Newsec Property Outlook Spring 2018

NEWSEC PROPERTY OUTLOOK SPRING 2018

NEWSEC PROPERTY OUTLOOK

DARE TO THINK FREELY It can be easy to get stuck in one’s ways and stick to what’s familiar, thereby underestimating the importance of challenging one’s perspectives and plunging into new situations, outside the immediate comfort zone. It happens all the time, and it happens to all of us.

Over the past few months, I have been confronted with the importance of diversity for my development. During a recent trip to California, I was confronted with another acceptance for differences than in Sweden. The nuance of your skin, the color of your hair, what you’re wearing – all of that matters less than what you have to say, and it’s rare to see someone get judged for sticking their neck out.

In the autumn, I came into contact with Sophie Rosén Hellström and Maria Stenvinkel and their concept High Vibe Mornings, workshops centered on well-being and personal development.

Participating in their work, I have learned a great deal about my own reactions to different situations, and have once again been reminded of the importance of taking a moment to stop and reflect in the daily merry-go-round.

A conclusion and a reminder, is that the way we experience and interpret the world to a significant degree comes down to perspective and psychology.

The housing market is likely the segment of the real estate industry most sensitive to precisely that. When newspapers report that a great many companies risk financial hardship, some interpret this as fact and the general mood shifts from sizzling hot to ice cold. However, we must ask ourselves, how much of this builds on an actually changing market, and how much is more likely an example of uncritical Simon-says behavior? Or, in other words, how much can be explained by psychology and prejudice?

There is no doubt that there has been an un­reasonable concentration of newly built projects in the upper-end of the market, and that too little is available for the lower and middle income segments. But does that really

mean that a significant number of companies are at risk?

Sweden is losing out in terms of competitiveness compared to the EU average, and substantially so when compared to countries like France and Germany. About one third of our growth is linked to housing development and it will therefore be interesting to follow that segment after the recent turbulence.

What happens to our growth without a wellfunctioning housing market? And what are we actually observing right now?

Even if Sweden is losing out in terms of competitiveness, we do have an advantage in terms of our demographics. Largely thanks to immigration, Sweden has a relatively young population, so despite a large number of elderly, there’s a good balance between the portion of older and younger people. If we succeed with integration and manage to get people to work, we’ll be in a strong position to take care of the elderly in our country.

Given this backdrop, we should ask ourselves what responsibility the real estate industry has.

Who are we building for? What are we investing in? Which segments of society are we focusing on? Are we stuck in our ways or are we daring to think differently? Are we driven by substantiated analyses or are we falling into the trap of believing in myths?

In this issue of the Newsec Property Outlook, we take on the sensational headings recently surrounding the housing market. We analyse four myths, and separate fact from fiction. It is easy to be misled by tales of companies in crisis and bubbles ready to burst, but I believe a more well founded attitude builds on comprehensive questioning and knowledge of underlying fundamentals. And daring to think freely.

Enjoy the read!

Max Barclay Head of Newsec Advisory in Sweden

CONTENTS The end of the party? ................................................................................................... 7 Mythbusters: The Swedish housing market — fact or fiction? ....................................... 10 The Swedish property market ............................................................................. 14 The Norwegian property market ....................................................................... 17 The Danish property market ................................................................................ 18 The Finnish property market ............................................................................. 20 The Estonian property market .......................................................................... 22 The Lithuanian property market ...................................................................... 23 The Latvian property market ............................................................................. 25 Nordic property financing ..................................................................................... 26 Outlook for the Northern European property market ..................... 28 Macroeconomic data................................................................................................. 30 Property data ................................................................................................................. 33 Definitions ......................................................................................................................... 37 The Full Service Property House ..................................................................... 38 Contact and addresses ............................................................................................ 39

Copyright Newsec © 2018 This report is intended for general information and is based upon material in our possession or supplied to us that we believe to be reliable. Whilst every effort has been made to ensure its accuracy and completeness, we cannot offer any warranty that factual errors may not have occurred. Newsec takes no responsibility for any damage or loss suffered by reason of the inaccuracy of this report.

Newsec, Box 7795, SE-103 96 Stockholm, Sweden. Phone + 46 8 454 40 00, www.newsec.se.

You may use the information in the Newsec Property Outlook but acknowledgement must be made for all quotations and use of data/graphics.

