euro area to work in the long run. The growth engines of recent years in Asia and Latin America also show clear trends of overheating, excessive dependence on exports and corruption. These countries will not be able to propel the world economy during the years to come any more than they did during the financial crisis of 2008. The world economy is now heading towards an uncertain autumn and increased risk aversion. LOW INTEREST RATES AND LOW INFLATION Newsec’s main macroeconomic scenario assumes that politicians on both sides of the Atlantic will finally take responsibility and make the right decisions in coming years – even if this occurs when all other options have been exhausted. Global growth will be weak during a prolonged period of low interest rates and low inflation, but that is normal in the decade following a financial crisis as businesses, households and governments consolidate their balance sheets. dic economies are small and exportdependent and therefore highly affected by the fragile global economy. However, the countries are characterised by stable government and stable household finances, a highly educated labour force and competitive industrial production, which together generate good fundamentals for growth even in an uncertain global economic environment. THE NORDIC ECONOMIES – STILL STANDING STRONG The real economic fundamentals of the Nordic region differ from those of most parts of the developed world in having economically strong households, healthy banks and strong government finances. The Norwegian economy performed well during the economic downturn due to the stable export incomes generated by the country’s oil and gas assets. Sweden and Finland were both heavily affected by the global recession. However, their recovery has been strong, especially in Sweden, driven by export demand and household consumption. Denmark has suffered from slumping house prices and falling private consumption but the economy is now recovering. The Nor- years. These problems had to be solved through internal devaluation since the countries have held on to their fixed exchange rates. The process has been successful and competitiveness has been increasing. Exports have been the single most important engine but domestic demand is now slowly starting to increase in importance. Estonia is showing the fastest recovery due to improving competitiveness, its ability to reform and good government finances. Confidence in the country’s economic recovery is also being strengthened by the adoption of the euro in 2011. Latvia and Lithuania were seriously affected by the global recession, but are now experiencing export-led recoveries. However, this recovery will weaken THE BALTIC REGION – CONTINUING PROGRESS UP THE ECONOMIC LADDER The Baltic countries are recovering from a deep recession generated by the excessively leveraged households, the asset-bubbles and the reduced domestic competitiveness of previous Country Balance GDP Development Percent of GDP Source: European Commission/DnB Nor Source: Newsec/SEB Percent of GDP 8 100 7 80 6 60 5 4 40 3 20 2 0 -20 1 Sw ed en No rw ay Fi nl a nd Gov. gross debt 2010 De nm ar k La Es to ni a tv ia Li th Export 2009 rm ua n Gov. budget balance 2011E Current account balance 2011E Ge ia an y Fr an ce UK US A 0 Sw ed en 2011E No rw ay Fi nl a 2012E nd De nm ar k La Es to ni a tv i a Li Ge th ua ni a rm an y Fr an ce UK US A NORTHERN EUROPEAN REGION NORTHERN EUROPEAN REGION E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( 8 “Bank interest-rate margins are expected to stay relatively high for some time to come” due to the sluggish global growth. All in all, the Baltic region’s competitiveness is improving and, as the internal imbalances are solved, the region is expected to continue its progress up the economic ladder. LOW INTEREST RATES BUT HIGHER BANK MARGINS Newsec expects inflation and shortterm interest rates throughout the Northern European region to remain low for some years due to the large output gap in the world economy and an intense global competition that puts strict limits on price increases. Recent developments further strengthen this scenario. Bank interest-rate margins declined after the financial crisis and were then stable – although at a higher level than before the liquidity crisis Transaction Volumes of the years 2008/2009 – for over a year up until the latest turmoil in Europe and the USA. Bank interest-rate margins are expected to stay relatively high for some time to come but at a level well below that seen during the financial crisis. HIGH DEMAND FOR NEW OFFICE PREMISES – BUT SPECULATIVE CONSTRUCTION PROJECTS ARE RARE Space-efficient premises are one of the key features sought after by tenants. The cost per employee is what matters, which is why landlords can charge a higher rent per square metre for space-efficient premises. The demand for such premises is high but there are still very few construction projects being initiated purely specu- I Nordic Region Billion EUR 20 5 15 4 10 3 5 0 I Nordic Region Billion EUR Exchange