Macroeconomic conditions and the listed property market

Longer term interest rates have stabilised on a slightly lower level in recent month.

Macroeconomic conditions

The general economic environment has come under further pressure across the Nordics and Europe, owing to rising cost inflation and rising interest rates. The outlook for GDP growth in 2023 is expected to decline in all regions, apart from Norway, but we should be back in positive territory again in 2024.

The war in Ukraine has put accelerated upward pressure on inflation, linked to energy, food and transport costs, and there are also signs of salary inflation. To contain the situation, central banks have started tightening their monetary policy more than previously guided and are determined to do what it takes to stop inflation getting out of hand. Inflation rose by 7.3 percent to 8.4 percent across the Nordics and the Eurozone in 2022, but is expected come down in 2023 to a forecasted 4.3 percent and 4.9 percent in the Nordics and across the Eurozone. Foreign Exchange Market (FX) changes are balancing on the negative and the weak SEK is elevating imported inflationary pressure, which risks elevating the central bank response in the short term.

The sharp increase in interest rates will partly be compensated by inflation, over time, through index-linked changes to rents. Strong growth in rents balance on the positive for 2023. However, the combination of negative outlook for real GDP growth and high interest rates could prove negative, since they increase the risks for higher vacancies and might limit market rental growth across cyclical sectors in the second half of 2023 and in 2024.

Listed property sector in the Nordics

The listed property sector in the Nordics consists of more than 40 companies listed on Nasdaq OMX and Nasdaq First North, with a total property value of €155 billion and a market capitalisation of €56 billion. The sector is currently valued at 30 percent discount to NAV* (median) which implies a 13 percent discount to total asset value. The sector performance is down 40 percent* since the end of 2021, despite higher asset values, and today’s valuations stand in sharp contrast to our Spring 2022 report which recorded a 15 percent premium to NAV and an 8 percent premium to total asset value. When we compare companies with different types of property assets, industry/logistics-related companies continue to trade at premium to assets while all of the other segments trade at historically high discount to assets and NAV. Performance so far in 2023 has turned more favourable and the sector is up by 12 percent*.

In the 2022 editions of our JLL Nordic Outlook reports, we argued that the lower multiples would imply less room for consolidation, held back by higher funding costs and a soft bond market. The trend in 2023 will likely start cautiously, due to the same factors. However, if visibility for a stronger bond market and declining interest rates improve, as seen in leading indicators and yield curve, preference for mergers and acquisitions should turn more favourable during the second half of 2023. Preference in the listed market relates to industry/logistics, while all the other segments are being incentivised to reduce exposure, due to the discount levels. We see potential for companies that raise equity to capture lower prices (higher yields) in the market, while reducing refinancing risks, which would create potential for further growth in 2024. Operational synergies and project revaluation potential could also act as a fundamental for consolidation across segments as ‘company-specific’ factors to improve cash flow will be rewarded when expectations are low.

* 9 February 2023