YOUR PARTNER IN THE NORTH Newsec, the Full Service Property House in Northern Europe, is the solid choice of partner within Advisory and Property Asset Management.

With sharp analyses, hard facts and just the right skill set, we’ve got you covered.

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE END OF THE PARTY? ●

THE END OF THE PARTY? The global economy is churning along at good speed. But asset markets are nervous as the peak of the business cycle is passing in some economies while support from central banks will be gradually withdrawn. This creates a new situation in which the long bull market will fade. A similar story holds in Sweden, where the Riksbank will slowly prepare to exit from the ultra-easy monetary policy, while the housing sector is losing steam, turning a previously strong driving force into a brake on the economy.

The global economy is still strong In recent months, most macro analysts have moved their forecasts up slightly, indicating good global growth. The reasons are a batch of strong GDP numbers as well as optimistic sentiment indicators in most large economies. The Purchasing Managers Indices indicate that business in most countries is prepared to invest and hire more personnel this year. The advanced economies will consequently see a cyclical peak in 2018; next year growth will slow down, due to capacity constraints and rising interest rates.

planning a late-cycle fiscal expansion (through tax cuts and higher expenditure). The party may be prolonged – but long-term fiscal risks will increase.

The US is first in the cycle. The labour market has reached full employment.

Still, the Trump administration is

China is experiencing controlled downshifting, as the government reins in credit growth. But other

In 2017, the European continent finally came out of the shadows of the financial crisis. Growth picked up, unemployment fell and budget deficits came down. As optimism grew, investments were planned in a way which indicates good growth also in 2018.

Outside the Euro zone, several economies in Eastern Europe show strong growth. The UK, however, suffers from uncertainties surrounding Brexit.

emerging markets, not least India are accelerating.

All this happens while inflation, though still low, has risen somewhat from the near-deflation levels which prevailed some years ago. So, in these aspects, this looks almost like a Goldilocks economy: Rising growth, falling unemployment and manageable inflation. But… Financial angst There is always a problem somewhere.

There are geopolitical risks, not least the threat of protectionism. But more acute is the combination of inflation, interest rates and shifting monetary policy. As output gaps are closed and labour markets in some places

7

● THE END OF THE PARTY?

NEWSEC PROPERTY OUTLOOK • SPRING 2018

» Volatility rose sharply in the beginning of 2018, further complicating life for investors and speeding up the rotation out of risky asset classes«

look strained, wage costs may start to increase. We have seen the first signs of this in the us. In Germany, too, the unions are starting to demand higher wages. This is news, since cost pressure from the labour market has been virtually extinct for several years. While some analysts previously pronounced the death of the Phillips curve (i.e the presumed inverted relationship between inflation and unemployment) the question now is whether this relationship may be staging a comeback.

In this situation, several central banks will actively start to move away from the ultra-expansionary monetary policy of recent years. The Federal reserve has already slashed its injections of liquidity and started to hike its key rate – and has signalled more hikes in the pipeline. The Bank of England has declared that they will hike rates more rapidly than previously signalled.

The ECB will start to “taper” its purchases of bonds, but it will probably be late in hiking the refi rate.

This means Goldilocks is changing.

Fundamentally, it is a good thing that deflationary fears have evaporated and that central banks gradually can exit from emergency measures. Nonetheless, the new situation is creating angst in financial markets. As central banks reduce their purchases of government bonds, uncertainty about the effect on market rates is creating nervousness. As the era of ultra-low rates draws nearer to its end, analysts are recalculating asset values.

Personally, I do not see interest rates coming up very high – and, more importantly, real rates will remain much lower than in previous cycles.

Nonetheless, psychology matters,

8

and after a relentless rise of real estate and stocks in most markets, it is not surprising that corrections will come. Some investors move out of stocks and into bonds, hoping this will reduce risk. As a result of all this, volatility rose sharply in the beginning of 2018, further complicating life for investors and speeding up the rotation out of risky asset classes.

urbanisation), strong income growth and ultra-low interest rates. Construction has strong “multiplier effects” on the rest of the economy – from infrastructure investments to purchases of furniture. In 2016 and 2017, construction was a primary driver of GDP growth. Capacity constraints – in particular, a lack of workers – has become a major problem.

