4th Edition 2018
Content
3
Content Foreign investments to Norway
04
General information
06
Foreign transactions
08
The macro outlook
12
The CRE market in Oslo
20
A “rough guide� to investing
34
Legal framework
42
Bank and bond financing
50
Selected tax issues
54
Management of CRE
60
Development of CRE
66
Forward sale of property
68
Publication partners
70
4
Foreign investments to Norway
Torbjørn Røe Isaksen Minister of Trade and Industry
Foreign investments to Norway In September 2017, the Norwegian government issued its national Strategy for Export and Internationalisation. Among several objectives, one of them is to attract more foreign investments to Norway. Norway has a small and open economy and our domestic market is small compared to many other countries. Foreign trade and investments are therefore vital to our economy and our business sector. Our tax system is neutral towards foreign and local investors and there are few investment restrictions. Furthermore, Norwegian company legislation contains few restrictions and disadvantages towards foreign investors. For the past few years, we have made major efforts in order to safeguard the competitiveness and innovativeness of Norwegian companies. We implement tax cuts
in order to release capital for investments leading to growth. Furthermore, we invest in transportation and technological infrastructure. We have simplified, digitised and reduced red tape in order to make it easier to start and run businesses. Norway is an attractive business location. The World Bank ranks Norway as the world’s eighth best country in which to do business . Moreover, we are at the top of indexes for digitisation and scoring high on competitiveness. As for digitisation, Norway is among the top three countries on criteria like band with speed, number of internet users and use of communication technology, according to the IMD Digital Competitiveness r anking of 2017. Norwegians are typically early adopters and
5
Norway is an attractive business location. The World Bank ranks Norway as the world’s eight best country in which to do business.
thus is Norway an excellent test market. This is confirmed by the DESI Index showing that Norwegian businesses utilize new technology to a greater extent than the rest of Europe. Compared to elsewhere in Europe, Norwegian busi-nesses also lead in use of e-commerce. As for competitiveness, Norway ranks as the 11th most competitive country, according to IMD world Competitiveness report . In this survey, we score high on productivity and efficiency. Our workforce is productive, competent and motivated. We have a well-educated workforce and our business culture is based on Nordic work values with a strong focus on equality. In Norway, you will see flat structures and an informal communication. We score high on trust meaning that businesses are efficient without too much bureaucracy. Working
in Norway means that you must take responsibility and initiative, which gives motivated employees. Norway is environmentally friendly. 70 per cent of our energy consumption is made from renewable energy, one of the world’s highest percent¬ages. This makes our industry less burdensome for the environment than similar industries in other countries. Moreover, we have ambitious climate and environmental goals. Norway is also a politically stable, modern and highly developed country with a strong economy and a well-functioning welfare system. All these factors make Norway a great place to live and an attractive market for foreign investments.
6
General information
General information As background to the key elements of the Norwegian commercial real estate market, the following is a summary of statistics about Norway, its population and economy. Key information Population: 5.3 million Size: 385,186 sq. km. Languages: Norwegian and Sami (official language in six northern municipalities) Government: Constitutional monarchy & parliamentary democracy Member of: European Economic Area (not EU) & NATO Demographics Population growth Fertility rate Persons per household Life expectancy Home ownership Higher education Net immigration
0,9 % p.a. (SSB 2016) Men 1.53/Women 1.71 2.2 (SSB Q4 2017) Men 80.6/Women 84.2 83 % (SSB Q4 2016) 32 % (SSB Q4 2016) 26,026 (SSB Q4 2016)
Economy Currency Norwegian krone (NOK) Interbank rate NIBOR Main industries Oil, gas, energy, fish, shipping GDP total NOK 3,279 billion / 340 billion (SSB 2017) GDP per capita NOK 623,652 per capita / €64,572 (SSB Q4 2017e)
GDP trade surplus NOK 160 billion / €16.6billion (2017e) GDP growth 1.8 % (2017) CPI 1.6% (Dec 2017) CPI-ATE 1.5% (Dec 2017e) Labour Market Number of employed 2,760,000 (Dec 2017) Unemployment rate 3.8% (Dec 2017) Rate of Employment 69.4% (Dec 2017) (age 15–74) Employment growth -0.4 (Dec 2017) Public sector 34.3% (Nov 2016) employment Average monthly salary NOK 44,310 / €4,588 (Dec 2017) Taxes and depreciation General Norw. tax rate 23 % of net income (2017) Depreciation Office buildings: 2 % Technical installations: 10 % Warehouse/industrial: 4 % Shopping centres: 2 % Hotels: 4 % Investments: 10 % Document tax 2.5 % of transaction volume Property tax Depends on municipality VAT 25 %
7
Tromsø Inhabitants: 74,541
Trondheim Inhabitants: 190,464
Bergen Inhabitants: 278,556 Stavanger Inhabitants: 132,729
Oslo & Akershus Inhabitants: 1,271,127 Drammen Inhabitants: 135,248 Fredrikstad & Sarpsborg Inhabitants: 68,363
Interest rates per 20.02.18 3M NIBOR 0.94% 3Y Swap 1.54% 5Y Swap 1.87% 10Y Swap 2.32% 10Y Government bond 2.00% Exchange rates per 20.02.18 EUR/NOK 9.66 USD/NOK 7.80 GBP/NOK 10.90 SEK/NOK 0.97 DKK/NOK 1.30 CHF/NOK 8.38
Area definitions BTA BRA P-rom BYA
Gross area Usable area Living area-residential Foot-print of the building
Abbreviations CBD Central business district CPI Consumer price index CPI-ATE CPI adjusted for tax changes and excluding energy products NOK Norwegian krone SSB Statistics Norway SPV Single purpose vehicle
8
Large transactions
Foreign transactions Largest transactions by international investors:
Price MNOK (MEUR)
Date
Buyer
Vendor
Property
Type
Location
Mar. 2017
Samhällsbyggnadsbolaget i Norden AB
Meteva AS (Trond Mohn)
Dronning Eufemias gate 30
Office
Oslo
4,300 (€449)
Jan. 2017
DCC
ExxonMobil Norway
150 Esso petrol stations
Retail
Regional
2,400 (€251)
June 2017
Via Outlets (APG, Hammerson,
Glastad m.fl.
Norwegian Outlet
Retail
Regional
1,100 (€115)
Dec. 2017
Ragde Eiendom
Partners Group og Union Eiendomskapital
Brobekkveien 80 + Alf Bjerckes vei 14
Logistics
Oslo
1,000 (€104)
Nov. 2017
Closed ended fund by Clarksons Platou Real Estate
Starwood Capital
Trondheim Innovation Center
Office
Trondheim
900 (€94)
Dec. 2017
Midstar
Strawberry Properties
Four regional hotels
Hotel
Regional
750 (€78)
June 2017
Deka
Winta Eiendom AS
Cort Adelers gate 33
Office
Oslo
737 (€77)
June 2017
Forenom
Oslo Apartments
Oslo apartments
Residential
Oslo
660 (€69)
May 2017
Genesta
Klaveness
Mariboes gate 13
Office
Oslo
565 (€59)
July 2017
Fabritius
Bjorgen Property Investment Holdings AS
Høgslundveien 49
Logistics
Skedsmo
500 (€52)
Nov. 2017
Fredensborg Eiendom
The Former U.S. Embassy
Henrik Ibsens gate 48
Office
Oslo
475 (€50)
Dec. 2017
Kubota
Private investors
Plogfabrikkveien 1
Industrial
Regional
390 (€41)
Dec. 2017
Samhällsbyggnadsbolaget i Norden AB
Closed ended fund by North Bridge
Offentlig bygg AS (3 properties)
Office
Regional
355 (€37)
Dec. 2017
Artmax AB
Sabinum AS
Victoriapassasjen
Office
Oslo
320 (€34)
Feb. 2017
Hemfosa Fastigheter
Aspelin Ramm
Gardermoen Campus Utvikling
Other
Ullensaker
310 (€32)
Meyer Bergman, Value Retail)
Note that listed gros property value in many cases are estimates and not verified.
Arctic Securities / Akershus Eiendom
9
Oslo highly ranked in the Investment Intensity Index 1 Oslo 2 London 3 Munich TRANSACTION MARKET 4 Edinburgh 5 Silicon Valley International Increasing share of investors are significant buyers in Norway 6 Frankfurt international investors 7 Dublin 8 Sydney Buyers of real estate % of total transaction volume Selection of international Buyers of real estate Selection of international investors in Oslo ranked 9 top New York in JLL’s Investment investors in Norway (% of total transaction volume)1 Intensity Index (March 2016) Norway 10 Copenhagen 11 Paris 1 London 19% 2 Oslo 84 % 12 San Francisco 16 % 20172016 3 Munich 13 Stockholm 4 Sydney 81% 14 Boston 56 Honolulu Copenhagen 7 Auckland 15 Las Vegas 45% 8 Frankfurt 2015 55% 16 Melbourne 9 Silicon Valley 17 Geneva10 Melbourne 2016 81 % 19 % 11 New York 18 Raleigh-Durham 12 Stockholm 27% 13 Paris 19 Amsterdam 14 Boston 2014 20 Los Angeles 15 Dublin 73% 21 Seattle 16 San Francisco 17 Austin 12% 22 Washington DC 18 Edinburgh 2015 55 % 45 % 19 Brisbane 23 Austin 2013 20 Berlin 24 Berlin 88% • The index compares the volume of direct real 25 Toronto 8% estate investment in a city relative to the city’s 26 Denver current economic size. 2012 27 Phoenix 2014 73 % 27 % • The index provides a measure of real estate 92% 28 liquidity Hongas Kong well as a useful barometer of a city’s overall “health” 29 San Diego International investors Norwegian investors 30 Tokyo
International investors are significant buyers in Norway
1
Oil
An net
Oil
et
An n
Oi
l
n An
et
Oi
(1) Including deals larger than NOK 50 mill l
Note:
n An
et
2013
88 %
36
12 %
Oi
l
n An
et
Norwegian investors
(1) Including deals larger than NOK 50 mill
International investors
• Established World Cities • New World Cities • The index compares the v olume of direct real estate investment in a city relative to the city’s current economic size. • The index provides a measure of real estate liquidity as well as a useful barometer of a city’s overall “health” Source: JLL, February 2017
10
Office Clock Q4 2017
London City Paris CBD Cologne, Dusseldorf Dublin Hamburg, Stuttgart Frankfurt, Manchester Budapest, Copenhagen, Edinburgh, Munich, Prague, Stockholm
Rental growth slowing
Berlin, Luxembourg Amsterdam, Barcelona, Helsinki, Lisbon, Madrid, Rome, St. Petersburg
Rental growth accelerating
Milan Brussels
Rents falling Rents bottoming out
Istanbul London WE Lyon, Oslo Athens
Geneva Bucharest, Kiev, Moscow, Warsaw, Zurich
Source: JLL
Transaction
The Former U.S. Embassy in Norway (Henrik Ibsens gate 48) Acquired by Fredensborg Eiendom for NOK 475 million (€50 million)
11
12
The macro outlook
Stein Bruun Chief Economist, Arctic Securities AS
The macro outlook:
Norway – coming full circle The Norwegian recovery gathered further speed in 2017, and the economy has come full circle after the hit in 2015-16 when plunging oil prices caused a sharp pullback in investment in the petroleum sector. Declining home prices since spring 2016 should not derail the recovery as consumer fundamentals have improved noticeably. Mainland GDP should thus expand by 2 ¼-½% on average in 2018 and 2019, towards the upper end in the current year and a bit less next year. Meanwhile, a number of new field developments means accelerating capital spending within petroleum. The Norwegian economy is currently enjoying robust growth. Mainland GDP – i.e. excluding oil/gas and shipping – expanded only 1.0% in 2016, the slowest since the recession in 2009 (and the second weakest since 1989), but averaged 1.8% in 2017 and ended the year on an even stronger note. Full-year growth in
overall GDP was 1.8% as well, as rebounding exports made up for another, though more modest decline in petroleum investment. Private consumption has strengthened in tandem with rising real income and firmer employment. In addition, non-oil business investment saw a second year of healthy, though not spectacular growth in 2017, while mainland exports trended up after a notable drop in 2016. These demand components should continue driving growth and more than make up for any marked decline in housing investment on the back of declining home prices and excess supply of new homes. Resilient economy The adverse effect from the sharp drop in p etroleum investment proved to be less severe than feared. Admittedly, the drop by more than a third from peak to trough, corresponding to three percentage points
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13
Executive summary The adverse effect from the sharp drop in petroleum investment proved less severe than feared. While the pullback had knock on effects on manufacturing and related services, fueled a rise in unemployment and hit sentiment among businesses and consumers alike, underlying economic momentum proved resilient. Private non-oil domestic demand actually accelerated fast over the past three years.