rate – August 2011 I Source: Newsec Sweden 2003 2004 Norway 2005 Finland 2006 2007 Denmark 2008 2009 2010 H1 2011 1 0 activity slowed dramatically following the crisis and was close to non-existent in 2008–2010 as a result of stricter equity ratios, declining rent levels and increasing vacancy rates. Danish prime office rents have risen and vacancies have dropped during 2011 which has contributed to the announcement of some new projects in the years to come. Developers have several planned projects in the pipeline, but most of them will not be initiated until a significant proportion of lease premises has been pre-let. In Tallinn and Vilnius the construction of new office space has gained some momentum mainly due to a substantial decrease in vacancies. Several projects will reach the market in 2011–2012 although most are completions of previous years’ projects. Some new projects have been initiated but it is unlikely that developers will start construction without some pre-leases, and banks will be selective in financing new projects during coming years as the financial crisis is still fresh in the memory. INCREASED FOREIGN INVESTOR ACTIVITY IN H1 2011, BUT TOTAL TRANSACTION VOLUMES CLOSE TO LAST YEAR 2 2002 Q1 2010 Sweden Q2 2010 Norway Q3 2010 Finland Q4 2010 Denmark Q1 2011 9 “In Tallinn and Vilnius the construction of new office space has gained some momentum mainly due to a substantial decrease in vacancies” latively. On the other hand the Nordic construction industry is up and running again except in Denmark. The relatively low project-completion figures for the Nordic region in 2011 can now be seen as a short-term effect of the financial turmoil a few years before. During 2011 several large new construction projects have been announced. In Stockholm about 40,000 m2 of new offices are expected to be completed during 2011 – in comparison to a figure more than three times as high, 130,000 m2, expected in 2012. In the Helsinki Metropolitan Area around 60,000 m2 of new office space is expected to be completed in 2011 and an additional 125,000 m2 in the near future. In the Oslo area about 85,000 m2 is expected to be completed in 2011 and about 260,000 m2 in 2012. In Copenhagen, on the other hand, building Transaction Volume Quarterly Exchange rate – August 2011 I Source: Newsec E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( Q2 2011 Q3 2011E 2010 was a year of recovery on the Nordic property markets, with soaring trans- action volumes in Sweden and Norway while Finland and Denmark had a more hesitant transaction development. During the first half of 2011 the transaction volume for Sweden has stabilised. In Norway the transaction volume was slightly lower than last year which resulted in unfulfilled projections. Finland and Denmark are picking up speed but are held back by the equity ratios required by finance providers and to some extent by the limited supply of acquisition targets that correspond to the investor’s criteria. SWEDEN The Swedish property market is leading the pack, with investors seeking business opportunities in all types of properties, including those located outside the three major cities. Important factors include the improved willingness of banks to finance transactions, an improving rental market, and investors’ expectations of a strong economic development in relation to the sluggish global economy. During the first half of 2011 foreign buyers’ share of the Swedish transaction volume was about 21%, compared to about 14% during the first half of 2010. American, Dutch and British investors have increased their share of the total transaction volume while German and Norwegian investors, who were the most active in 2010, accounted for smaller shares. NORWAY On the Norwegian property market both banks and investors are selective regarding the quality and location of targets. Although prime properties with Total Property Returns I Nordic Region Percent (In local currencies) Source: IPD 20 15 10 5 0 -5 2001 Sweden 2002 2003 Norway 2004 Finland 2005 2006 Denmark 2007 2008 2009 2010 NORTHERN EUROPEAN REGION NORTHERN EUROPEAN REGION E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( (' “During 2011 liquidity on the Swedish and Norwegian property markets is expected to stay at about the same level as in 2010” E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( “A strong demand for office space in Stockholm has pushed vacancy levels close to those of 2008” long, stable lease agreements have seen the largest increases in price, properties throughout the market are achieving higher prices. British and German funds have bought properties in Norway during the first half of 2011. est has been fuelled in particular by low interest rates and an improving employment market. In recent months Scandinavian value-adding and opportunistic investors have shown interest in properties located in secondary locations. in 2010 and Estonia’s adoption of the euro has already helped to attract some international players during 2011. A STRONG RENTAL MARKET IN STOCKHOLM