We end this brief analysis of the global economy with the conclusion that the real outlook still is strong, but that asset markets will be wobbly and vulnerable as the monetary cycle turns.

In an environment of higher bond yields, stocks will not perform as well as in recent years. Most of the long bull market is behind us.

Despite the increasing supply of new houses and apartments, strong demand pushed real estate prices to rise well into 2017. But in the autumn of 2017, prices first stalled and then started to fall. In January 2018, the housing price index HOX had fallen 2.2 per cent year-on-year, with flats in Stockholm taking the hardest hit; minus 8.6 per cent.

Same story in Sweden The same could be said about the Swedish economy. Here the main issue is real estate. Falling house prices and contracting real estate markets will have a negative effect on the real economy.

This should not be a surprise, since the Swedish economy has grown at a brisk pace for five consecutive years, and house prices have been rising for even longer. The economy has been firing on all cylinders. Net exports have been strong, courtesy of booming export markets and a weak currency; private consumption has grown strongly as low inflation has supported real income; public consumption has risen (partly in response to immigration); and construction has acted as a strong driving force.

In recent years, the volume of newly built homes annually has trebled.

The drivers have been demography (growing population, immigration and

The forces behind this turnaround are partly similar to the drivers of the equity volatility. Deflation fears have subsided, and inflation has approached the two per cent target.

The Riksbank has signalled tapering of their government bond purchases, as well as rate hikes beginning in the autumn. Thus, in Sweden too investors are starting to realize that the period of ultra-low rates is nearing its end.

Given the high rate of mortgage borrowing for new homes, this is bound to have negative effects on real estate prices. On top of that, the Financial Supervisory Authority has raised the bar for entrants to the market by setting tougher amortisation rules, taking effect this spring.

As prices tumbled in late 2017, the repercussions on the construction sector were swift. Several projects were stopped or paused, and some construction companies and property developers – in particular those with

NEWSEC PROPERTY OUTLOOK • SPRING 2018

high leverage – were hit. As a result, there will be bankruptcies and consolidation in 2018-2019. The number of housing unit starts will fall. Gradually, this brake on supply will stabilize prices again, albeit at a lower level than the peak. Recent surveys indicate that market actors believe that we are already close to that point.

More importantly, this reduction of new construction will dent economic growth. The strong positive multiplier effects on the economy will turn negative as house building contracts.

Sweden will not experience a hard landing, though. Exports are still strong, the rest of the manufacturing

sector is doing fine, and most services as well. Furthermore, the government budget is in surplus – and during this election year, politicians will be willing to spend more, thus creating fiscal stimulus while monetary policy gradually becomes less expansionary.

Not too bad All in all, from a macro perspective the glass now goes from full to half-full.

Swedish fundamentals are still strong.

Inflation will probably remain just below 2 per cent, which means that the repo rate hikes will be small and slow. Even as the Riksbank gradually reduces monetary stimulus, real rates will remain low. It is difficult to foresee

THE END OF THE PARTY? ●

a severe crash in the real estate market. The main forecast is thus a scenario of financial and real estate volatility, as the markets search for new equilibria – on a lower level, but not dangerously lower.

But the inflated construction and real estate sectors will have to adjust and consolidate. And that process will be painful for several actors, in particular highly leveraged developers.

Klas Eklund Senior Economist Mannheimer Swartling

9

● MYTHBUSTERS: THE SWEDISH HOUSING MARKET — FACT OR FICTION?

NEWSEC PROPERTY OUTLOOK • SPRING 2018

MYTHBUSTERS:

THE SWEDISH HOUSING MARKET — FACT OR FICTION? The Swedish housing market has been one of the hottest in the world, having experienced rapidly increasing prices and an expanding supply of new apartments over the last few years. In a hot and fast-moving market, it is not always easy to keep track of and fact-check everything that is reported, sometimes leaving us with unsubstantiated myths being taken for truths. At Newsec, we remain committed to providing you with the analyses you need to make sense of it all. In this edition of Newsec Property Outlook, we have donned our Mythbusters attire and will analyse a number of these “facts” to deduce whether they are really facts – or fiction.

» THE NUMBER OF HOUSING DEVELOPERS IN STOCKHOLM HAS RISEN FROM 40 TO 400« IT HAS BEEN WIDELY REPORTED in the media that the number of housing developers in Stockholm has, over the course of just a few years, gone from 40 to 400 – a staggering tenfold increase. But how valid is this claim in reality?