of mainland GDP, had rippling effects on the rest of the economy: slumping demand hit manufacturing and related services, fueled a rise in unemployment and hit sentiment among businesses and consumers alike. However, the fact that the economy avoided a recession underscores an underlying resilience, largely due to a flexible economic policy framework while the welfare system provides a very important cushion for households/homeowners/consumers in case of adverse developments. Moreover, most of the negative impact was geographically confined to a few counties along the southern and western coast of Norway most exposed to the petroleum sector. Here, employment started declining in late 2014. The resulting increase in unemployment was quite large by Norwegian standards, although the registered unemployment rate on average for the five counties peaked slightly below 4% in 2016. Interestingly,
The Norwegian economy is currently e njoying robust growth. Private consumption and nonoil business investment and exports should continue driving growth and more than make up for any marked decline in housing investment on the back of declining home prices and excess supply of new homes.
registered unemployment in the rest of the country has actually declined steadily since spring 2015. In addition, economic policy worked well. First, Norges Bank turned monetary policy very loose despite inflation rising well above target. Second, fiscal policy made use of the “golden rule” which shields the budget from volatile petroleum income by tying spending to the Government Pension Fund Global, Norway’s sovereign wealth fund (the largest in the world and c orresponding to some 250% of GDP). Despite the central government’s net cash flow from petroleum dwindling by two thirds in 2014-16, the fiscal rule thus allowed for stimulating domestic demand. In all, underlying economic momentum proved resilient. In fact, private non-oil domestic demand accelerated
14
The macro outlook
Economy resilient in the face of slumping petroleum capex
% change (4Q)
% change (4Q)
4,5
30
3,0
20
1,5
10
0,0
0
-1,5
-10
-3,0
Mainland Norway: excl. oil/gas and shipping
2011
2012
-20 2013
2014
2015
2016
2017
Norwegian mainland GDP (LHS) Investment oil & gas extraction and pipelines (RHS)
fast over the past three years, and picked up from a strong gain of 2.6% in 2016 to fully 3.2% in 2017 as household continued spending, invested more in dwelling services and non-oil business capital expenditures gathered pace. Tide turning within petroleum The forecast has long been for capital spending in the petroleum sector to pass the trough in 2017 when the 4% decline was well below the marked drop of 14.6% on average in 2015 and 2016. Expectations for gradually stronger investment seems to materialize as seen in operators upping planned capital spending for 2018 in the most recent investment survey compiled by Statistics Norway. In this regard, it’s worth noting that operators at the Norwegian continental shelf continued preparing for new developments amid persistent volatile oil prices and uncertainty to the outlook. In fact, while operators in 2016 submitted five plans for development and o perations (PDO) with capital spending of an e stimated NOK 23bn., they stepped up markedly in 2017 to 13 PDOs with overall investment estimated at approx. NOK 130bn.
Cost-cutting and efficiency measures made so far has vastly improved project economics and significantly reduced break-even levels. According to Statoil, the by far dominant operator at the Norwegian continental shelf, capital spending and estimated annual o perating costs for phase 1 of the vast Johan Sverdrup field development, which should start producing in late 2019, have been slashed by almost 30% since the PDO was approved in 2015. The PDO for phase 2 is scheduled for the second half of 2018. (At peak, output at the Johan Sverdrup field will account for 25% of all Norwegian petroleum production). Likewise, the Johan Castberg development in the Barents Sea – expected production start in late 2022 – has been through comprehensive changes to the design concept and new solutions, which successively has halved planned capital spending. In all, Statoil now estimate a volume-weighted break-even oil price of USD 21/barrel for its portfolio of projects sanctioned since 2015 or planned for sanction, with start-up by 2022. Back above trend Growth has steadily accelerated over the past couple of
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… the fact that the economy avoided a recession underscore an underlying resilience, largely due to a flexible economic policy framework while the welfare system provides a very important cushion for households …
years, and the underlying trend is even stronger than the full-year growth rate of 1.8% in mainland GDP in 2017 suggests: as of the four quarter, GDP was up 2.6% from late 2016, the strongest year-on-year rate since spring 2014. Private consumption has proved resilient. Admittedly, growth slowed in 2016 as households’ real disposable income showed the sharpest decline in years due slower nominal wage growth, near-stalling employment and a marked jump in overall inflation to 3.6 on average for the year (reflecting the sharp NOK depreciation). On all counts, 2017 saw improvement as employment and wage growth firmed while annual CPI inflation was halved. As a result, full-year growth in private consumption picked up from 1.5% to 2.3%. More of the same is likely in 2018. Importantly, the labour market is now a tailwind. When the economy downshifting a couple of years ago, government-initiated construction and infrastructure investment supported overall activity and rather steady job growth in the public sector put a floor under the labour market. As the recovery took hold, employment in the private sec-
tor started rebounding during 2016 and accelerated in 2017 to be up 1.6% year-on-year by the fourth quarter, the strongest annual gain since 2012. As a result, nation-wide registered unemployment was back at levels prior to the slump in oil prices and petroleum investment, and at par with the lowest levels of the past nine years. In addition, wage growth should pick up a bit further. Here, 2016 marked a low point as economy-wide wages growth slowed to 1.7%, resulting in the steepest decline in real wage growth in at least 35 years. (Note that compositional changes had an extra depressing effect as jobs were shed in the high-earning petroleum sector and related businesses). In 2017, overall wage growth is preliminary estimated to 2.5% which is marginally stronger than assumed in the 2016 wage negotiations. Wage growth should be slightly stronger in 2018, reflecting tighter labour markets. Overall, households’ inflation-adjusted income should thus gain some 2.5% in 2018. Improving fundamentals
16
The macro outlook
Non-oil business investment has for years surpassed capital spending within the petroleum sector.
are also mirrored in consumer confidence, which has steadily improved since hitting a seven-year low in early 2016 on the benchmark quarterly survey. By early 2017, sentiment among households was the most optimistic in five years, and the level back above the longterm norm, indicating slightly above-trend consumption growth. Households have taken declining home prices in stride, at least thus far. Measured decline in home prices Existing home prices have increased relentlessly for 25 years, interrupted by a decline in 2008 and a brief and short correction in 2013. For the better part of the period, surging household disposable income supported the increase, accelerating population growth has played a part as have historic low mortgage rates in recent years. However, following a spurt in 2016 and up to the first quarter of 2017 when prices gained in excess of 12% year-on-year (to be 37% higher than five years earlier), existing home prices turned lower, raising concerns that a deep slump would hurt the economy.
A correction was in the offing as prices seemed somewhat inflated to begin with, spurred by potential sellers sitting on the fence expecting prices to continue increasing. The situation was most acute in the c apital of Oslo where existing home prices were up more than 25% in the year to Q4/16. The tipping point was the introduction of tighter mortgage regulations in December 2016. While maximum loan-to-value ratio on residential mortgages was kept at 85%, it was lowered from 70% to 60% for home equity credit lines and set at 60% for secondary homes in Oslo. In addition, borrowers’ overall debt was capped to five times gross annual income. As of early 2018, existing home prices were a modest 2% lower than a year earlier and centered on the c apital of Oslo (where prices were down 9-10%). Declining prices on a year-ago basis is likely to accelerate in spring, but the forecast remains for a continued m easured slide and a trough by autumn 2018. As such, lower prices shouldn’t make any marked impact on private consumption. Admittedly, some households (especially
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in areas where prices have dropped the most) will see restrained ability to take on further debt as their LTV declines below required levels, but most homeowners will still be well “in the money” as only a small minority has purchased a new home in the past couple of years. In contrast, declining housing investment should be a drag well into, if not through 2019. Hence, home completions were thus running ahead of slower household formation in 2017 for the second consecutive year, and new home sales dropped by 22% from 2016. However, while builders have started to pull back, the very high level of homes under construction suggests completions being too high relative underlying demand in the near term, suggesting that housing starts have quite a bit further to adjust. Slower but not stalling population growth As mentioned, population growth has slowed from well above-trend growth starting in 2005 as the EU enlargement caused a very strong influx of labour and
17
crested in 2015 following the European migrant c risis. However, while the 0.7% increase in the population in 2017 was the slowest in 12 years, it remained slightly above the historic norm. Going forward, the most recent projection from Statistics Norway suggested population growth of 0.8% on average per year in the 2017-27 period in the mid-alternative but with low immigration. Meanwhile, centralization continues. Since the year of 2000, almost 40% of overall population growth was concentrated to the capital of Oslo and the surrounding county of Akershus, and more than 60% including the counties of Rogaland and Hordaland. That said, population growth in Oslo is more than halved from the very hectic pace in 2007-15 to be back at the n ational average, in part due to stalling net foreign migration while anecdotal evidence suggest the very high home prices in the capital has played a part. To wit, the surrounding county of Akershus have experienced a spurt with the by far strongest increase due to very high net migration from other Norwegian counties.
18
Transaction
Dronning Eufemias gate 30 Acquired by Samhällsbyggnadsbolaget i Norden AB for NOK 4.3 billion (€449 million)
19
Photo: Nyebilder.no
20
The Commercial Real Estate Market in Oslo
Ragnar Eggen
Tor-Øyvind Skjelvik
Partner – Head of Research, Akershus Eiendom
Analyst, Akershus Eiendom
The Commercial Real Estate Market in Oslo The office building stock in the greater Oslo market today stands at around 8.6 million sq.m. Of this, roughly 3.3 million sq.m. are situated within the city centre, marked on the map as the CBD-area. Since 2007, the city centre has seen major urban re developments. Two new neighbourhoods on the water front, Tjuvholmen (the extension of Aker Brygge) and Bjørvika (by the central station), have been developed to become mixed residential and commercial areas. Bjørvika still has potential for further large development projects, and in the longer term, Filipstad just west of Tjuvholmen will be redeveloped, with up to 440,000 sq.m. of new residential and commercial space. Most of the office building stock is concentrated in densely built areas. Office zones outside CBD are generally found along the outer ring road from Lysaker through Nydalen, Hasle-Økern and Helsfyr-Bryn to Ryen. All areas have seen new development over the last ten years, and Fornebu and Nydalen have seen the highest activity. The area marked as Rest of inner Oslo, is mostly used for residential, university and retail purposes.
