JLL Nordic Outlook Autumn 2022

The first half of 2022 has been a brutal reminder of the impact of the higher cost of capital on financial markets, in combination with a softer outlook for the economy for real assets and listed real estate companies. Inflation has continued to rise, and already high inflation prints have been replaced with even higher prints throughout the year. To contain inflation, central banks have started tightening their monetary policies more than previously guided and they are determined to do what it takes to stop inflation getting out of hand. Funding costs are also up due to deteriorated liquidity in the capital markets for real estate corporates. Nordic banks are still showing good appetites for lending but are primarily focusing on existing relationships. The premium to net asset value (NAV) in the listed real estate sector has come under pressure in the Nordics, and markets today trade at around 30 percent discount for a median listed real estate company*–well below the 16 percent average premium, which we recorded in the Spring 2022 edition of this report only six months ago.

In the property market, all segments are being affected by higher funding costs and lower loan-to-value parameters. A strong rental market for community service, logistics and prime office properties bodes well for these segments to mitigate higher yield requirement with higher rents. Residential rental properties are among the segments with a major decline in return requirement post COVID-19 and are under some pressure today. The retail and hotel market remains under pressure, although within these segments there continues to be pockets of strength.

In this edition of the JLL Nordic Outlook, we cover the Nordic office, logistics, retail and residential markets and review developments in investment and capital markets. The theme for this report is devoted to the outlook for the logistics market, both in terms of supply and demand. The sharp increase in recent years of new build logistics space and in particular the amount of speculative development has increased recently. JLL argues that the higher share of unlet projects follows a trend seen in the rest of Europe. Supply chain disruption is also adding to short-term demand among importers and production companies in Sweden. JLL expects that the demand for higher inventory will be seen in logistics take-up over the coming 6-12 months, supporting record-high production starts and rental growth, while mitigating for recessionary cycle risks.

The central banks' focus on battling inflation, with less consideration for the entire economy and growth, has led to recession worries and a lower outlook for GDP growth. Weak consumer confidence indicators add downside risks, albeit with a continued high employment balance on the upside. We expect continued high volatility going forward as different investors adjust return requirements and continue to focus on core low risk assets, owing to the uncertain economic environment and less capital available for high-risk projects. Moving forward in 2022, the return outlook looks mixed, supporting a 7-10 percent higher CPI adjustment factor in Sweden for 2023 – a 30 year high. Real estate assets have historically stood firm in an inflation-induced market, as can be expected of real assets, and we see no reason why this should change.