The graph (1) shows the number of different active housing developers in Stockholm city between 2012 and 2017. An active housing developer is defined as a company that has completed a housing and/or apartment

project, or that has been allocated land for construction of housing. As seen in the graph, in 2012, there were 60 active housing developers, while in 2017, there were 85. Further, there were 119 different active developers between 2012 and 2014, and 158 different developers active between 2015 and 2017. This is a far cry from the 400 developers claimed to exist in 2017 – indeed, there have only been 301 different active housing developers in Stockholm over the past 10 years, and there are currently less than 200 housing developers with an ongoing project – in the entire country. There may be many who have ambitions to be housing developers in Stockholm – one attractive land allocation in 2015 received 150 applications – but an ambition to become a housing developer cannot be equated to actually being one.

1. Active Housing Developers Amount of different housing developers 100

75

50

Critics might point out that the graph only pertains to Stockholm city, and not the county as a whole – a valid point. However, we consider it likely that Stockholm county has approximately the same amount of developers as Stockholm city, and extremely unlikely that there would be an additional 315 unique developers focusing only on Stockholm county, but not Stockholm city. Further, the increase in housing developers between 2012 and 2017 amounts to approximately 40 per cent – a far cry from the 1,000 per cent increase advertised by the claim. Even if we were to compare 2017 to 2007, the increase has still only been marginally higher than 100 per cent. Hence, the claim that the number of housing developers in Stockholm has risen from 40 to 400 is deemed to be a myth.

25

FINAL VERDICT: 0 2012

10

2013

2014

2015

2016

2017

✓ TRUE

✓ MYTH

NEWSEC PROPERTY OUTLOOK • SPRING 2018

MYTHBUSTERS: THE SWEDISH HOUSING MARKET — FACT OR FICTION? ●

» THERE ARE NO AVAILABLE RENTAL APARTMENTS IN SWEDEN« IT IS OFTEN CLAIMED, in professional

and social settings alike, that Sweden is experiencing an extreme housing shortage. Many point to a chronic undersupply of housing as an underlying factor contributing to this, with a lack of building throughout much of the 1990s and 2000s said to be particularly to blame. But is it true that there are no available apartments in Sweden?

There are only just over 6,000 vacant rental apartments in Sweden, which amounts to just over 0.2 per cent of the total housing stock. This is a dramatic fall from the levels seen in the early 2000s, where in 2003 approximately 1.10 per cent, or just over 26,000 apartments, were vacant.

Hence, the amount of available apartments in Sweden has clearly fallen, and availability does appear

to be more limited – in Stockholm there were less than 800 vacant apartments in 2017 (equating to 0.10 per cent of housing stock), while Gothenburg had less than 200 (equating to 0.06 per cent of housing stock), many of which can likely be attributed to relocation vacancies.

One logical conclusion resulting from this would be that housing developers in past years should have built more, in order to address the dwindling numbers of available apartments.

However, as shown in the graph (2), a large number of apartments were actually demolished in the late 90s and early 00s, owing to difficulty finding tenants. Up until 2006, over 1,000 apartments a year were demolished for this reason. In total, from 1998 to 2007, around 22,000 apartments were demolished. Further, in the

2. Demolition of Housing Number of demolitions 5,000 4,000 3,000 2,000 1,000

It may appear that current trends point to a further decrease in available apartments. However, Newsec has noted that over the past year, significant amounts of more luxurious apartments have been built in some cities. This, has resulted in a mismatch between supply and demand, where people have a hard time finding more affordable housing. This, in turn, could lead to a reversal of current trends, and an increase in available apartments. However, new construction notwithstanding, housing demand in Sweden remains relatively substantial because of a strong economy, a lack of construction in previous decades and a significant population growth. Hence, for the time being, the claim that there are no available rental apartments in Sweden is deemed to be true, especially in affordable segments.

Demolition as a result of difficulty finding tenants

2016

2015

2013

2014

2012

2011

2010

2009

2008

2007

2006

2005

2003

2004

2002

2001

2000

1999

FINAL VERDICT: 1998

0

10-year period prior to 1998, approximately 13,000 apartments were demolished for similar reasons, meaning that in the 20 years before the last recession, a total of over 35,000 apartments were demolished due to a lack of interest from prospective tenants. It is therefore unsurprising that construction activity throughout much of the 1990s and 2000s was limited, particularly outside the three major cities.

