Nordic Outlook - Spring 2023
- Niclas Höglund
Last year was a brutal reminder of the impact of the higher cost of capital on financial markets, in combination with a softer outlook for the economy. Inflation continued to rise, boosting rent index adjustments, while creating further pressure on central banks to act.
To contain inflation, central banks are continuing to tighten their monetary policies and 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 and lower refinancing loan-to-values ratios (LTV), owing to increased focus on interest-coverage-ratios (ICR) following higher interest rates.
The listed real estate sector has come under pressure in the Nordics, and today trade at around 30 percent discount for a median listed real estate company*—which stands in contrast with the 15 percent premiums we recorded in the Spring 2022 edition of this report, a year ago.
In the property market, higher funding costs are affecting all segments. A strong rental market for community service, logistics and prime office properties bodes well for these segments to mitigate, to some extent, yield requirement with higher rents. Residential rental properties are among the segments where values are under pressure also linked to lower visibility on rental growth, short term. The retail and hotel market remains under pressure with caution with regards to rental outlook, despite the already high underlying yield requirement of the properties.
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 funding situation in the Nordic market, compared with Europe and the US. Market mix in the Nordics, particularly in Sweden, is more tilted towards listed property companies, which have expanded their balance sheets over the business cycle. Although LTV ratios have declined, higher funding costs will likely put pressure on some companies to raise equity.
Institutionally owned and or government backed property companies with high grade credit ratings (A- or better) are also active in the bond market and are elevating the perceived refinancing risks. These companies now represent 46 percent of bond maturities in 2023–2026 which make up more than SEK 180bn of bonds.
With the interest rate curve now inverted, and the bond market expecting the central banks to focus on battling inflation, recession worries have intensified. This suggests an expected decline for 2023 and a lower than expected outlook for growth also in 2024. Weak consumer confidence indicators continue to add downside risks, albeit with a continued high employment balance on the upside. We expect the current price discovery in the transactions market, in combination with the decline in GDP during the fourth quarter of 2022 and a further decline during the first quarter of 2023, to limit transaction volumes and total return on assets during the first half of 2023.
Stabilisation of long-term rates, an expected rebound in the general economy and, a stabilisation of the bond market should create fundamentals for an improved market again in the second half of 2023 and in 2024. Real estate assets have historically stood firm in an inflation-induced market, as can be expected of real assets, and assuming the economy recovers as expected, we see no reason why this should change.