AND OSLO DUE TO A HIGH DEMAND FOR OFFICE SPACE DECLINING YIELDS FOR PROPERTIES IN ALL MAJOR NORDIC CITIES EXCEPT COPENHAGEN FINLAND During 2011 liquidity on the Swedish and Norwegian property markets is expected to stay at about the same level as in 2010, while the transaction volume in Finland is expected to continue to grow and prime property prices to continue to recover. In Denmark the improved possibility of financing at a lower loan-to-equity ratio has contributed to an increased transaction volume during the first half of 2011 and this trend is expected to continue. Since bank interest-rate margins in the Nordic region are expected at higher levels than before the credit turmoil, liquidity on the Nordic property market is not expected to reach the high levels of former years. Except in Copenhagen, prime office yields in the Nordic region fell during 2010 and have continued to do so during 2011. Norway experienced the yield shift as early as 2009 – sooner than the other Nordic countries – due to the gradual improvement of the financial market in combination with stabilised vacancy rates and recovering rents. Prime office yields in Oslo are now at 5.0%. The recovery started later in Stockholm and Helsinki, and the effects of an improving rental market in combination with low interest rates and gradual improvements on the financial markets generated falling prime yields during 2010 and the first half of 2011. In Copenhagen yields are stable in prime locations due to the improved financial market, the limited supply of office premises and expectations of a general economic recovery. The Swedish labour market turned around in early 2010 when the employment statistics showed growing figures once again, and this trend has continued during 2011. Finland experienced a slightly later economic recovery than Sweden. Employment stabilised during 2010 and has shown growth during 2011. Norway had a high rate of capacity utilisation throughout the recession, with low unemployment and only a minor decline in employment. The labour market then bottomed out in late 2010, resulting in a slight increase in unemployment for the year, but during 2011 employment started to grow again. Denmark was hard hit by the recession; since then the labour market has somewhat stabilised. In the Baltic countries the recession had extensive effects on the labour market, with significant falls in wages and high unemployment in all sectors of the economies. However, the In Finland transaction volume in the first half of 2011 rose by a third compared to the first half of 2010 – from EUR 750 million to EUR 1 billion. The financial market has improved due to increased competition amongst banks and there are signs that property investors are becoming more active on the selling side due to improved market conditions and a slight downward pressure on yield levels. During the first half of 2011 the main focus of international investors was still prime office assets in Helsinki. A majority of these investors were equity investors from Sweden and Germany. Domestic investors on the Finnish market have mainly bought residential portfolios, offices and industrial premises. DENMARK INCREASED ACTIVITY BY FOREIGN INVESTORS ON THE BALTIC PROPERTY MARKET In Denmark, investment demand is currently led by financially strong investors such as institutional investors and wellconsolidated property companies that can match the equity ratios required by banks. However, finance providers have recently eased their requirements to some extent, which may open up the market to a wider range of investors. 2011 has seen increased investor interest in prime office properties, with an increased number of transactions. Inter- Up to the end of 2010 the Baltic property market was mostly explored by local investors such as private companies and small funds. Interest from opportunistic Scandinavian and Russian buyers has increased during the first half of 2011, which has contributed to rising transaction volumes, but these are still a long way from the high figures seen in 2007– 2008. Large institutional investors are still reluctant to enter the Baltic market; nevertheless market stabilisation began In the Baltic countries yields have continued to decrease during the first half of 2011 due to the clear signs of an economic recovery, significantly lower interest rates and an improving credit situation. The continued fall in vacancies and rise in rents for Baltic CBD office properties will further strengthen this development. (( Office Stock Q3 2011 A strong demand for office space in Stockholm has pushed vacancy levels close to those of 2008. This has resulted in a seller’s market in Stockholm CBD with a strong increase in prime office rent. In Oslo the rent growth continues, mainly driven by the strong Norwegian economy. In Finland the improving economic situation and confidence in the new government have strengthened the demand for Helsinki CBD offices, with rising rents as a consequence. In Copenhagen, rents for prime offices have stabilised