✓ TRUE

✓ MYTH

Demolition as a result of other reasons

11

● MYTHBUSTERS: THE SWEDISH HOUSING MARKET — FACT OR FICTION?

NEWSEC PROPERTY OUTLOOK • SPRING 2018

» THE COST OF BUILDING IS RISING AT AN UNPRECEDENTED RATE« IN SWEDEN, BUILDING COSTS have long been rising relatively statically, but over the past year, many in the industry and media have raised concerns about a perceived rapid appreciation.

In February 2017, Petter Jurdell at Sabo, said that Sweden has had the highest building costs in the EU over the past ten years and in September 2017, Johan Lindholm at the Swedish Construction Workers Association, stressed that the high building costs are a “huge problem”. Finally, a report from Boverket in December 2017 concluded that ‘’high production costs are the most significant obstacle to housebuilding.’’ But are building costs really appreciating as quickly as has been portrayed?

The graph (3) shows real building costs, indexed to 2011’s values, with approximations included for 2017, pending data publication. We note that between 2011 and 2014, building costs rose at fairly similar levels year-on-year, and aside from some

3. Building Costs Building Cost/apartment area for new-build ordinary apartment buildings, indexed value 150 140 130 120 110 100 90

2011

2012

2013

2014

2015

2016

Stockholm Metropolitan Area Gothenburg Metropolitan Area Malmö Metropolitan Area Nationwide excluding Stockholm, Gothenburg and Malmö Metropolitan Areas Inflation

12

2017

negative development in Malmö, the rate of increase did not appear to vary particularly between the three major metropolitan areas, or at the nationwide level. However, since 2014, the appreciation in Stockholm has been markedly higher than in the other regions. Indeed, throughout the entire period, the rate of building cost appreciation in Stockholm has been over 20 times higher than the inflation rate. Further, we know that in 2017, building costs continued to appreciate rapidly until Q3. However, the market now indicates that this trend seems to have been shifting over the last quarter. Whether this develops into a long-term development remains to be seen. Hence, the claim that the cost of building is rising at an unprecedented rate is deemed to be mostly true, though its degree of accuracy varies slightly depending on location in the country.

FINAL VERDICT:

✓ TRUE

✓ MYTH

NEWSEC PROPERTY OUTLOOK • SPRING 2018

» WE HAVE NEVER BUILT AS MUCH HOUSING AS WE ARE BUILDING NOW«

MYTHBUSTERS: THE SWEDISH HOUSING MARKET — FACT OR FICTION? ●

Programme levels have been reached – or even exceeded. But how much truth is there to these claims?

THE AMOUNT OF NEWLY produced

housing is on the rise in Sweden, and an increasing number of newly built apartments and houses are hitting both the market, and the planning stages. This has led to a number of industry professionals and academics claiming that there has never been as much housing production as there is now, with many claiming that Million

The graph (4) shows the number of housing units produced in Sweden since 1965. As can be clearly seen, throughout the Million Programme years of 1965–1975, more than 70,000 units of housing were produced every year – with a peak of almost 110,000 in 1970. In recent years, housing production has admittedly risen, and

4. New-build housing production New housing units completed 120000 100000 80000 60000 40000 20000 2015

2010

2005

2000

1995

1990

1985

1980

1975

1970

FINAL VERDICT: 1965

0

2017 has seen the highest amount of newly built housing in 25 years. However, approximately 47,000 housing units were produced in 2017 – only just over half as many as in the least construction intensive part of the Million Programme years. Even when considering project starts, 2017 saw just over 64,000, which is substantially less than during peak years. In addition, the Swedish population has grown by almost 2.5 million since 1965, indicating that on the per capita level, the gap is substantially wider. If we look to Stockholm only, the gap is admittedly slightly narrower – since a large portion of housing production in Sweden currently is concentrated in Stockholm. However, the levels are still markedly lower than those seen in the late 60s and early 70s in the Stockholm region, even without per capita adjustment. Hence, the claim that there is more housing being built now than ever before is deemed to be a myth.