The west of Oslo contains high-end residential areas with lower density. The northeast of Oslo and towards Oslo Airport Gardermoen is the core logistical area, with many distribution centres for retail, wholesale and third-party logistics companies. Eastern and southern areas mainly consist of residential areas with varying degrees of density. Oslo office rents Real office rents in Oslo fell sharply in the wake of the financial crisis in 2008. Rents bottomed out d uring 2010 and increased sharply until the end of 2012. During the last six years, rental growth has stagnated and has even experienced a slight fall in real terms in some submarkets. However, rents bottomed out during 2016 and we have seen a slight increase during the last six months. Due to low office supply and increased demand for office space close to public transportation, rents in the CBD and the office hubs Skøyen, Major stuen and Nydalen is expected to increase over the next two years. Rent for good standard office space in the CBD is currently at NOK 4,300 per sq.m (€449 per sq.m).
Akershus Eiendom
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Outer Oslo West
Outer Oslo North/East/ South
Rest of Inner Oslo
CBD
Oslo office rents, 2005–2017 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 2005 Q4
2007 Q4
Prime Outer Oslo West Source: Dagens Næringsliv leieprispanel
2009 Q4
CBD
2011 Q4
2013 Q4
2015 Q4
Rest of Inner Oslo Outer Oslo North/East
2017 Q4
22
The Commercial Real Estate Market in Oslo
Oslo office vacancy, SQ.M and % 900,000
11%
1,000,000
‘17
‘18
5.5%
‘16
5%
‘15
6% ‘14
6.6%
‘13
7%
‘12
7.5%
‘11
8%
‘09
7%
‘08
6.5%
400,000
5%
500,000
4.5%
600,000
7%
8%
‘10
7%
Sq.m. office
700,000
8%
800,000
300,000 200,000 100,000 ‘06
‘07
Actual
‘19E
‘20E
‘21E
Forecast
Vacancy level at the start of the year Net new office space added Change in demand (absorbed space)
Vacancy levels in Oslo Vacancy levels in Oslo today are in a very controlled phase. There has been little speculative building in recent years, and there is a very low net supply of office space over the next years due to low construction levels and a high volume of office space being converted to other uses, mostly residential. The take-up level has been strong and is believed to stay strong going forward. Thus, the vacancy level is expected to decrease over the coming years.
Orkla’s new HQ in Drammensveien 149 at Skøyen which both will be finished during 2018. Two new developments in Bjørvika, Diagonale and Eufemia, will be finished in 2018 and 2019, developed by HAV Eiendom and Olav Thon, and Oslo S Utvikling respectively. TV2 will move into Diagonale while the 21,600 sq. m. Eufemia will accommodate PwC and Microsoft. Moreover, the Norwegian Labour and Welfare Administration will move in a new build in Fyrstikkalléen 1 at Helsfyr which will be finished in 2020.
Oslo office vacancy measured as floor space available per January 2018 and within 3 months stands at 6.6%, or approximately 570,000 sq. m. The vacancy level is expected to decline below 6% in 2019, close to 5% in 2020, and approximately 5.5% in 2021. Vacancy for the city centre is expected to remain 2–3% points lower than the market average.
Regional markets The regional property markets typically revolve around the three other larger cities in Norway, namely Bergen, Stavanger and Trondheim. Stavanger is the undisputable “oil capital” of Norway and has historically been the second most liquid commercial real estate market in Norway. The slump in oil prices and the gloomy outlook for investments are obviously having a severe impact on the region, with vacancy rates increasing and rents falling. Most of the companies in the Stavanger oil industry are situated at Forus, just south of Stavanger. Thus, this area has experienced a more severe setback than the Stavanger CBD. Bergen and Trondheim are also linked to the oil sector to some extent but have a more diversified business sector and as such, the impact is less here.
New commercial real estate in Oslo There was a significant peak in construction start-ups until the financial crisis in 2008 and an even sharper decline during 2009. In the last three years, quite stable levels have been seen for all real estate classes. Noteworthy new projects being finished within the next three years are Vitaminveien 4 at Storo which will accommodate the Norwegian Directorate of Health and
Akershus Eiendom
23
Regional office rents, NOK/sq.m/year, 2007-2017: 2,400 2,200 2,000 1,800 1,600 1,400 1,200
Bergen
Trondheim
Stavanger - CBD
Stavanger - Forus (oil)
2017 H2
2017 H1
2016 H2
2016 H1
2015 H2
2015 H1
2014 H2
2014 H1
2013 H2
2013 H1
2012 H2
2012 H1
2011 H2
2011 H1
2010 H2
2010 H1
2009 H2
2009 H1
2008 H2
2008 H1
2007 H2
2007 H1
1,000
Source: Dagens Næringsliv
Regional office vacancy, 2007-2017:
12% 10% 8% 6% 4% 2% 0% ‘07
‘08
Bergen
‘09
‘10
Trondheim
‘11
‘12
‘13
Stavanger
In general, all these three cities are considered liquid, attracting capital from both pension funds and closed-ended funds. International capital has typically been driven towards long lease objects with blue chip
‘14
‘15
‘16
‘17
Source: Eiendomsmegler1 Midt-Norge, Eiendomsmegler1 Rogaland, Kyte Næringsmegling
companies in the Stavanger region, and not towards Bergen and Trondheim.
24
Transactions and yield levels
Transactions and yield levels Transaction market The transaction market had a strong development until 2006/2007, with the peak volume in 2006. The market recorded a setback during the financial crisis in 2008, and 2009 saw the lowest volume of transactions of the last decade. However, the market recovered quite rapidly, and much faster than elsewhere in E urope, and was stable in the period from 2010 to 2013. In 2014, volume picked up further, and in 2015 there was a r ecord high transaction volume of approximately NOK 120 billion (€12.5 billion) with foreign investors accounting for 41% of the total volume. The recent year’s transaction market has been assisted by low interest rates, coupled with good availability of bank funding, as well as a large amount of corporate/ portfolio transactions and foreign investors taking a larger share of the market. The high activity level we
saw in 2015 continued through 2016 and 2017, with more than 280 transactions taking place in 2016 and above 300 transactions in 2017, up from just above 200 transactions in 2015. The transaction volume for 2017 amounted to just below NOK 90 billion (€9.4 billion), the second highest volume recorded. Yield Office yields in Norway have been falling since the financial crisis in 2008, following the development in long interest rates. During 2016, prime office yields in Oslo fell from 4.25% to 3.75%, and we experienced yield compression for other long-lease properties. Prime yield has remained at 3.75% during 2017. The downward pressure on yields is mainly driven by low interest rates, foreign activity and market participants financed solely by equity.
Akershus Eiendom
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Interest rates and transaction yields, 2002-2017: 8,00% 7,50% 7,00% 6,50% 6,00% 5,50% 5,00% 4,50% 4,00% 3,50% 3,00% 2,50% 2,00% 1,50%
10y Prime yield curve
10y SWAP interest rate
10y Gov. Bond
Transaction yield
120,000
60%
100,000
50%
80,000
40%
60,000
30%
40,000
20%
20,000
10%
0
0% 2008
2009
2010
2011
2012
2013
JAN. 17
JAN. 16
Source: The Central Bank of Norway, Akershus Eiendom
Transaction volume per year (MNOK) and share of international investors, 2007-2017:
2007
JAN. 15
JAN. 14
JAN. 13
JAN. 12
JAN. 11
JAN. 10
JAN. 09
JAN. 08
JAN. 07
JAN. 06
JAN. 05
JAN. 04
JAN. 03
JAN. 02
1,00% 0,50%
2014
2015
Domestic
Foreign
Entra
Share of international investors
2016
2017
26
The retail market
Remi N. Olsen Senior advisor retail, Akershus Eiendom
The retail market The Norwegian retail market in general has seen stable growth over the last decade, except for a slight setback in consumption in late 2008/early 2009, and retail sales volumes has seen a slightly negative trend since the beginning of 2015. However, Virke (the Enterprise Federation of Norway) expects a 4% growth in retail turnover in 2018. Historically, the Norwegian retail market has been driven by shopping centre expansion with domestic and Nordic brands as the drivers. With the highest density of shopping centres per capita at approximately 470 sq. m. (compared to the average in Europe of approximately 275 sq.m.) growth in shopping centre trading is now flattening out and, in many cases, has turned negative. Consumers are becoming more demanding and seek brands and products they find when travelling abroad. This has resulted in a revival of growth in the high street market and many international brands have sought locations in the centre of Oslo – where the potential turnover and footfall are highest. We will see a lot of leasing activity the next five to ten years where international brands are expanding in Norway. Rents in the high street market in Oslo have increased significantly during the last 10 years, while most of the
growth came between 2011 and 2015. This reflects the trend we have seen not only in cities like London and Paris, but also in Copenhagen and Stockholm. High street prime rent flattened out in 2015 after a slight decrease. We believe the decrease is only temporary, and that prime rents will stabilize around NOK 25,000 per sq.m (€2,611 per sq.m). The luxury market is still performing best, followed by sports/outdoor brands. The strong market has attracted international retailers but also international investors looking for properties in which to invest. Due to the limited supply of good retail properties the competition among retailers, as well investors, to secure the best sites has been strong. Whereas 2015 had many large transactions, 2016 lacked large portfolio deals, and 2017 had very few noteworthy transactions, mostly due to lack of good properties in the market. The most noteworthy transactions during 2017 were the sale of Lille Grensen 5 by Patrizia to CapMan Nordic Real Estate. Hasle Torg and Hauketo Senter, two shopping centres in the outskirts of Oslo, was sold from Spabogruppen to a closed ended fund by Carnegie, and from Union Eiendoms kapital (50%) and Siga AS (50%) to Realkapital Investor, respectively.
Akershus Eiendom
Prime rents retail, NOK/sq.m, 2006-2017:
27
Prime yield retail, NOK, 2006-2017:
27,500
1,750
7,5 %
25,000
1,700
7,0 %
22,500
1,650
20,000
1,600
Unit shops
Shopping centres
5,5 % 5,0 % 4,5 % 4,0 %
2017
2016
2015
2014
2013
1,350 2012
1,400
7,500 2011
10,000
2010
1,450
2009
12,500
2008
1,500
2007
1,550
2006
17,500 15,000
6,5 % 6,0 %
Q4 2007
Big Box (right axis)
Q4 2009
Unit shops
Q4 2011
Q4 2013
Q4 2015
Big Box
Shopping centres
Retail year-on-year growth
2017M10
2017M04
-6,0 % 2016M10
92,5 2016M04
-4,0 %
2015M10
95,0
2015M04
-2,0 %
2014M10
97,5
2014M04
0,0 %
2013M10
100,0
2013M04
2,0 %
2012M10
102,5
2012M04
4,0 %
2011M10
105,0
2011M04
6,0 %
2010M10
107,5
2010M04
8,0 %
2009M10
110,0
2009M04
10,0 %
2008M10
112,5
2008M04
12,0 %
2007M10
115,0
2007M04
Retail volume index
Norwegian retail volume index, seasonally adjusted, 2010=100, 2007-2017:
Retail sales year-on-year growth (r.h.s) Retail sales volume index: Excluding motor vehicles and petrol (l.h.s)
Source: Statistics Norway
Q4 2017
28
The hotel market
The hotel market The average Norwegian hotel occupancy rate bottomed out during 2013 and has increased slightly since then, averaging approximately 53% over the last 10 years. The occupancy rate in the largest cities in Norway is considerably higher in Oslo, Bergen, Stavanger and Trondheim, however, they have seen the same de velopment. In Oslo, the average occupancy rate is above 70%, and a centrally located business hotel might have close to 100% occupancy on weekdays. Bergen is the second largest hotel market in Norway. After a surge of new hotel rooms entering the market during 2017, average occupancy rate fell from above 70% in 2016 to slightly below 60% in 2017. RevPAR has, not surprisingly, had the same development as occupancy rate, with a very positive development in Oslo during the last year, averaging NOK 740 (€77)
in 2017. Even though Bergen experienced a dip in occupancy rate during 2017, RevPAR fell only slightly to just below NOK 600 (€63). The Norwegian hotel market is typically characterised by a high portion of long lease contracts with revenuebased rents and substantial, guaranteed minimum rents. Thus, Norwegian hotel owners usually have much better downside protection than one finds in many other countries. During 2017, Petter Stordalen’s company Strawberry Properties sold four hotels in Norway to the Swedish hotel company Midstar. The hotels in question was Clarion Collection Hotel With and Clarion Collection Hotel Aurora in Tromsø, Clarion Collection Hotel Tollboden in Drammen, and Clarion Hotel Ernst in Kristiansand.