during 2010 and a small increase in rents is expected in 2011 and 2012. In the Baltic countries prime office vacancies have decreased substantially since the end of 2009 due to the low supply of high-quality office Office Stock Q3 2011 Source: Newsec I Baltic Region Source: Newsec Million m2 14 0.6 12 0.5 10 Companies’ increasing focus on keeping down costs and the continued emphasis on attracting competent workers are reinforcing the trend seen in recent years towards locating in newly constructed office premises or highly efficient refurbished premises. The consequences have been a better rental development for prime office premises and a fairly quick absorption of new space put on the market. At the same time there have been higher vacancies and a slower rental development in the older, unmodernised stock, creating an increased rent spread between the prime office stock and the unmodernised stock. BRIGHTER PROSPECTS FOR COPENHAGEN I Nordic Region Million m2 premises. Rents stabilised in Tallinn and Vilnius in late 2009, while Riga followed suit with a rental stabilisation in 2010. All three cities have experienced increasing prime rents during 2011. Baltic labour market has now started to recover and all countries showed slightly positive figures during the first half of 2011. 0.4 8 0.3 6 0.2 4 0.1 2 0.0 0 Stockholm Oslo Helsinki Copenhagen Tallinn Riga Vilnius RETAIL RETAIL E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( () RETAIL Magnus Andersson Head of Retail & Urban Development [email protected] THE NORDIC REGION In the Nordic region there has been a steady rise in retail trade turnover since the financial crisis, but this lost its momentum during the first half of 2011 when retail statistics came in weaker than expected. Higher interest rates and energy prices in combination with prospects of tougher times to come were the key factors behind this dip. Recent global developments – which will result in low future interest rates – will benefit the retail market and consumers are predicted to start spending money once again during 2012. The real economic fundamentals for the Nordic region differ from those of the developed world in general because of the lack of housing bubbles, a healthy banking system and high consumer saving ratios. However, the slow global rebound is affecting the region’s economic outlook and increasing the importance of domestic demand, which is expected to account for a larger share of the region’s GDP during coming years. Private consumption is the single most important component of domestic demand, and in combination with the ongoing urbanisation process is generating a growing urban population that also consumes more per Increasing demand for high-quality retail during the next few years capita. All in all, this is creating the fundamentals for a steadily increasing demand for high-quality retail premises in good locations in the major cities during the next few years. Great investor interest in Nordic retail Investors opened their eyes to the Nordic retail market during 2009 and 2010 because of the potential offered by stable private consumption. Prime retail rents fell only slightly during the economic downturn of 2008–2009, and by 2009–2010 the combination of stable vacancies and a betterfunctioning credit market led to significantly improved investor sentiment. In general, prime retail yields have fallen since early 2010 but are still about 25–75 points up from the low levels of 2008. In Norway, however, prime retail yields are back at the levels seen before the financial turmoil and are priced at 5% even for short contracts. Investor interest has increased not only for prime retail sites but also for shopping centres and big-boxes in regions other than the major Nordic cities. However, financial providers still appreciate secure cash flows and also place increasing emphasis on residual value and alternative usage. SWEDEN In Sweden the interest in retail properties by foreign investors has increased significantly during 2011. Liquidity is still low in prime locations in Stockholm, Gothenburg and Malmö because of a shortage of willing sellers, but instead investors have shown great interest in prime assets in regional cities and in suburban areas of the three big cities. During the first half of 2011 the Carlyle Group acquired two shopping centres in Västerås from Boultbee for about SEK 850 million; a consortium with Grosvenor Fund Management as the key player purchased a portfolio including three malls located in the Stockholm area and an ICA Maxi facility in Helsingborg from Unibail-Rodamco for SEK 2,400 million; and NIAM bought Heron City, a 46,000 m2 shopping centre south of Stockholm, from Heron International for about SEK 850 million. FINLAND The demand for prime retail in Finland has historically been quite strong, and a good consumer confidence level and growth in private consumption have further increased the demand. However, liquidity on the transaction market has been quite low and only a few E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( (* “In