✓ TRUE

✓ MYTH

CONCLUSION: Though some of the “facts” about the Swedish housing market are true, many much reported stories appear to be myths. In a market as red hot as the Swedish one, more myths are likely to appear in the coming months. In spite of this, and some of the recent cooling which has hit the market, activity on the market is unlikely to subside. Newsec believe that housing will most likely remain a talking point among buyers, sellers, and investors alike.

Ulrika Lindmark, Head of Valuation & Strategic Analysis Co-author: Adam Tyrcha, PhD Candidate, University of Cambridge

13

● THE SWEDISH PROPERTY MARKET

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE SWEDISH PROPERTY MARKET INCREASING INTEREST FROM INTERNATIONAL INVESTORS The Swedish economy experienced strong development in 2017 and Newsec estimates that Sweden’s GDP growth was 3 per cent. The Swedish Riksbank’s first interest rate rise is expected to occur during the autumn of 2018 and the rate is predicted to reach -0,25 per cent by the end of 2018. The total transaction volume in 2017 on the Swedish property market amounted to SEK 147.5 billion over 498 transactions.

The volume for the year is 26 per cent lower than 2016’s record volume of SEK 201 billion, but is at a similar level as the transaction volume in 2015. With 37 per cent of the transaction volume Stockholm is the largest geographical segment.

Other major cities and the rest of the country accounted for 24 and 20 per cent respectively. Last year Gothenburg had a 7 per cent market share, which was lower than Malmö, but this year it recovered and accounted for 12 per cent of the year’s volume. Newsec estimates that the transaction volume in 2018 will amount to SEK 150 billion.

Contact: Anders Elvinsson, anders.elvinsson@newsec.se Alexandra Lövgren, alexandra.lovgren@newsec.se

Interesting occurrences on the Swedish property market in 2017:

THE OFFICE SEGMENT IS NO LONGER THE LARGEST Throughout the year, the office segment lost market share and at year end the segment accounted for only 18 per cent of the volume, which is the lowest figure ever recorded by Newsec. The segment’s share last year stood at 30 per cent and the previous lowest level was 26 per cent.

With 26 per cent of the volume in 2017, residential properties were the segment with the highest turnover.

However, the demand for office properties is still large, rents are increasing and in Stockholm CBD the vacancy rate is 2 per cent.

-26 %

23%

VOLUME FOR THE YEAR

FOREIGN INVESTORS

NEW AMORTIZATION REQUIREMENTS During the fourth quarter of 2017, there was a stabilisation of prices on the Swedish housing market. One explanation to this is the uncertainty caused by the newly introduced amortisation requirement, which will come into force in March 2018.

The purpose of the new amortisation requirement is to slow down the rapidly rising house prices and in turn decrease the growing levels of debt.

INCREASED CONSTRUCTION BUT NO EFFECT ON THE HOUSING SHORTAGE Construction has increased significantly and there is a large supply of newly constructed residential properties. However, the shortage of housing is not diminishing as a large number of the newly produced apartments are built in a too expensive market segment. This has led to

14

+3%

GDP GROWTH

many apartments not being sold or let at the asking price, as they are too expensive for the vast majority of the population.

INCREASING INTEREST FROM INTERNATIONAL CAPITAL Last year, three transactions with a price level above SEK 2 billion were completed. The largest transaction in 2017 was D. Carnegie Co’s pur­chase of 27 residential properties in Stockholm from Akelius at a trans­ action volume of approximately SEK 2.5 billion. Furthermore, two American companies were responsible for the second largest transaction during the year. Starwood Capital sold the shopping center Bromma Blocks to CBRE Global Investors at a

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE SWEDISH PROPERTY MARKET ●

» With 37 per cent of the transaction volume, Stockholm is the largest geographical segment«

transaction price of approximately SEK 2.2 billion. In addition, China Investment Corporation acquired nine logistics properties from Blackstone & Areim in October.

Foreign investors accounted for 23 per cent of the year’s transaction volume and for the fifth successive quarter they were net buyers on the Swedish market.