Akershus Eiendom
29
Occupancy rate, seasonally adjusted, 2007-2017: 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% JAN. ‘07
OCT. ‘08
DEC. ‘09
FEB. ‘11
Occupancy (Oslo)
APR. ‘12
JUN. ‘13
AUG. ‘14
OCT. ‘15
DEC. ‘16
JUL. ‘17
Occupancy (Norway) Source: Statistics Norway
Real RevPar (NOK), seasonally adjusted, 2007-2017: 1,100 1,000 900 800 700 600 500 400 JAN. ‘07
OCT. ‘08
RevPAR (OSlo)
DEC. ‘09
FEB. ‘11
APR. ‘12
JUN. ‘13
AUG. ‘14
OCT. ‘15
DEC. ‘16
JUL. ‘17
RevPAR (Norway) Source: Statistics Norway
30
The logistics market
The logistics market
The map to the right shows where the main clusters of logistics properties are situated around Oslo. Most logistics properties are situated to the north east t owards Gardermoen Airport, to the south towards Vestby and south east towards Drammen. The leasing market for logistics properties in the G reater Oslo region is strong, and demand for modern storage space and cross-stock buildings within the next 2–4 years is forecasted to remain at a high level. Vacancy in the Greater Oslo region, measured as floor space available now and within 3 months, stands at 3.2% as of January 2018. Observed rent levels are high in the area stretching from just east of Oslo and south towards Vestby, as hubs in this area are very popular. Their closeness to effective intersections with the main highway E6, the short driving distance to Oslo and the availability of vacant land plots makes these hubs a good alternative to the relatively fully developed area around the Alnabru national cross dock terminal (east of Oslo). The Norwegian logistics market is mostly based on logistics buildings for retail purposes and not so much
for industrial purposes. Thus, the yield levels have a certain correlation to the development in the retail market and might be considered low compared to many international markets. The prime yield is currently 5%. Moreover, building costs for logistics properties, and thus rents, in Norway are high due to restrictions and regulations such as: • Fire regulations put restrictions on the sizes of the fire cells within a building. • The Norwegian climate dictates the need for more insulation and heating systems. • The climate also means structures and roofs must be strong enough to withstand the weight of snow in the winter. The logistics transaction market has seen stable high yearly investment volumes over the last four years, ending close to NOK 10 billion (€1 billion) in 2017. The most noteworthy transaction during 2017 was Partners Group and Union Eiendomskapital’s sale of Brobekkveien 80/Alf Bjerckes vei 14 to Ragde Eiendom for above NOK 1 billion (€104 million).
Akershus Eiendom
31
Gardermoen
Oslo
Vestby
32
The residential market
The residential market The Norwegian housing market has seen extraordinary growth since the Norwegian banking crisis at the beginning of the 1990s. Thus, people buying homes in the last two decades have seen values increase substantially, making owner occupation lucrative and popular, with many buying a second home as an investment. Tax incentives have also contributed to this. As a result, there are only a few professional investors operating in the residential market, and few portfolios become available. As can be seen from the graph, housing prices in all major cities increased rapidly after a setback in 2008 due to the financial crisis. While all markets have experienced significant growth, the Stavanger market has struggled after the downturn in the petroleum industry since 2013. However, the market sentiment has been reversed during the second half 2016. The price growth in Oslo residential market stands out in 2016 with an increase of as much as 23%, fuelled by a low level of
new construction, low interest rates, and an increased number of private investors buying property. However, as of 01.01.2017, the Norwegian government implemented several measures to calm the sharply increasing residential prices. These measures include maximum debt ratio of 5 times gross income and mandatory amortization if loan value exceed 60% of housing price. More uncertainty has reached the market, and even as the major forecasters see a relatively modest Âdecline, the risk is perceived as much higher by international observers. 2016 also had a record volume of sale of new homes, which will be completed over the next 1-2 years, which might contribute to dampen the price development over the next couple of years. In Oslo, residential housing prices has dropped by more than 10% since its peak in May 2017, however, the latest reports suggest that prices began flattening out in the beginning of 2018.
Akershus Eiendom
33
Residential housing prices (all types), NOK/sq.m, 2007=100, 2007-2017: 220 200 180 160 140 120 100
Oslo Trondheim
Bergen
JAN. 17
JAN. 16
JAN. 15
JAN. 14
JAN. 13
JAN. 12
JAN. 11
JAN. 10
JAN. 09
JAN. 08
JAN. 07
80
Stavanger National average
Source: Eiendom Norge/Real Estate Norway, Finn.no, Eiendomsverdi AS
34
“Rough guide”
Mads H. Syversen
Mona Cecilie Bugge
CEO, Arctic Securities AS
Partner, Corporate Finance, Arctic Securities AS
A “rough guide” to investing in the Norwegian commercial real estate market Practical issues to be aware of for first-time investors Introduction The commercial real estate (CRE) sector in Norway is well developed and supported by a healthy Norwegian economy and strong government finances. The sector has developed rapidly from being dominated by Norwegian investors, to today where international investors represent a substantial part of the annual CRE transaction volumes – varying between 20% up to around 45% of the annual total transaction market. Their market share varies depending on whether or not larger portfolios and large single assets have been available. The listed Norwegian real estate companies, together with Norwegian and international insurance c ompanies, pension funds, family offices and private equity firms, represent the majority of CRE transaction volumes. The significant inflow of international capital over the
last years has contributed to making the Norwegian CRE market among the more professional and efficient markets in Europe. Norway, with one of the highest GDP per capita in the world, low unemployment rates, strong government finances and stable political landscape, attracts real estate investors seeking profitable investment opportunities with acceptable risk profiles. The Norwegian CRE market has become highly liquid over the years with the substantial volume of inter national capital entering the market. International investors have challenged standard Norwegian m arket practice, increased transparency and has further professionalized the local advisors (strategic and fi nancial advisors, lawyers, brokers, accountants etc.) through their thorough analysis of the various investment opportunities, in depth due diligence processes, various negotiation- and decision making procedures
Arctic Securities
35
Norway, with one of the highest GDP per capita in the world, low employment rates, strong government finances and stable political landscape, attracts real estate investors seeking profitable investment opportunities with acceptable risk profiles.
and requirements in terms of SPA’s and shareholders agreements as the case may be. Alone the fact that the demand side increased as international investors entered the market has resulted in the preceding three years to have historic high total transaction volumes. There are only a few listed Norwegian real estate companies. These listed companies have historically, p artly due to the ownership structure and limited share liquidity, been priced below Net Asset Value and also lower than Swedish listed real estate companies. Thus, listed shares represent an attractive alternative to obtain real estate exposure in Norway as long as a discount in pricing continues. The share of free float, and the shareholding and long term intentions of the major shareholder(s), should also be carefully considered before resolving to invest in Norwegian listed real estate companies.
The Norwegian CRE transaction market has changed from being a very local market with transaction processes impossible to follow and compete in for international players to a professional and transparent market. Over time the national advisors and sellers have adjusted and professionalized the sales processes in order to cater for international investors’ requirements with regards to timing and processes so that they are able to participate and compete as active market players. In addition, a substantial share of the larger CRE transactions have been and continue to be initiated by larger investment banks creating off market transaction opportunities. The investment banks’ in depth knowledge of the investment criteria, preferences and requirements of the various international CRE investors is a prerequisite in order to search for and create such off market opportunities.
36
“Rough guide”
Based on the variety of the players in the Norwegian CRE market, and their different preferences when it comes to debt financing and optimal degree of leverage (LTV), the financing market will always be crucial. Even though several of the Norwegian commercial banks have been reluctant to finance large international investors as well as Norwegian syndicates, the well-functioning bond market offers a competitive variety of financing solutions through senior and junior secured debt financing. Additional funding through issues of preference shares is also becoming a more common and increasingly attractive product. Thus, the Norwegian CRE market is attractive to both domestic and international investors ranging from “all-equity”- investors to investors with broader financing preferences. The Norwegian economy took a hit a few years back when plunging oil prices led to sharp cutbacks in capital spending in the petroleum sector. The adverse effect turned out to be less severe than feared. The economy troughed in late 2015, a cautious recovery started during 2016 and accelerated quite a bit last year. For all of 2017, mainland GDP gained 1.8% up from the modest full-year growth of 1.0% in 2016. The Norwegian fiscal budget is still in surplus despite the plunge in oil revenues as policy is largely unaffect-
ed by changing oil prices because the fiscal spending is tied to the sovereign wealth fund. The fiscal policy rule (introduced in 2001) effectively shields budget spending from variations in oil revenues. The rule states that the structural non-oil budget deficit over time might correspond to the assumed 3% real return of the G overnment Pension Fund Global (previously set at 4%). By tying the budget to the cyclical-adjusted balance, the fiscal rule allows automatic stabilizers to work in a downturn. The Government Pension Fund Global was set up as a long-term saving vehicle to help cope with future pension obligation. Market value was NOK 8118 bn as of February 2018 (abt. USD 1028 bn). The fact that Norway is not a member of the EU has previously been considered a disadvantage by some international investors. However, the British Brexit resolution, and the so far unclear consequences, has further strengthened Norway’s relative attractiveness. Do also note that Norway is part of the EEC agreement with full access to the inner market, without being a member of the union. Some practical issues: A large portion of the international investors entering the Norwegian real estate market use local buy-side
Arctic Securities
37
The Norwegian fiscal policy rule effectively shields budget spending from variations in oil revenue. By tying the budget to the cyclical-adjusted balance, the fiscal rule allows automatic stabilizers to work in a downturn.
advisors. Some of the experiences from these buy-side advisory services are summarized here: 1. Dealsourcing: International investors entering the Norwegian market often have preset and specific investment criteria. Finding opportunities matching their criteria may be challenging. At first glance, the market may seem somewhat less transparent than what is the case for other jurisdictions due to national market characteristics. Even though this is not necessarily the case, the role of the buy side advisors is nevertheless at least as important in Norway as compared with the rest of Europe, and hence the presence of experienced local investment banks that are used to performing their advisory services is highly appreciated by the international investors. 2. Speed: The Norwegian culture is not very hierarchical – hence; decision-making processes take less time than in most jurisdictions. Investment and divestment decisions are made quite fast, which has historically benefitted national investors in transaction processes. However, over the recent years the transaction processes has changed and are now aligned with what international investors are used to in other and larger countries in Europe with respect to timing and level of information.
