Residential Nordic

Financial highlights

11.3€bn

Investment volume for the residential segment in the Nordics in 2022

-49%

A regulated rental market in Sweden and changes in the regulatory environment, regarding presumptions-based new-build rents, have put further negative pressure on the sentiment in Sweden. Activities to reduce costs and improve rental growth on specific properties and portfolios will attract interest and add value across the Nordics.

International investors have grown in importance during the last few years, primarily focusing on the new-build sector, which offers certified buildings with lower operational and maintenance costs. We expect flight to safety factors to support the sector in the medium term and have also started to see a broader interest for the regional growth cities across the region. Listed Nordic residential companies today trade at an average discount-to-NAV of close to 37 percent, which implies a discount-to-assets of approximately 17 percent*, and stands in sharp contrast to the premium-to-NAV of 37 percent which was highlighted in our report twelve months ago.

The multiple contraction among listed companies also confirms a sharp shift in sentiment. The outlook for the sector has changed to mixed. Rising funding costs imply a negative bias to yield requirements across the Nordic countries. However, limited risks for vacancies, in combination with stable cash flow, underpin sector sentiment in the medium term, especially considering a softer outlook for the Nordic economies adding relative strength, compared with cyclical segments.

Investment volume for the residential segment in the Nordics 2022 vs 2021

Residential Sweden

The residential market continues to be under pressure, owing to rising funding costs, higher yields and increased construction prices. New supply in 2023 is expected to fall dramatically, leading to fewer forward transactions and an even greater demand-supply imbalance.

Investment market

The residential investment market was down 64 percent in 2022, compared to 2021 when the Swedish transaction market recorded the second highest investment volume in Europe. The outlook for 2023 is soft, although fundamentals should stabilise towards the end of 2023, assuming stabilisation of interest rates and inflation outlook.

Tenant market

Falling supply rates will continue to support pent-up demand. The market is regulated and will not receive the same level of inflation protection as other commercial segments in this high inflation environment. In the event of normalisation; however, rents are expected to rise to the level of or slightly above inflation again.

Funding status

Banks continue to be willing to finance residential property assets, albeit with higher spreads and reduced LTV levels. The combination

Financial highlights

-64%

Investment volume for the residential sector 2022 compared to 2021

Residential Finland

of higher nominal interest rates and rising spreads will act negatively on interest coverage ratios and debt yield parameters.

Sustainability

ESG factors have clearly grown in significance and are today very important to both domestic and international investors. However, when funding costs, rental growth and underlying investment feasibilities in general have risen to the top of the agenda, ESG has come to be somewhat overshadowed.

Outlook for 2023

We have seen a clear shift in investor sentiment from the end of the second quarter of 2022, owing to a sharp increase in funding costs and a relatively soft rental growth outlook. The low-risk characteristics will likely improve relative sentiment when rates stabilise and/or the economy softens, while the medium-term outlook for 2023 continues to be cautious.

~4.15%

Prime yield for new build multifamily buildings in Stockholm

Residential was, once again, the most traded segment in 2022. However, the high inflation followed by rapid increases in interest rates and overall uncertainties in the markets slowed the residential transaction activity towards the year end.

Investment market

Residential yields have been the lowest of all segments, thus the impact of increasing financing costs has been strongest. High inflation puts pressure on operating costs, which can partly be covered by rent indexations. The prime yield was 4.00 percent in the last quarter of 2022—a 70 basis point increase, quarter-on-quarter, and a 90 basis points increase, year-on-year.

Tenant market

Rent indexation possibilities vary among cities and submarkets. Despite of common 100 percent CPI indexation clauses, it seems challenging to transfer the whole inflation figure to rents. In terms of supply and demand, the amount of new construction starts have been decreasing, which will realise as a lower amount of new supply in the next few years. Long-term demand for rental apartments in the growth centres is supported by their growing populations.

Financial highlights

4.00 %

Helsinki prime yield Q4 2022, expected to face some upwards pressure in the future due to uncertainty regarding inflation and increasing interest rates

1.7€bn

Funding status

Filip

Senior Director Capital Markets, Sweden

Lenders have decreased their maximum LTV levels and are more selective. The margins have been increasing and availability of project financing has tightened.

Sustainability

The significance of sustainable solutions, especially relating to energy efficiency, is increasing continuously, and is driven by investors, shareholders and occupiers. New developments are driven by sustainable aspects, which are a prerequisite for a growing number of investors.

Outlook for 2023

Activity is expected to invigorate moderately, if compared to final quarter 2022 levels. Investors are monitoring inflation figures and interest rates closely; however, they also have significant dry powder ready to be deployed to new acquisitions.

The transaction volume of the residential sector did not reach 2021 amounts in 2022

Residential Norway

As mortgage costs tick upwards, housing prices are expected to continue to fall. However, considering the positive marked indicators from December, the housing market might not be as gloomy as many predicted. On the rental side, prices are on the rise.

Investment market

In 2022, Norges Bank increased the key policy rate more than fivefold from 0.5 to 2.75 percent. In the last three months, house prices in Norway have fallen by 6.5 percent. It is the biggest fall in house prices since the global financial crisis, and the strong price growth in the first half of the year has now virtually been erased in most areas. Despite this, demand among professional investors for residential property, particularly for residential development and private rented property, remains strong.

Tenant market

According to Eiendom Norge, the rental housing price statistics show a historically strong rise in rental housing prices in Norway, both in the last two quarters and in 2022 as a whole. Rental prices normally fall in the last quarter of the year, but in the last quarter of 2022 they rose.

Sustainability

Property developers continue to set higher ambitions for their development projects. 55 percent of new residential projects in Oslo in the second half of 2022 carried a Building Research Establishment Environmental Assessment Method (BREEAM) certification. There is also increased focus among homeowners to improve existing buildings, particularly when it comes to bettering energy efficiency.

Outlook for 2023

Norges Bank expects housing prices to fall by 4.5% in 2023. Housing and rental price growth tend to move in opposite directions, and we expect the growth in rental prices to continue, because the higher interest rate has not yet been priced into the housing market.

Financial highlights

10.9% Residential Denmark

5.88%

Share of residential transactions in 2022

Average increase in rental price y/y

The residential market continues to be the most soughtafter segment for investors in Denmark, as it is still highly desirable among both investors and tenants.

Investment market

The residential investment market continues to be the largest sector by far, being more than twice as large as any other sector in terms of transaction volume. More investors have been specialising in subsegments, such as student, youth and senior housing.

Tenant market

Demand has been growing as an increasing share of households are choosing (or are forced) to rent instead of owning. Additionally, demographic fundamentals such as smaller household sizes and continued urbanisation guarantees demand long term. Completions of residential construction will be limited in 2023, as rising material and financing costs have delayed or cancelled projects.

Funding status

Kari Due-Andresen Chief Economist / Head of Research, Akershus Eiendom

As interest rates have increased, funding has become more difficult. This has been particularly noticeable for older unrenovated buildings, where the mortgage bank’s critical rent calculations have come into play, as net rental income must exceed financing costs.

Sustainability

Sustainability and energy efficiency are becoming increasingly important for investors, tenants, and regulators, with plans in place to convert many households in Denmark to district heating.

Outlook for 2023

Overall, the outlook for 2023 is positive with a continued increase in transaction volume and the emergence of niche residential products such as senior housing and co-op living.

Financial highlights

3.25%

Prime yield for new residential properties in Copenhagen

8,951

Person population growth in Copenhagen Municipality October 1, 2021–October 1, 2022