E-COMMERCE AND ITS EFFECT ON RETAIL PROPERTIES During the year, retail properties accounted for 18 per cent of the transaction volume, which amounts to a similar level to what the segment accounted for in 2015 and 2016. One major obstacle to a continuing high interest in retail properties is the growth of e-commerce. E-commerce continues to advance and has been growing at a similar stable rate from year-to-year, which puts pressure on retail properties. Nevertheless, it was recently announced that the Japanese clothing retailer Uniqlo will lease 1,580 sqm of retail space from Vasakronan in Stockholm. However, a growing trend is that large retail actors are not expanding their stores in order to increase mass sales, but rather to increase their visibility and enhance the customer experience.

15

● THE NORWEGIAN PROPERTY MARKET

16

NEWSEC PROPERTY OUTLOOK • SPRING 2018

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE NORWEGIAN PROPERTY MARKET ●

THE NORWEGIAN PROPERTY MARKET ANOTHER OUTSTANDING YEAR ON THE NORWEGIAN PROPERTY MARKET Strong property fundamentals coupled with favorable economic conditions resulted in another outstanding transaction year for the Norwegian property market. In the 4th quarter, Newsec registered 90 transactions amounting to NOK 28 billion. In the year in total, the transaction volume on the Norwegian property market amounted to NOK 88 billion with a record high of 340 transactions.

The volume for 2017 is approximately NOK 10 billion higher than the corresponding figure for 2016. With a total volume of roughly NOK 43 billion, or 50 per cent of the total transaction volume, the office segment dominated the market. Logistics and industrial properties are becoming increasingly attractive as investors are eliminated from other segments, resulting in record-high pricing for the aforementioned segments.

Geographically speaking, Oslo accounted for 50 per cent of the total volume in 2017 and secondary markets such as Trondheim and Stavanger enjoyed a notable surge in transaction velocity. Foreign investment was also a significant contributor to activity during 2017, with 20 per cent coming of the transaction volume coming from foreign investors, up from 11 per cent in 2016, but below 2015 figures of 33 per cent.

Contact:

Oyvind Johan Dahl, ojd@newsec.se

Interesting occurrences on the Norwegian property market in 2017

LONG LEASE CONTRACTS

RESIDENTIAL DECLINE

The demand for properties with long lease contracts has been high over the past six months and as a result, they are priced extremely high. This is most evident in the logistics/industrial market space, in which lease contracts with a duration longer than 10 years are yielding just above 4 percent.

The latest seasonally adjusted numbers show recorded housing sales around the same level in 2017 as in 2016, with 86 600 units sold.

December 2017 became the 8th month of continuous decline in housing prices. Residential prices on the national level are down 2.1 per cent on a year-on-year basis in December and prices in Oslo declined 6.2 per cent in the same timeframe.

COLLATERAL FROM LIFE INSURANCE COMPANIES Owing to some uncertainty regarding new financial regulations, life insurance companies are requiring collateral on the property when lending against commercial properties. Depending on the outcome of the financial restraints, the market may lose some of its liquidity.

For instance, Arctic Securities’ acquisition of Storebrand HQ, which was financed by Storebrand Life Insurance, may not have proven as lucrative in the future due to these regulations.

HOUSING DEVELOPMENT ACTIVITY Although the residential market suffered a decline in 2017, residential development proved eventful with 30,700 new housing units under development in 2017, which is a 2 per cent decline from 2016.

However, seen historically it is a high figure.

50%

INTEREST RATES Short and long-term SWAP rates are slowly appreciating after declining for the majority of 2017.

5-year and 10-year SWAPs are trading around 1.5 per cent and 2 per cent respectively while 3 month NIBOR is trading at a historically low 0.85 per cent. Newsec expect interest rates to remain at current levels throughout 2018 before appreciating again.

+13% 20%

OFFICE SEGMENT

PART OF TOTAL TRANS­ACTION VOLUME

VOLUME FOR THE YEAR FOREIGN INVESTORS

17

● THE DANISH PROPERTY MARKET

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE DANISH PROPERTY MARKET GREAT TRANSACTION ENVIRONMENT In 2017, the Danish economy experienced great stability and a GDP growth of 2 per cent. The growth is primarily a result of increasing levels of investment in gross fixed assets and a slight increase in household consumption. Additionally, the improvement is also a result of a growing population and a rising

number of jobs. Interest rates remain low, which in turn encourages private consumption and supports housing and real estate investment. All these factors combined created a great environment for the transaction and investment market during 2017. The transaction volume reached a new alltime high at DKK 84 billion, which is

an increase of 31 per cent compared to the previous year. Moreover, international investors have demonstrated significant interest in the Danish real estate market.