3. Data room and due diligence: For most of the sales processes over the last few years, thorough virtual data rooms have been prepared in English. A practical advice is to thoroughly describe report requirements in the initial definition of scope to the due diligence advisors. 4. Financing: Loan documents are less comprehensive than in most other jurisdictions. The reason being that most of the topics are, as opposed to other jurisdictions, covered thoroughly by the general background legislation. The bond loan documents are to a large degree standardized through the Nordic Trustee. (see also chapter F inancing). Norwegian banks may be somewhat reluctant to fi nance international investors. The banks do a thorough and comprehensive underwriting of potential new, international investors, so be prepared to supply them with company presentations, business plans, an overview of equity sponsors as well as investment track records. 5. Negotiations: As in all other jurisdictions, negotiations vary a lot depending on the chemistry between the parties, the
38
“Rough guide”
We expect that international investors will continue to play a significant role in the Norwegian real estate market going forward.
nature of the parties involved and whether the contemplated transaction is a share deal or an asset deal. Because of the tax on capital gains and the real estate transfer tax (i.e. stamp duty) of 2.5 %, the vast majority of Norwegian transactions are carried out as share deals, as opposed to asset deals (see also chapter Legal framework). Hence, you do not negotiate just the gross property value, but also adjustments such as discount for reduced tax depreciations (latent capital gains tax), discount for property tax and the value of tax loss carried forward. Thus, it is recommended to state all key assumptions/adjustments in the bid to limit uncertainty in the transaction. 6. Standardized documentation: Most agreements are standardized in the Norwegian market including loan documentation, lease agreements, and SPAs (with different standards for regular transactions, forward transactions, development cases etc.).
Current investment appetite: As a leading indicator, since 2010, prime yield in Oslo has compressed with some 200-225 percentage points, leveling out at 3.75 %. However, not many assets have been traded at these levels. The Oslo CBD yield compression has led to a ripple effect for other locations as well, although with a few local exceptions. Market consensus among leading analysts is that the yield compression will not continue into 2018 due to an expectation of higher long term interest rates and a relative risk/reward consideration as compared with the rest of the European CRE market. Appetite for Norwegian CRE remains strong among international investors and the traditional focus on core office properties in the greater Oslo area is shifting to also include more value add investments. This is both due to increasing comfort in the Norwegian market in general, and to comply with return requirements across all real estate segments. We expect that international investors will continue to play a significant role in the Norwegian real estate market going forward.
Arctic Securities
39
40
Transaction
Norwegian Outlet Acquired by Via Outlets (APG, Hammerson, Meyer Bergman, Value Retail) for NOK 1.1 billion (â‚Ź 115 million)
41
42
Legal framework
Anne Sofie Bjørkholt
Stig L. Bech
Partner, BAHR
Partner, BAHR
Legal framework Background legislation and industry standards play a key role The market both for the sale and purchase and for leases of commercial real estate in Norway is from a legal perspective characterised by the important role of background legislation and a broad use of industry standards as a basis for negotiated agreements. Most of the background law can be waived in agreements between professionals. However, background legislation will be used to fill in unregulated areas in the agreements and will also affect the interpretation of the wording of an agreement. The Norwegian contracts for both leases and the sale and purchase of real estate are less comprehensive than their equivalents in, for instance, Anglo-American jurisdictions. Most of both lease and sale and purchase contracts are based on industry standards, although with individual adjustments as a result of negotiations. Key real estate organisations such as the Real Estate Agents Association and the Landlords’ Association, together with, among
others, the law firm BAHR, issue a set of standard agreements for both leases and for sale of property every two to three years in accordance with market practice, legislative amendments etc. These standards are used as a basis for 80–90% of all leases and real estate transactions. This chapter gives an outline of the main legal aspects related to an investment in real estate in Norway, starting with relevant issues related to purchase of real estate followed by a description of commercial leases. Purchase of real estate Share deals as the practical main rule Capital gains on a corporate shareholder’s sale of shares in a limited liability company (Norwegian: Aksjeselskap) are tax free for a corporate shareholder. This is in contradiction to the sale of assets that are taxable at 23% of the gain. In addition, a share deal will assume no stamp duty on the property, as opposed to a real estate asset deal. Stamp duty is 2.5% of the market value of the property. Thus, around 90% of commercial real
BAHR
43
Executive summary • Transactions are normally structured as share deals (SPVs). The purchase price for the shares is based on the property value, with addition of the company´s assets, less liabilities. • Standard sale purchase agreements (SPAs) are widely used and contain
- “as is” clauses implying that it is the buyer that is taking a risk on the quality of the property, shares or parts,
- basic representations and warranties,
- warranty periods of 1 year and 3 years after closing, caps, baskets and thresholds on claims for defects and breach of warranties on 10% of the agreed property value
• As a practical main rule, a SPV owning property under development/construction can grant security over its real estate in connection with the financing of its acquisition • There are standard lease agreements for (i) new built/newly refurbished properties/ premises, (ii) as is properties/premises and (iii) triple net leases for properties. These templates are widely used and must be said to represent market practice.
estate transactions are carried out through the sale of the shares in property owning companies (single purpose vehicles (SPVs)).
(to the extent the buyer is willing to pay for this) • any other assets in the company´s balance sheet that the parties agree to include
Having said that, there are also a considerable number of real estate transactions structured otherwise – both as asset sales or through sale of parts in general partnerships (Norwegian: Ansvarlig selskap), limited partnerships (Norwegian: Kommandittselskap) and silent partnerships (Norwegian: Indre selskap).
and with deduction of • all liabilities on the balance sheet of the company • around 9% (normally, based on practice from 2017) of the difference between the property value after the deduction of the estimated market value of the land (because the land does not qualify for any depreciations) and the basis for tax depreciation on the property as per closing.
Calculation of purchase price in share deals The seller and the purchaser agree on the property value that forms the basis for the calculation of the purchase price of the shares in the target company. The purchase price is normally calculated as follows: Property value with the addition of • the cash and receivables on the balance sheet of the company • an agreed compensation for losses carry forward
The rationale behind the latter deduction is that in a share deal, the buyer does not obtain a step up in the tax basis for the property, but takes over the tax basis in the target company. Thus, the buyer will not be able to depreciate with tax effect the difference between the agreed property value and the tax basis in the target company.
44
Legal framework
Most of both lease and sale and purchase contracts are based on industry standards, although with individual adjustments as a result of negotiations.
There is no depreciation on the land, but the building can be depreciated by 2% and 10% on the fixed technical installations (elevators, ventilation system etc.). Often, the fixed technical installations will amount to around 40% of the building’s total tax value for a newly built building. Warehouses, hotels etc. are d epreciated by 4% on the building and 10% on technical installations. The net present value of the lower depreciation can be calculated individually, but is normally defined as a lump sum being around 9% of the difference between the agreed property value of the building and the basis for tax depreciations. This is the case if the building is depreciated by 2% annually. For a building depreciated by 4% annually the deduction is normally agreed at 12-15%. The lump sum equals the percentage reached by using a discount rate of 6%, and assuming a 60/40 split between building and technical installations. Because of a decrease in the tax rate, we assume that we might see a decrease of the percentage going forward. The market value of the land is subject to discussions/ negotiations, but is often agreed as being 20–30% of the property value for properties in central areas. Under Norwegian market practice, the buyer is thus not compensated for the full latent capital gains tax on
the property, i.e. the total tax saving for the seller. Such compensation would have equalled the net present value of 23% of the difference between the taxable value of the building and land and the agreed property value, discounted over the gain and loss account by 20% each year (declining balance method). The rationale behind this market practice is that the market assumes that the buyer will also sell the property as a share deal, and assumes that the tax rules will stay in force, i.e. that the buyer will trigger no capital gain on the later sale. Given the prevailing tax rules, it will normally not be an option for the buyer to sell the property as an asset deal as the full latent tax will be triggered. In a later sale, the buyer will have to grant the new owner a price reduction based on the same calculation method. The size of the price reduction will under normal circumstances increase, as the gap between the tax value and the market value will increase over time. The tax value will steadily decrease due to annual tax depreciation, while the property value will develop according to the development in the market. That part of the discount to a new buyer exceeding the discount received from the seller will be a cost for the buyer on a new sale.
BAHR
The standard contracts – defects, warranties and indemnities The standard sale and purchase agreements cover direct sale of property, sale of shares in a property holding limited company and the sale of interests in a property holding partnership (general partnership, limited partnership and silent partnership). It is also standard agreement for sale with M&A insurance. Updated standard contracts were published in October 2015. A set of new standard agreements for forward sales were published in 2017. With regard to defects, warranties and indemnities, one should note the following: • The standard agreements contain a so called “as is” clause, implying that the buyer takes the risk on the quality of the property and shares. The buyer is entitled to conduct a due diligence review before the purchase; but if any hidden defects are discovered after the purchase, the buyer as a main rule has no recourse against the seller – unless the seller has failed to disclose information or given incorrect information. • The standard contracts contain basic warranties, such as the seller’s ownership of the shares and his right to sell the property, shares or interests; that
45
the target company owns the property; that the accounts have been adopted in compliance with the accounting rules and that the target company does not have liabilities and debt that should have been recognised in the balance sheet other than those presented to the buyer. Further, the b uyer will usually require certain warranties or indemnities, covering special risk factors identified through the due diligence process. • The warranty period is normally 1 year after closing. However, the time limit is usually 3 years for breaches of warranties that comprise the target company’s ownership of the property, the seller’s ownership and right to sell the shares in the target company, and those related to the company’s tax and VAT liabilities and documentation related thereto. • Claims regarding defects or warranties are subject to caps, baskets and thresholds. Normally, the cap will be around 10% of the property value. The buyer’s right to revoke the contract in case of significant defects or serious breach of warranties, will, however, rarely be waived, and will thus serve as a safety net for a buyer if the loss exceeds the agreed cap.
46
Legal framework
No stamp duty or other taxes accrue with respect to the registration of the mortgage. Notarisation is generally not required in Norway in connection with establishing a security interest.
A growing trend in the Norwegian market is to take out M&A insurance in the name of the buyer to protect against breaches of warranties under the sale and purchase agreement. Normally the insurance premium is covered by the seller, but we also see that it is agreed that the premium shall be covered by the seller and purchaser with 50% each. Establishment of title and security in real estate Registration of new title holder and stamp duty Transfer of shares or parts does not trigger any registration of new title holder nor stamp duty. In an asset deal, however, registration of the title to the property in the Land Register is the legal act to grant the new owner security against the former owners’ creditors. Such registration triggers stamp duty of 2.5% of the market value of the property. Registration of the title is not required by Norwegian law in order to transfer ownership but is necessary in order to obtain legal protection of the ownership of the property. Mortgages in real estate are perfected by registration with the Land Register. The registration fee to the Land Register for mortgages is approximately NOK 500. The fee is fixed and not dependent on the secured amount. No stamp duty or other taxes accrue with respect to the registration of the mortgage. Notarisation is generally not required in Norway in connection with establishing a security interest.