Sweden the interest in retail properties by foreign investors has increased significantly during 2011” transactions have been completed in the first half of 2011. In 2010 a trend arose towards investments in shopping centres and retail parks at the expense of high-street retailing and this trend has continued during 2011. Fennia Quartet, containing 37,900 m2 of retail and office space in the centre of Helsinki, was purchased by Sponda from Suomi Mutual Pension Fund; the construction company SRV bought a shopping centre in Niittykumpu Espoo from Cordea Savills’ Nordic Retail Fund; in Kempele, Sponda acquired part of the Zeppelin shopping centre from Arif for EUR 7.8 million; and Aberdeen Property Fund Finland Ky 1 agreed the purchase of Phase 2 of the Avenas shopping centre in Seinäjoki from the construction company Peab Retail Trade Turnover RETAIL STOCK IN THE NORDIC REGION The total retail stock in Sweden is apgifo`dXk\cp(/d`cc`fed), with around a quarter located in Stockholm. The stock in the major Finnish cities totals about 7.8 million m) of which around half is located in the Helsinki Metropolitan Area. The Norwegian shopping Z\eki\jkfZb`jXifle[,%)d`cc`fed) and the total Danish retail stock is Xifle[ ()%( d`cc`fe d) of which some )%)d`cc`fed) is in Copenhagen. Oy. The property will contain 6,000 m2 of retail space when finished later this year. NORWAY Prospects of continued high demand for Norwegian prime retail space from tenants and a strong rental market contributed to a significant number of retail transactions totalling NOK 3,500 million during the first half of 2011. This represents nearly a third of the total property transaction volume during the period. Domestic investors accounted for the lion’s share of these transactions. Søylen and Schage acquired Steen & Strøm Magasin in Oslo (one of the oldest shopping centres in Norway) from Storebrand eiendom for NOK 1,000 million with a yield of 5%. I Quarterly Data I Nordic Region Percentage change on previous period The transaction also included two adjacent buildings with development potential. Selvaag/Sealbay sold a 5,000 m2 high-street property in Oslo containing H&M’s Norwegian flagship store. The purchase price and the buyer were not disclosed. Although several new retail projects are predicted to start in the second half of 2011, the main focus at the moment seems to be on refurbishment and extension of existing centres and on new mixed-use concepts combining retail, residential and service areas. Retail Trade Turnover Source: Eurostat 4.5 14 3.5 10 2.5 I Quarterly Data I Baltic Region Percentage change on previous period Source: Eurostat 6 1.5 2 0.5 -2 -0.5 -6 -1.5 -10 -2.5 -3.5 2005 Sweden 2006 Norway 2007 Finland 2008 Denmark 2009 2010 2011 -14 2005 Estonia 2006 Latvia 2007 Lithuania 2008 2009 2010 2011 RETAIL RETAIL E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( (+ “Today, lower property prices in combination with the financial sector’s slightly greater willingness to lend have opened up the Danish property market to international financial institutions” E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( (, “Average vacancy levels in the most successful shopping centres on the Baltic retail market are now close to zero as demand is very high” the international home-furnishing retailer IKEA could gear up the retail market. Segregation on the Baltic retail market DENMARK In Denmark, transaction activity started to pick up in the fourth quarter of 2010 with a number of significant transactions closed at the beginning of 2011. International investors have traditionally been an important group of players on the Copenhagen retail investment market, but they pulled out in the wake of the financial turmoil in early 2008. Today, lower property prices in combination with the financial sector’s slightly greater willingness to lend have opened up the Danish property market to international financial institutions, which are gradually showing renewed interest in this market. Danish prime retail properties are expected to see compressed yields in the short and medium term, unlike properties in secondary locations which will continue to experi- ence weak demand apart from properties with long leases to strong tenants. The largest single property transaction in Danish history was closed in late summer 2011 when the private equity fund manager MGPA bought the Danish department store property Illum in central Copenhagen for EUR 220 million. The acquisition is a joint venture with Partners Group and a Canadian institutional investor, where the fund holds a majority stake and controlling interest. THE BALTIC REGION Stable signs of recovery – increasing retail trade turnover The retail market in the Baltic countries has shown stable signs of recovery since the middle of 2010. The previous fall in retail trade turnover came to a halt in early 2010 and turnover has increased steadily in 2011. With gradually increasing wages and slowly diminishing unemployment in the Baltic countries, private