Investment market Sweden

Investment volumes for 2022 were down by 50 percent year-over-year and the volume ended on SEK 180 billion. Mergers and acquisitions among listed companies contributed with SEK 30 billion in 2022, which is down from 177 billion in 2021. When we adjust for M&A, volumes are down by 18 percent year-over-year. Pricing has been poor, with gradually lower prices recorded for transactions and lower transparency in both ongoing and finalised transactions. Sentiment continues to be under pressure, owing to the sharp increase in interest rates and lower LTV from secured financing in the Nordic banks. Many transactions remain on hold and await clarity around current trends in the capital markets and rate increases from central banks. All sectors are impacted, although segments with high visibility to rental growth linked to consumer price index (CPI) adjustments can partly compensate for increasing funding costs and mitigating the negative value impact. The residential market continues to be particularly tough at the moment, especially with new build units, owing to limited visibility for rental growth in the short term and changes in the regulatory environment related to new build rental growth. Community service properties and core office properties are doing better, followed by the cyclical segments of logistics, retail and hotels.

Investment market

Interest costs have risen sharply in Sweden, linked to amended policy among the central banks. To contain inflation, they have started tightening their monetary policies more than previously guided and are determined to do whatever it takes to stop inflation getting out of hand. Funding costs are also up, due to deteriorated liquidity in the capital markets for real estate companies. Nordic banks are still showing good appetites for lending but are primarily focusing on existing relationships. Even though their appetites are still good, they are now more cautious about offering higher levels of leverage, particularly for low yielding segments.

Rising funding costs have clearly put pressure on the yield requirement to compensate for the higher costs and lower availability of funding. Our prime yield estimates are up for all segments from the second quarter of 2022, related to sentiment-based evidence linked to ongoing transactions and discussions. We expect yield requirements to stabilise in 2023, assuming that short-term and long-term interest rates stabilise. The strong rental market in 2022 will be tested in 2023, although the 10.9 percent index impact on rents will mitigate the increase among commercial segments, albeit with a level of risk on vacancies and renegotiations on a lower level towards the second half of 2023, due to a softer economic outlook.

Weaker demand from both international and domestic investors, in combination with a sharp shift in sentiment in the listed sector (which is currently trading at record-high discount-to-NAV compared with large premiums in the first half of 2021) has limited the transaction volumes. The weak start to the year, compared to the strong start to 2022, will be tough to compensate in 2023, although we do expect investment activity in 2024 to stabilise at around SEK 200 billion, which is the same level we saw in 2019 and 2020.