Security for the financing of the acquisition in a share deal - financial assistance restrictions The Norwegian Act relating to Private Limited Companies (Norwegian: Aksjeloven) (the “Companies Act”) section 8-10 has certain financial assistance r estrictions that will apply to a target company’s granting of security for its parent’s obligations in connection with acquisition of shares in the company. However, the Ministry has suggested to amend this provision, as further described below. Today, a Norwegian company may only grant financial assistance in connection with acquisition of its shares within the limits of what the company may distribute as dividends, provided that the security is based on commercial, arm’s length terms and principles, and that adequate security is given for the company’s recourse claim against the principal of the secured obligations. In addition, certain procedures apply prior to granting such credit. However, there is an exception to the restrictions in section 8-10 of the Companies Act for acquired companies where the main assets are real estate. Pursuant to a regulation under the Companies Act, a real estate company may grant security over its real estate if the following conditions are fulfilled: • The company must be a real estate SPV. This is defined as a company whose sole activity consists of owning and operating real estate. The property cannot be under development/construction as the
BAHR
exemption applies to cash flow properties only. However, the SPV may own shares in other real estate SPVs. • The company must not have other creditors than those who are financing the acquisition. However, the SPV can have creditors whose claims relate to the day-to-day operations of the SPV, creditors which have satisfactory security for their claims, or which consent to the security in writing. • The company cannot have any employees other than its general manager. Moreover, the parent company must as a result of the acquisition be the owner of all of the shares in the SPV. The above-mentioned exception only applies to a mortgage over the real estate owned by the SPV. If the SPV is to provide security over other assets, an exemption application must be filed with the Norwegian Ministry of Trade and Industry, which may grant an exemption on certain conditions. The same applies to a mortgage over real estate under development/construction, cf. above. One should note that the Ministry of Trade and Industry is reticent about granting such dispensations, and collateral for the purchase price for the shares in companies owning such property must as a practical main rule be organised otherwise. However, as mentioned above, the Ministry has suggested amendments to the Companies act section
47
8-10. The Ministry proposes that any Private L imited Liability Company (Norwegian: aksjeselskap) which is acquired by another Private Limited Liability C ompany or Public Limited Liability Company (Norwegian: allmennaksjeselskap) shall be able to provide security for the acquiring company’s obligations in connection with the acquisition of the shares in the company, as long as certain formal requirements are fulfilled, including a statement from the board and adoption by the general meeting of the company. If adopted, the changes will represent a substantial liberalization of today’s restrictions, which will s implify the financing and reduce the financing cost when acquiring a Limited Liability Company in Norway. For real estate transactions, the amendments will be important if the company is not covered by the exception mentioned above, e.g. companies owning property under development/construction. However, the change will also have effect for companies covered by the exception as the current exception only covers real estate security, while the suggested amendment will allow any kind of security. Lease agreements The Tenancy Act The Landlord and Tenant Act of 1999 (the “ Tenancy Act”) regulates leases of real estate in Norway and c on-
48
Legal framework
Professionals are entitled to derogate from most of the provisions in the Tenancy Act.
stitutes the background legislation also for leases of commercial property. The Tenancy Act forms a set of rules primarily protecting a (residential) tenant’s interest based on the legislator’s view of a tenant b eing the lessor’s subordinate and thus having a stronger need for protection than the (presumably) professional lessor. Professionals are entitled to derogate from most of the provisions in the Tenancy Act. The standard lease agreements for commercial leases – the different versions There are standard lease agreements for (i) new-built/ newly refurbished properties/premises, (ii) as is properties/premises and (iii) triple net leases for properties. The standard agreements were last updated in 2016. There are two versions for new-built/newly refurbished properties/premises: one where the lessor shall deliver the lease object in accordance with the agreed requirement specifications, and one version where the tenant has an extensive right to require alterations during the construction period. This latter new built version is widely used in major new building projects. The tenant’s right to require alterations presupposes that the lessor is entitled to require the same changes/additions from its contractor under the construction contract for the new building, and that the tenant bears all costs related thereto. Main terms (a) Responsibility for technical building and construction requirements
The parties normally agree that as at the handover date the lessor shall ensure that the leased object is in compliance with any technical building and construction requirements applicable to the leased object, based on the activities to be conducted by the tenant. According to the triple net lease standard agreement, the lessor is not responsible for ensuring that the leased object is in compliance with the technical building and construction requirements that apply to the leased object. In the standard agreements for new-built/newly refurbished properties/premises, the lessor is responsible for delivering the leased object in compliance with any applicable technical building and construction requirements based on the activities to be conducted by the tenant. (b) Maintenance obligations According to the standard as-is agreement and the new built agreements, the tenant is responsible for indoor maintenance, while the lessor is responsible for replacements and outdoor maintenance. It is also the lessor’s responsibility to see that the leased object meets with all public requirements, unless these requirements are a result of the tenant’s business. Under the triple net standard, the tenant is responsible for all indoor and outdoor maintenance, as well as replacements. (c) Duration The normal lease term for commercial properties is a 10 or 15 years fixed term for new premises, often com-
BAHR
bined with options to renew on the same terms for 5 or 10 years, and 3–5 years for smaller premises. Lease agreements with the state or a municipality have normally a somewhat longer term than leases with private parties, but rarely more than 20 years. (d) Sub-lease and assignment As regards fixed-term leases, the tenant normally has the right to sub-lease for the remaining period subject to the lessor’s approval, which cannot be unreasonably withheld. Assignment of the lease agreement is usually subject to the lessor’s approval, which can normally be freely withheld. (e) Termination A commercial lease agreement can, as a main rule, not be terminated during the lease term. However, the tenant is normally entitled to terminate the lease agreement by force majeure events. In triple net leases, the tenant often waives the right to terminate the lease agreement in the event of serious damage or destruction, however combined with an obligation for the lessor to provide a substitute lease object during the reconstruction period. (f) Rent The rent is normally a fixed amount and subject to annual adjustments in accordance with 100% of the changes to the consumer price index. For retail properties, a turnover-based rent is widely used, but often combined with a minimum rent.
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Under the Tenancy Act section 4-3, after a lease period of 30 months both parties may require, without terminating the lease agreement, that the rent is fixed at the “current level” of rent for similar properties on similar contractual terms, provided there have been no other changes in the rent than indexation. This rule is, however, derogated from in most commercial lease agreements, including the standard agreement. If not, it is considered a “red flag” finding in a legal due diligence review. Lease agreements with governmental entities as lessee In January 2015 Statsbygg, a public sector administration agency responsible to the Ministry of Government Administration, Reform and Church Affairs, together with Difi, the Agency for Public Management and eGovernment, launched its own version of the standard lease agreement. Statsbygg intends to recommend governmental entities to use this version as a basis when they lease real estate in the commercial market. Some of the adjustments are necessary as the lessee is a public entity (termination rights in case of re-organisation, insurance-, and security clauses). However, most of the recommended adjustments are commercial, making the lease agreement more lessee friendly. A governmental entity is normally considered a much-coveted lessee, and Statsbygg’s recommendations must be viewed in this light.
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Bank and Bond financing
Kristian Berg Corporate finance, Arctic Securities AS
Bank and Bond Financing for Norwegian Real Estate An introduction to financing in the Norwegian commercial real estate market
As we have mentioned in previous versions of our “Invest in Norway” reports, the Norwegian CRE (Commercial Real Estate) lending market continues to be attractive both for new transactions, as well as for refinancing. Both the bank and bond market has been open for domestic and international borrowers. The Norwegian real estate transaction market continues to be very active, and we see new investors entering the market every year. More international investors have entered the Norwegian market, especially due to the fact that the sales processes are now structured in a more international manner. The NOK has also w eakened vs. the EUR from around 9.00 (MIPIM 2017) to current levels around 9,75. We continue to see a number of investors buying real estate in Norway unhedged. EURNOK at 9,75 vs. 10 year average at 8,42 looks like an interesting bet. In this article, we would like to make an introduction into how real estate transactions can be financed in the Norwegian market.
We have seen some larger portfolio transactions (above 1 bill USD) from foreign investors in Norway, that have been financed through syndicates of domestic and international banks. We have also seen single asset transactions above 1 bill NOK that have been financed through the bond market, at attractive terms with long dated tenors up to 10 years. As we see more portfolio transactions with cross border assets (Norway and Sweden), we are glad that we at Mipim 2018 can offer both bank and bond financing for international investors on Scandinavian portfolios. Bank Financing Norwegian and Scandinavian banks are still among the most well capitalized banks in Europe, however the Norwegian banks today faces somewhat stricter capital cost from local financial authorities than many other Scandinavian and European banks. These capital charges have resulted in the Norwegian banks being more stringent on what assets and what clients they
Arctic Securities
Loan to Value (average) Loan to Value (min–max) Bank margin (average) Bank margin (min–max)
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Q4 2012
Q4 2013
Q4 2014
Q3 2015
Q4 2016
Q4 2017
71 %
69 %
70 %
65 %
64 %
62 %
60% - 75%
60% - 75%
62% - 75%
62% - 77%
60% - 70%
60% - 65%
2,62 %
2,29 %
1,76 %
1,96 %
2,35 %
2,45 %
2,30% - 2,90%
2,00% - 2,50%
1,55% - 1,90%
1,70% - 2,20%
1,90% - 2,50%
2,00% - 2,80%
6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FEB. 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018
5 year SWAP
Bank spread 5 y.
would like to offer CRE lending. Local real estate investors still faces attractive funding, but i nternational SPV financing for single assets have not been their favourite. Some larger international investors that have been in the Norwegian market for a number of years are considered to be local, and offered same terms as local investors. The total lending to real estate sector from Norwegian Banks and Financial institutions were at 550 bill NOK as of November 2017, up from 450 bill NOK in 2009. DNB – Norway’s largest bank has more than 215 bill NOK in the commercial real estate sector, corresponding to 12% of total lending. This indicates that CRE lending is an important part of the banks total balance sheet. The graph above are from the latest CRE lending report from UNION were the seven major banks are asked for their levels on loan to value and margins on a 5 year loan for a prime office building in central Oslo. The graph shows the levels for the last years. All in cost
Bank spread 5 y.
were at 3.84% in Q4 2017 compared to 3.95% in Q4 2016. With the major rise in swap rates last months, all in cost today is slightly above last years levels. Margins have more or less been unchanged, and main c hanges from last year has been that banks tend to favour shorter maturities (3-5 years). What is important for the domestic banks when new international investors are coming to Norway: • Investors having good knowledge of the local market and the underlying property/tenant • Solid tenant, long lease contract and liquid/ attractive properties • Asset management of the property • Investors track record All the parameters above will be important for deciding loan to value/gearing and margin.
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Bank and Bond financing
Bond Financing We have seen a growing market for CRE financing through bond market over the last few years, with more and larger institutions entering the market with good appetite for both domestic and international borrowers. These investors are mainly Norwegian insurance companies and pensions funds, but we have also seen a number of international investors that are looking to offer attractive financing for Norwegian assets through the bond market. International real investors n ormally want to borrow through SPV financing, and this is one of the strengths for the bond market vs. local bank market. Bond investors continue to be more asset focused vs banks that prefer borrowing at corporate level. The process with bond arrangement and the covenance for bonds are also superior to bank financing for the right assets, as well as shorter decision process. The three largest and most frequent bond issuers in the Norwegian bond market are still: Entra Eiendom: 14,700 mill NOK, Olav Thon Group: 12,300 mill NOK and Steen & Strøm: 5,500 mill NOK. This includes both bonds and commercial p apers. The largest CRE bond issued in Norway (Dec 2015) was when the DNB headquarters in Norway were sold. This was financed with a 65% LTV 9 year senior bond, volume 2,535 mill NOK, and with a 65-75% junior bond with 5 year tenor and volume 390 mill NOK at attractive terms. The senior bond was last year increased to 2,795 mill NOK when the building again was sold (refinanced with same investor).