consumption was on an upward trend during the first half of 2011, although retail sales remain modest compared with activity before the financial crisis. The Baltic countries have a diversified retail stock with large variations in quality. In Estonia and Lithuania the stock exceeds the EU-27 level – the average shopping-centre space per capita for the 27 EU countries. With slightly over 200 m2 of shopping centre space per 1,000 inhabitants, Lithuania exceeds the EU-27 level by about 5%. Estonia has reached over 300 m2 per 1,000 inhabitants, and is close to 50% above the average European level and in line with the Scandinavian countries, the UK and France. With an average shopping centre space just reaching 200 m2 per 1,000 inhabitants, Latvia is close to the average. Development activity in the retail segment is more or less non-existent. No large new projects are expected to be started during the second half of 2011, and no new developments were brought to the market during the first half-year except for the ongoing Tähesaju City shopping area of around 30,000 m2 in the Lasnamäe district of Tallinn. In the medium term the prospects are brighter. A considerable amount of new retail space is expected to be developed in Tallinn starting from 2013. In Latvia several anchor and semi-anchor tenants have re-launched their expansion with very careful choice of where to establish. In Lithuania the planned opening in 2013 of Average vacancy levels in the most successful shopping centres on the Baltic retail market are now close to zero as demand is very high. High-street retail is also experiencing low vacancy levels generated by increasing demand. Along with rising rents, landlords in the Baltic countries are removing the discounts for prime retail which were used to attract or keep their tenants during the recession. On the other side of the coin are low-quality centres and retail in secondary locations which are struggling with high vacancies and no prospects of rising rents. In the first half of 2011 several retail property transactions with a total volume of over EUR 100 million were closed in Estonia by a mixture of local and foreign Scandinavian investors. In Latvia, a few retail property transactions with a total volume below EUR 5 million were closed by local investors. No significant transactions were closed in Lithuania during the same period. Prime retail yields for transactions in the Baltic countries in the first half of 2011 have been in the range 8–9%. LOCATIONS WIND POWER E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( Jan Rosengren Senior Advisor [email protected] In the aftermath of the financial crisis and the weaker office rental markets of the years 2008 to 2010, it became clear that rising vacancies were primarily affecting properties in poorer communications locations. Even after the recovery of the markets that we have now seen it is apparent that these poorer communications locations are still continuing to face very high vacancy rates. Major cities are the engines in most economies. Not least in the Nordic and Baltic countries, the capital cities are very clear centres of strength for the whole country as well as being administrative and financial centres. To an ever greater extent job opportunities are created and concentrated in these cities and their surrounding regions. It is therefore very important not only for the regions but for the economic growth of the country that the major cities are given opportunities of further development. When a city grows, great demands are also placed on the expansion of communications and other infrastructure so as to make it possible, for example, to live in places further away and commute to work from them. With ever-increasing commuting distances for many people in a growing region, it becomes corre- (- LOCATIONS WITH GOOD COMMUNICATIONS WILL BE THE FUTURE WINNERS ON THE OFFICE MARKET spondingly more important to locate offices in the immediate vicinity of communications hubs. IMPORTANT TO IDENTIFY THE FUTURE GOOD COMMUNICATIONS LOCATIONS COMMUNICATIONS MAKE THE DIFFERENCE When infrastructure and communications extend our major cities, attractive new office districts close to new communications hubs are created – locations that will compete very strongly against areas with inadequate communications. Districts that are sited close only to major road links will continue to serve a function as good office areas for companies in some industries, but will face increasing difficulties when competing against new office districts that also have good underground and rail communications. When tenants start to leave the districts that are losing competitiveness, vacancies rise and rents fall. Scope for the investments and tenant improvements necessary to attract new tenants diminishes at the same time. In the past twenty years new office districts have grown up round the major cities. In districts with substandard communications we are now seeing increasing problems with vacancies, even in times when the rental market