Since MIPIM last year a total of 41 bill NOK of CRE lending have been issued through the bond market, and the total outstanding volume for CRE bonds in Norway is today at 107 bill NOK (77 bill NOK in 2017) We expect to see the bond market increase up to 25% market share of all CRE lending in the years to come from current levels around 19%. A new trend we have seen last few years, that we believe will grow in the years to come, is mezzanine bonds (junior bonds) being offered for CRE lending. Arctic Securities has executed a number of larger deals (1 bill NOK +) in 2016 and 2017, with long dated senior bond financing at 65% loan to value, and mezzanine bond for the 65-75% tranche. Compared to other markets the terms for the senior bonds, and especially the mezz debt are at attractive levels. Most of the CRE bonds that have been issued have been long dated fixed rate bonds (5–10years), but we have also seen a number of floating rate or inflation linked bonds (linked to Norwegian CPI), as well as Shariah compliant bonds being issued out of Norway. Bond investors have also become more flexible on tenors and pre-payments, and can offer both floating rate and fixed rate bonds. We have also seen a number of bond transactions with loan documents more or less similar to standard bank documents, re. pre-payments, change of underlying assets and amortisation. The Norwegian bond market in general has been attractive for international borrowers for many years. A good part of this must also be rewarded to Nordic Trustee ASA. Nordic Trustee manages third-party
Arctic Securities
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Bank financing vs. Bond financing for international investors Bank financing Pros
Cons
• Flexible, can be refinanced at any time
• Floating credit spread – cannot be locked in
• Can be partly prepaid
• Short tenors 3–5 years
• Has traditionallybeen more attractive for corporate borrowing on shorter maturities
• Documentation and covenants • SPV financing hard for new clients
Bond financing Pros
Cons
• Long-dated, with fixed interest rate and margins
• Cannot/expensive to be refinanced or prepaid during tenor of the bonds
• No amortisation
• Bond investors normally only want longer maturities (5 years +)
• Few and simple covenants, standard documentation • SPV financing • No ownership clause / guarantees – ideal for SPV’s
contractual rights (bond agreements) on the basis of individual assignments. Their core business is to offer trustee services to bond investors. Nordic Trustee is the leading supplier of trustee services in the Nordic r egion with a 95% market share, and has played an important role in the securities market for over 20 years. With close to 2,500 active assignments to the value of more than NOK 1,300 billion. For the real estate sector, they are now trustee for a record number of 281 assignments and volume of 137 bill NOK. Many of the new international real estate investors (and their lawyers) have been impressed by the quality work, and the standardisation of the Norwegian bond market. For more information see www.nordictrustee.com
What can the local bond market offer international investors, and what elements are important: • Pledge in property owning company, and pledge in land and title number • LTV restrictions vs. dividend and Max LTV (Solvency II) • No ownership clause or guarantees needed • SPV financing • Long dated tenors (5-15 years) with no amortisation • Attractive margins vs bank financing for tenors above 3 years
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Selected tax issues
Anne Sofie Bjørkholt
Ole Andreas Dimmen
Partner, BAHR
Senior Associate, BAHR
Selected tax issues Property tax Each municipality in Norway may at their own discretion levy property tax. The property tax rate is between 0.2% and 0.7%. The value on which property tax is levied should in principle be the value of the property in question. The base for the property tax is, however, in many cases lower than this. The default alternative in the new standard lease agreements is that property tax forms part of the joint costs. This may, however, be subject to negotiations. Previously, most lease agreements placed this cost with the landlord, except in traditional triple net lease agreements. Tax on income from real estate in Norway Positive income deriving from real estate situated in Norway will be subject to Norwegian tax at a rate of 23%. This applies regardless of the way the investment is structured.
The rate of depreciation on office buildings is 2% on a declining balance method. For warehouses and production facilities the rate is 4%. In addition, fixed technical installations in the building are depreciated with 10%. A part of the investment must be allocated to the land, which is non-depreciable. Because Norwegian real estate transactions are commonly structured as sale of shares in property owning companies, the buyer does not obtain a step up in the tax basis for the property, but takes over the tax basis in the target company. To compensate for the loss of depreciation, it is market practice with a reduction of the purchase price for the shares, calculated as a percentage (often around 9%) of the difference between the property v alue ( after the deduction of the estimated market value of the land) and the basis for tax depreciation on the property as per closing. Deductible expenses will for most practical purposes be the owner’s maintenance costs, depreciations and in-
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Executive summary • Each municipality in Norway may at their own discretion levy property tax. The property tax rate is between 0.2% and 0.7%. Oslo introduced property tax on commercial property as from 2017. • Net income deriving from real estate situated in Norway will be subject to Norwegian tax at a rate of 23%. • Sale of shares is tax exempted for a Norwegian company shareholder, and is normally not taxable for a foreign shareholder, whereas an asset sale will trigger a 23% taxation of the capital gain.
terest on loans. However, for interest on internal loans (loans to/from shareholders etc. owning/controlling more than 50%) there is a rule capping the deduction of interest at 25% of an EBITDA calculated for tax purposes. Further, an external loan secured by a related party will in this relation be considered as an internal loan. Changes to the limitation rule were proposed in a consultation paper in May 2017. The deadline for comments was in August 2017, but it is not known when the final rule will be presented or set into e ffect. Below the main features of the proposed rule is d escribed, but it is not unlikely that the final rule will differ from the rule described below. In the proposal, the existing regulation is suggested to continue almost as today, but mainly for companies who are not part of (or can be part of ) group accounts. Further, the proposal also include a new rule for companies
• Norway has rules capping the right to deduct interest on internal loans (and external loans backed by an affiliated party). • Dividend payments from a Norwegian acquisition vehicle are not subject to withholding tax for shareholders in other EEA/EU states as long as such shareholders are limited liability companies or similar, conducting business within the EEA/EU.
who are part of group accounts, and also companies who may be part of such accounts according to IFRS. For such companies, both internal and external interests are limited by the Limitation Rule. The threshold is heightened to MNOK 10, but is suggested to apply on a group level (for all Norwegian companies in the group). The limitation will still be 25% of EBITDA per company. However, for these companies a new exception is also proposed, based on the equity ratio in the Norwegian companies and the equity ratio for the whole group. If the equity ratio of the relevant Norwegian company is the same or higher than the equity ratio in the whole group, no limitation apply. Alternatively, if all the Norwegian companies in the group have an equal or higher equity ratio (on consolidated basis) then the whole group, no limitation applies for any of the Norwegian companies.
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Selected tax issues
A quite common way of structuring investments in Norway is to establish a Norwegian acquisition vehicle in the form of a Norwegian limited liability holding company. This holding company then acquires the shares of one or more property owning target companies.
The structuring of inbound investments to Norway A quite common way of structuring investments in Norway is to establish a Norwegian acquisition v ehicle in the form of a Norwegian limited liability h olding company. This holding company then acquires the shares of one or more property owning target companies. The acquisition vehicle will to a large extent be fi nanced with loans from the foreign investor as interest payments as a starting point are deductible, while N orway does not as per today levy any withholding tax on outbound interest payments. The acquisition vehicle will incur tax losses as a result of deductible interest (see below). This tax loss can be utilized by group contributions received from the target company. The group contributions will be deductible for the target company and taxable for the acquisition vehicle. The group contributions will therefore serve to neutralize the taxable income from the property owned by the target company. The interest on the loan from the foreign investor to the acquisition vehicle will be deductible to the extent that the equity ratio and the interest rate are at arm’s length and the net interest amount is within the interest
deduction cap. The effect of the interest deduction cap will normally be that some tax will accrue. Capital gains upon realisation of real estate The foreign investor may sell the property by way of selling the shares in the property owning company or the shares of the acquisition vehicle. Sale of shares is tax exempted for a Norwegian company shareholder, and is normally not taxable for a foreign shareholder. An asset sale will trigger a 23% taxation of the capital gain. The capital gain taxation may, however, be posted on the gain and loss account where a minimum of 20% of the gain will have to be taxed each year (declining balance method). Tax on dividends Income may also be transferred to a foreign investor by way of dividend payments from an acquisition vehicle. In this context one should note that Norway does not levy withholding tax on dividend payments to shareholders in other EEA/EU states as long as such shareholders are limited liability companies or similar, conducting business within the EEA/EU. If the foreign company is tax transparent, taxation depends on the status of the investors in the tax transparent entity.
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Transaction
Cort Adelers gate 33 Aquired by Deka Immobilien for NOK 725 million (â‚Ź 76 million)
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60
Management of Commericial Real Estate
Rune Mikaelsen Executive Director and Head of Property Management Newsec Property Asset Management Norway
Management of Real Estate Management of commercial real estate is complex and requires dedicated professionals within several fields of expertise. This article is primarily addressed to investors in need of outsourced asset services, property and company management. Property management in Norway Historically, management of real estate in Norway has been characterised by a very relationship-oriented approach to partners and tenants, partly due to the relatively small size and transparency of the market. Traditional domestic investors often do not have the same approach with regards to property management that international investors do, meaning that the management agreements are less detailed and with much less reporting requirements than the average inter national agreements. Norwegian property managers often undertake responsibility for added value and risk issues, which in other countries would be considered asset management. The basis of each instruction is however the management
of lease agreements, liaison with tenants, maintenance obligations/requirements and accounting, handling of invoices, receivables, service charges, insurances etc. Please note that this article only covers management of commercial real estate properties. Letting and management of residential properties is subject to very strict mandatory legal regulations that differ considerably from commercial real estate and must be handled separately. The residential real estate letting market is also somewhat limited, since the home ownership rate in Norway is 83 % (Statistics Norway 2016). Generalist management Foreign investors will find that there are few p roperty management suppliers specialising in only one segment
Newsec Basale
of the market - contrary to larger markets – with the exception of retail/shopping centres. Most commercial real estate properties that are managed by external property managers are within the office segment, but the same managers also handle retail, logistics and combination properties etc.
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According to Norwegian standard lease agreements for commercial properties, tenants are obliged to pay their share of the property expenses. Service charges are invoiced on account either monthly or quarterly based on a service charge budget, and are settled against actual costs accrued at the end of each calendar year. The scope, annual adjustment and distribution of the Facility management service charges is defined in the lease agreements. It Most managers purchase facility services as an integrated is common that the property manager hosts annual part of the property management service for multi- tenant meetings to present the service cost budget for tenant buildings. Most properties in Norway are not the coming year, giving the tenants an influence on the large enough to justify separate facility management service and cost levels. agreements covering total facility service packages. There are exceptions, especially with larger single The standard Norwegian lease agreement for commercial tenant units. properties includes an administration fee of 5-7 % of the total service charges to cover costs for handling of Facility services the service agreements and property accounting. There is a wide range of facility service suppliers within different sectors such as caretaking, energy, fire protection, Service charges applicable to vacant areas must be covsecurity, internal control and so on. Some property ered by the owner. To the extent that the service chargmanagers offer one or several of these services in-house, es are reduced due to the vacancy, these savings may be others purchase facility services from third party sup- deducted. pliers on behalf of the owner or as sub-suppliers under the management agreements. Service charges for multi-tenant office properties in Norway typically range from NOK 253/BTA (€26) to Service charges NOK 386/BTA (€40), with an average of NOK 320/ The owner may only charge the tenant for service costs BTA (€33) (based on statistics from the Newsec Basale to the extent that this is covered in the individual lease agreement.
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Management of Commericial Real Estate
report May 2017). For comparative reasons, costs for elevators, staff restaurants and services typical for retail properties are not included in these numbers. Maintenance obligations – interface between lessor and tenant According to standard Norwegian lease agreements, the tenant is responsible for the interior maintenance of its exclusive premises, while the lessor is responsible for exterior maintenance including the façade, windows, roofing etc. Furthermore the lessor is responsible for replacing technical installations when it is no longer possible to maintain these at an adequate cost level. At the end of a lease the tenant is required to vacate the premises in the same condition as they were on occupation, however taking normal wear and tear and the tenant’s maintenance obligations into consideration. If the tenant has not fulfilled its obligations, the tenant must either carry out necessary repairs or compensate the lessor financially. Detailed minutes from hand-
over inspections and a close dialogue with the tenants during the lease period with regards to the m aintenance obligations are key factors to avoid disputes and financial losses in this connection. Health, safety and environmental requirements According to Norwegian law, the owner and the board of directors of a company have the sole responsibility for compliance with health, safety and environment laws and legislation. This responsibility is non-transferable and it is therefore vital that real estate investors in Norway secure professional handling, including documentation, of HSE routines and measures. Owner’s costs in Norway The typical property related owner’s costs in Norway are insurance, maintenance and property tax (where applicable) as well as the costs connected to administration of the property company, to the extent that these are not covered by the service charges.
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Cost category
Average
Low
High
Maintenance
NOK 71 / € 7.4
NOK 14 / € 1.4
NOK 127 / € 13.1
Insurance
NOK 10 / € 1.0
NOK 6 / € 0.6
NOK 16 / € 1.7
Local audit
NOK 3 / € 0.3
NOK 1 / € 0.1
NOK 15 / € 1.6
Management
NOK 38 / € 3.9
NOK 24 / € 2.5
NOK 69 / € 7.1
Legal fees
NOK 2 / € 0.2
NOK 0 / € 0
NOK 12 / € 1.2
Technical information
NOK 19 / € 2.0
NOK 6 / € 0.6
NOK 56 / € 5.8
Other costs
NOK 13 / € 1.3
NOK 1 / € 0.1
NOK 24 / € 2.5
The following overview (above right) shows the typical range of owner’s costs per sq.m. gross area for both property and company related costs, based on a selection of 60 SPVs with a total area of 502,400 sq.m. (office and retail only): The figures in this overview should only be used as an indication, as they are based on a limited selection of properties. Refitting and upgrades Refitting and upgrades vary heavily based on the technical standard and layout of a building and the t enant’s requirements so it is difficult to give an indication of typical fit-out costs in connection with new lease agreements in Norway. While an upgrade of interior surfaces might cost around NOK 2,000/BTA (€220), full interior refurbishment including ventilation, lights and a new layout, might cost up to NOK 10,000/ BTA (€1100) excluding VAT. Reliable estimates for a specific building will require a technical survey.
In lease negotiations the lessor typically offers a rent based on the as-is standard or an upgrade to a ordinary modern standard. Cost-increasing special requirements and wishes from a tenant are normally added to the market rent, but can in some cases be defined as an investment rent or be paid directly by the tenant. Letting Services According to the Norwegian Estate Agency Act, letting services may only be provided by authorised estate agents (with the exception that property owners may let their own properties without using an external estate agent). Many property managers in Norway deliver letting services in-house through an affiliated company and can handle both re-lettings and new lease agreements, although it is also common to appoint a specialised estate agency, especially in connection with larger letting processes. A letting services agreement is mandatory for all assignments and normally includes a success fee of
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Management of Commericial Real Estate
All Norwegian limited liability companies are obliged to appoint a board of directors, with at least one member.
15% of the annual rent for a new lease agreement, while direct expenses are paid by the lessor. In most cases the agreements are exclusive and the a ppointed estate agent has the sole right to market the object. There is a widespread use of search agents in Norway – assisting the tenant in its search for new premises. Although they have not been appointed by the lessor, it is very often requested that their fee (often 15% of an annual rent) is covered by the lessor and recouped through an addition to the rent. Management of SPVs/Property companies As described earlier in this handbook, share deals are the most common transactions in the Norwegian real estate market and properties are mostly held in single purpose vehicles throughout their lifecycle. Hence, there is normally a need for management not only of the property itself, but also of the company owning the property. Foreign investors must place their Norwegian property portfolio in at least one Norwegian company
and adhere to the various official requirements connected to that. Company management services mainly consist of: • Norwegian GAAP accounting (or IFRS) – Bookkeeping, payments, reconciliation, financial statements – An official authorisation to perform accounting services is required
• Budgeting and reporting at company level
• Annual closing – Preparation of annual accounts – Tax papers – Assistance to local GAAP audit • VAT – VAT return forms and settlements – VAT adjustment regulations – Compliance with VAT-regulations
Newsec Basale
• Company administration – Company secretary services – Company files • Financing – Loan administration and assistance – Covenants reporting – Bank account administration Most property managers in Norway also offer c ompany management and treat the two aspects as integrated parts. There is no clear-cut division in most N orwegian management agreements between company and property management. Board of directors and signatory rights All Norwegian limited liability companies are obliged to appoint a board of directors, with at least one member. The members of the board carry personal liability for compliance with Norwegian law and legislation. The board of directors and/or a managing director
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hold the formal signatory rights on behalf of the company, either individually or jointly, depending on what is adopted in the Articles of Association and registered in the company register. Foreigners may be appointed as board members. However, a Norwegian ID-number is required to be registered as a director in Norwegian company. This number can be obtained by applying to the relevant Norwegian registry. An annual board meeting and ordinary general meeting is mandatory per year for approval of the annual accounts etc. The fiscal year follows the calendar year. Local company audit Norwegian limited liability companies above a certain size are obliged to have a certified company auditor registered at all times. The company auditor performs an audit of the company’s annual accounts.
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Development of Commericial Real Estate
Gjermund Fossnes Head of region South East/greater Oslo Area, Newsec Property Asset Management Norway
Development of Real Estate As in other countries, real estate development in Norway is a dynamic business with rapid changes due to technological advances, new regulations, volatile markets, financing etc. This article gives a short introduction to the basic elements of real estate development in Norway.
Right of ownership and restrictive covenants Before initiating development of a property, it is important to determine whether there are restrictive covenants on the property, and whether these limit the development of it or not. This information is normally registered in the land register, although non-registered agreements between the owner and third parties can also represent restrictions. Zoning Zoning regulations are based on the Planning and Building Act. According to this, the Municipal Plan (Norwegian: “Kommuneplan”) represents the superior guiding principles for property development in a municipality. The Municipal Plan for Oslo, as of September 2015 has a strong focus on the environment
(green areas, surface water requirements etc) and protective measures for listed properties. Furthermore, municipalities may issue master plans for certain areas of development, with restrictions regarding density, utilisation, use and requirements for development. Such requirements may include area infrastructure, such as roads, street lights, kinder gardens etc. Where the area master plan is detailed enough, developers can proceed straight to a building application. If not, or where there is no area master plan, individual zoning regulations for the property are necessary – a process that can take from 9 months to several years. Permission to start major construction works cannot be granted until the planned works are in accordance
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The development phases:
Idea
Feasibility study
Application for general permission
Project phase/tender competition
with approved zoning regulations for the property. The municipality may grant a dispensation from the current zoning regulations in cases where it is in the best interest of the municipality and not in substantial breach of the intentions of the zoning plan. The use of a property is governed by laws and regulations, and a change of use requires prior consent from the authorities. Technical regulations In general, new construction and renovation need to fulfil mandatory technical requirements, the current TEK 17 building regulations. These regulations are intended to ensure that projects are planned, designed and executed in line with good visual aesthetics, accessibility for all, and in compliance with technical standards for health, safety, the environment and energy. The “TEK” requirements are frequently updated, the latest version was updated in 2017. This new version aims to make regulations simpler and more flexible in order to reduce building costs for residential properties. BREEAM classified buildings require technical adaptations beyond the requirements set out in TEK 17 . Building applications The regulations regarding building applications are
Contracting
Building phase
Completion
found in the Planning and Building Act. A building application can either be made in one or two phases, depending on the need for a preliminary acceptance to limit the risk of a rejection of the application. In order to clarify the terms of a building application at as early as possible, a preliminary conference between the developer, the local authority and any other relevant authorities is often useful. To obtain building permission a developer must appoint authorised professionals (Norwegian: “ansvarlig søker”) responsible for the application, design, execution and control of the construction works. The processing time for a building application varies between 3 and 12 weeks, depending on whether the project involves dispensations from the zoning plan, comments from affected neighbours, consent from other authorities etc. In pressure areas – such as Oslo – the processing time can be longer than 12 weeks due to the heavy workload of the building authorities in the municipality. Certificate of completion The municipality is required to issue a certificate of completion within 3 weeks after completion given all necessary documentation is in place.
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Forward sale of property
Ole Andreas Dimmen
Erik Langseth
Senior Associate, BAHR
Partner, BAHR
Forward sale of property The rationale behind forward sales and the different models A significant number of transactions in recent years have been structured as so-called forward deals. A forward sale refers to a sale of the shares in a property company owning a building under construction, and can be structured in two ways: with immediate share transfer or deferred share transfer. New standard agreements for both models were published in 2017. In the immediate share transfer model, the shares in the target company are acquired early in the construction period, whereas under the latter, the buyer acquires the shares when the building is complete and the lessee has moved in. The main differences between the two models relate to the financing of the construction cost. When the sale is carried out before or during the construction phase, the estimated construction cost in the company is fi nanced
by the buyer, while the seller normally fi nances the construction cost in the deffered share transfer model as the transaction is closed when the construction has been completed. The immediate share transfer forward model is the most complex, but also the most common one. An outline of its main elements is set out below. Immediate share transfer model – main elements The target company owns a building site and has entered into a construction contract and a lease agreement that takes effect from completion of the building. To achieve a pricing of the target company as if the building had already been completed, the seller assumes the responsibility for constructing the building in accordance with the requirements in the lease agreement. Thus, the seller assumes the full risk for the final construction costs. A lower construction cost is
BAHR
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Time line – Forward deal with immediate transfer
The SPV enters into 1: Lease agreement 2: Construction contract
The shares in the SPV are transferred from seller to buyer (‘closing date’)
Commencement date, lease agreement
Construction period
Final settlement with contractor and adjustment of purchase price for the shares in the SPV
Lease term
On-going purchase price adjustment
for the benefit of, and excess costs must be covered by, the seller. The purchase price for the shares is calculated based on an agreed property value as if the building had already been completed, including a deduction to reflect that there will be no lease income during the construction phase (a lump-sum ‘lease substitute’). Further, a deduction equal to the estimated residual construction costs is made when the price of the shares is being calculated. At the same time, the buyer commits to finance the estimated residual construction costs. The construction costs are then financed in accordance with a pre-arranged payment plan and subject to a r equirement that the payment/withdrawal leads to a corresponding added value to the property. Construction costs that do not have any corresponding ‘added
value’ are financed by the seller providing bridging finance (through supplementary loans) to the target company. When the building has been completed and the final settlement with the contractor has taken place, the purchase price is subject to adjustments based on the actual construction costs incurred and the actual lease obtained. Any final costs payable to the c ontractor exceeding the estimates lead to a corresponding r eduction in the share purchase price, adjusted for tax effects. If the final construction costs are lower than estimated, the buyer pays an amount equal to the d ifference, adjusted for tax effects, as an additional part of the purchase price. Certain quantitative components or factors included in the actual construction cost will not necessarily be known as per the actual lease commencement date, and the parties normally agree that the purchase price is subject to on-going adjustments for a following agreed number of years.
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Publication partners
Publication partners
Arctic Securities An independent investment bank with an unparalleled track record within corporate finance real estate transactions. www.arctic.com
Akershus Eiendom The leading commercial real estate agent in Norway, offering transaction, leasing, research and valuation services. www.akershuseiendom.no In association with:
BAHR BAHR is the advisor you turn to when complicated legal matters need to be resolved. www.bahr.no
Estate Media Norway’s leading media- and communication bureau for commercial real estate. www.estatemedia.no
NEWSEC Newsec is by far the largest specialized commercial property firm in Northern Europe, with some 1.700 co-workers spread across the seven Nordic and Baltic markets. Newsec covers all parts of the commercial property market. www.newsec.no
blake.no
4th Edition 2018
Handbook for the Norwegian commercial Real Estate Market