is otherwise strong. Many districts are located with direct links to major radial highways and are therefore readily accessible by car. Locations of this type have attracted many companies, but the lack of rail communication links is becoming increasingly significant. The traditionally best office districts, like the CBDs, will continue to be very attractive to many companies into the future. Closeness to clients and business contacts and walking distance to communications hubs are a winning combination. However, for office districts outside the most central areas, access to underground and rail communications in particular is probably the most important competitive advantage. For property investors it is therefore important to identify the future good communications locations early on. Closely following and being early to note changed market attractiveness and the competitive situation among different office locations are thus critical for profitable property investments. E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( (. THE SWEDISH WIND POWER MARKET Continued growth and increased interest from institutional capital Swedish wind power continues to grow rapidly at rates exceeding 40% per year. Growth is fuelled by three key drivers: the needs for more, local and renewable energy. Also, ongoing technological development is continuously bringing down the cost per produced kWh and enabling large-scale energy production. The growth and profitability of Swedish wind power have created an increasingly active transaction market attracting Swedish and international utilities, independent power producers, developers, energy-intense industries, financial players and also real estate companies. Players on the Swedish market are adopting three quite different roles. Some seek to develop projects ready for construction and then divest them; some to construct turnkey wind farms and divest them at this stage; and some to acquire and operate commissioned wind farms. FOCUS ON OPERATIONAL ASSETS Although activity in the development and construction of wind farms is fierce, increasing numbers of companies are also focusing on investment in wind farms that are already producing electricity. Operational wind farms attract not only utilities but also increasingly institutional investors, corporates with high levels of excess cash and large energy consumers such as real estate companies. These companies are usually not willing to accept permit-risk and are instead looking for long cash flows with attractive risk-adjusted returns. Investor returns are primarily driven by top line revenues, turbine prices and debt market prerequisites. Since turbines are usually acquired in EUR, the EUR/SEK exchange rate also impacts returns. Some investors also benefit from additional benefits via energy tax exemption and opportunities to utilise accelerated depreciation. INCREASED M&A ACTIVITY M&A activity has increased during 2011. During the first half-year, Newsec advised on a number of transactions including IKEA’s acquisition of the Korpfjället wind farm from O2 Vind and Folksam/KPA Pension’s acquisition of Gnosjö Energi AB from Tuleholmen Fastigheter. Other major deals on the market included Eolus’s acquisition of Svenska Vindbolaget and Folksam’s partnership with FAM and Proventus via acquisition of shares in Proventus Wind Power. Omid Ashrafi Head of Renewable Energy [email protected] So far during 2011 the key challenge for the market has been low electricitycertificate prices. Although it is difficult to foresee the impact of the recent financial turmoil, the momentum so far has been positive. M&A activity in 2011 is expected to increasingly reflect expectations about the electricity market integration with Norway. Transactions and greenfield investments are expected to lay the foundation for new Nordic, as opposed to Swedish, wind power companies. Finland, which is introducing a feed-in tariff for generated electricity, could also become an interesting and potentially more integrated transaction market. THE FULL SERVICE PROPERTY HOUSE E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( DEFINITIONS (/ E<NJ<:GIFG<IKPLG;8K<8LKLDE)'(( THE FULL SERVICE PROPERTY HOUSE DEFINITIONS OFFICES E\nfie\ncpi\]liY`j_\[df[\ie and flexible office premises with normal area efficiency. =`ecXe[1f]ÓZ\gi\d`j\jn`k_efidXc area efficiency in office buildings in office areas. K_\j`q\f]k_\gi\d`j\j`jXjjld\[ kfY\Xifle[(#'''d). K_\dXib\ki\ek`eZcl[\j_\Xk`e^ and excludes property tax. =`ecXe[1BK@[\Óe`k`fef]^ifjjdXiket rent — net rent plus all costs. Newsec offers a comprehensive range of services within the business areas of Advice, Asset Management and Transactions. Newsec – The Full Service Property House in Northern Europe – offers a comprehensive range of services within the business areas of Advice, Asset Management and Transactions to property owners, investors and occupiers of premises. Newsec was founded in 1994 and is owned by its partners. Today the Group has its own operations in six countries, about 500 employees and an annual revenue of over EUR 65 million. Every year we carry out hundreds of successful assignments for our clients. Through this great volume, and the breadth and depth of our various operations, we acquire extensive and detailed knowledge of the real estate market. This means in turn that we can quickly see business opportunities that create added value and are able to give the most accurate and reliable picture of the market. Newsec is the result of a unique history of growth, characterised by constant originality of thinking. The first issue of the comprehensive market analysis Newsec Property Outlook was published in 2001. (0 The Group expanded internationally into Finland in 2001 and Norway in 2005. Newsec then acquired the Finnish real estate and asset management company Tallberg Toimitilajohto Oy in June 2005. The Norwegian full service company Eiendoms-Consult AS was acquired in 2006. The Baltic full service company Re&Solution was acquired in 2009. Our prime market is Northern Europe, but through our well-maintained international network of consultants we can offer our services on the global market. This makes Newsec Northern Europe’s only full-service property house, which provides us with a unique ability to forecast the future. NEWSEC ADVICE The key to giving the most accurate and reliable advice about the future is specialist knowledge in all areas that affect the property market. Through extensive research and unique forecasting methods we offer professional advice in areas such as property acquisition, investment, business development and capital development projects. Newsec is the leading property advisor in Northern Europe for property owners, investors and corporates. Our Northern European analysis and valuation unit, of about 50 professionals, is the largest in the market and has access to more information than any other player. NEWSEC ASSET MANAGEMENT Newsec Asset Management is the leading asset manager in Northern Europe. We employ more than 400 professionals and have offices throughout Northern Europe. Since we are also the market leader in letting, we help to minimise vacancies in your property stock. This means that our property administrators and managers know when to sign long or short lease contracts. By virtue of our size we are able to purchase goods and services at advantageous prices. For you our client this means lower prices and better financial returns. This enables us to offer you the highestquality and most cost-effective service. NEWSEC TRANSACTIONS Newsec offers tailor-made propertyrelated financial and strategic advisory services and is one of the fastest-growing consultancy firms for property transactions in Northern Europe. With over 40 professionals specialising in investment and corporate finance, we have deep knowledge and long experience of the transaction market in Northern Europe. Newsec has a unique updated database of 4,000 investors with specific needs, which means that we can find the right buyers for specific projects in the most efficient way possible. EfinXpXe[;\edXib1k_\dXib\k rent excludes heating and property tax. RETAIL 8kkiXZk`m\#df[\ie_`^_$jki\\k or central-shopping-centre retail premises with a prime location on the high street or in the shopping centre. K_\i\ekj[fefki\]\ikfgi\d`j\j used for groceries and day-to-day items. Jn\[\e#;\edXibXe[k_\9Xck`Zj1 Xcci\kX`cgi\d`j\j%EfinXp1fecp j_fgg`e^Z\eki\j%=`ecXe[1Xcci\kX`c premises in the three major cities. K_\j`q\f]k_\gi\d`j\j`jXjjld\[ kfY\Xifle[),'d) for premises in Sweden, Norway, Denmark and the 9Xck`Zj%@e=`ecXe[k_\j`q\`j`ek_\ iXe^\(,'Å+''d). K_\i\ek\oZcl[\j_\Xk`e^Xe[ property tax in all countries except Finland where the rent is gross rent — net rent plus all costs. LOGISTICS K_\j`q\f]k_\gi\d`j\j`jXjjld\[ kfY\dfi\k_Xe,#'''d). >ifjji\ekÆe\ki\ekgcljXccZfjkj% CONTACT AND ADDRESSES NEWSEC SWEDEN Stockholm – Head Office Stureplan 3 P.O. Box 7795 SE-103 96 Stockholm, Sweden Tel: +46 8 454 40 00 [email protected] Gothenburg Lilla Bommen 5 P.O. Box 11405 SE-404 29 Göteborg, Sweden Tel: +46 31 721 30 00 Öresund Office Dockplatsen 12 SE-211 19 Malmö, Sweden Tel: +46 40 631 13 00 NEWSEC ASSET MANAGEMENT Stockholm Humlegårdsgatan 14 P.O. Box 5365 SE-102 49 Stockholm, Sweden Tel: +46 8 55 80 50 00 [email protected] Gothenburg Lilla Bommen 5 P.O. Box 11405 SE-404 29 Göteborg, Sweden Tel: +46 31 721 30 00 Malmö Dockplatsen 12 SE-211 19 Malmö, Sweden Tel: +46 40 631 13 00 NEWSEC FINLAND NEWSEC ESTONIA Helsinki Mannerheiminaukio 1 A P.O. Box 52 FI-00101 Helsinki, Finland Tel: +358 207 420 400 [email protected] Tallinn Roseni 7 EE-10134 Tallinn, Estonia Tel: +372 6640 540 [email protected] Tampere Aleksanterinkatu 32 B FI-331 00 Tampere, Finland Tel: +358 207 420 400 NEWSEC LATVIA NEWSEC NORWAY Oslo Filipstad Brygge 1 P.B. 1800 Vika NO-0123 Oslo, Norway Tel: +47 23 00 31 00 [email protected] Riga Zala street 1 LV-1010 Riga, Latvia Tel: +371 6750 8400 [email protected] NEWSEC LITHUANIA Vilnius Saltoniskiu str. 2 LT-08126 Vilnius, Lithuania Tel: +370 5 252 6444 [email protected]