Contact: Anders Nilsson, anders.nilsson@newsec.dk

Interesting occurrences on the Danish property market in 2017:

E-COMMERCE NOT AS THREATENING AS EXPECTED In terms of the amount of footfall, the two luxury shopping streets in Copenhagen, Amagertorv and Kobmagergade, were ranked as the fourth and fifth busiest shopping streets in Europe in 2017. As physical stores and online stores have become better at complementing one another, physical stores in Copenhagen are not as threatened by the growing e-commerce market as one might expect. Figures from the Danish Chamber of Commerce demonstrate that 25 per cent of all purchases in stores begin with an online examination, with the aim to collect enhanced information about the product.

THE RETAIL MARKET IS INCREASING ITS MARKET SHARE When looking at the total transaction volume and the various segments, the retail segment took a larger market share than the office segment, which mainly is a result of large shopping center transactions. In December 2017, the Danish pension fund, Danica, bought a large portfolio of retail centers for DKK 6.9 billion. The residential, office and retail segments are the main drivers of the property

18

+2 % +31 %

GDP GROWTH VOLUME FOR THE YEAR

prime properties in Copenhagen. Increased demand and greater interest from pension funds have contributed to price increases for residential properties in Aarhus and Aalborg. For example, PKA and A. Enggaard are constructing 280 apartments with a total cost of DKK 400 million.

HIGH POPULATION GROWTH

75%

OFFICE, RETAIL AND RESIDENTIAL PART OF TOTAL TRANS­ACTION VOLUME

market and account for approximately 75 per cent of the total transaction volume.

INCREASED INTEREST OUTSIDE OF COPENHAGEN The residential market is mainly driven by high demand in Copenhagen, but investors also seek investment opportunities outside of Copenhagen, in areas including North Zealand, East Jutland/Aarhus, Aalborg and the Triangle Area in Jutland. These areas all possess great development potential; however, they are associated with a higher level of risk than

Between the years 2007–2017, the population in Copenhagen has increased by 18 per cent and it is estimated that the population will experience continued growth, increasing with an additional 100,000 people by the end of 2027. The high population growth has led to high demand for residential properties, in particular smaller apartments for students, which in turn has caused substantial price increases in 2017. Between the years 2012–2017, the price increase in residential properties was 55 per cent. The average price per square meter in Copenhagen is DKK 38,500, which is higher than the previous all-time-high level reached in 2007.

Banks and mortgage institutions maintain a cautious lending policy and property investments are largely financed by equity.

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE DANISH PROPERTY MARKET ●

» The residential market is mainly driven by high demand in Copenhagen, but investors also seek investment opportunities outside of Copenhagen«

19

● THE FINNISH PROPERTY MARKET

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE FINNISH PROPERTY MARKET NEW RECORD VOLUME IN 2017 Owing to strong demand for export goods and increased price competitiveness, the Finnish economy is in a strong position. Economic growth is forecast to continue throughout 2018 and the robust economy has been reflected in the real estate market. The transaction volume hit a new record in 2017, of EUR 10.2 billion. International investors accounted for almost 70 per cent of the transaction volume and commercial properties comprised more than 80 per cent of the total volume.

Residential properties only accounted for 10 per cent of the volume (EUR 1.05 billion), which is a significant decrease compared to 2016 when residential properties accounted for approximately 38 per cent. As yield levels in many university cities are relatively high compared to the levels in the Helsinki Metropolitan Area (HMA), properties located outside the HMA became more attractive during 2017. Having considered the improved economic outlook, low interest rates and the attractiveness of Finland as an investment opportunity in the eurozone, Newsec predicts that 2018 will be an active investment year, and the transaction volume is estimated to reach EUR 7–8 billion.

Contact: Kauri Melakari, kauri.melakari@newsec.fi

20

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE FINNISH PROPERTY MARKET ●

» The transaction volume in Finland is estimated to reach EUR 7–8 billion during 2018«

Interesting occurrences on the Finnish property market in 2017:

TWO MAJOR PORTFOLIO DEALS One explanatory factor for the record volume in 2017 was two major portfolio deals: Blackstone’s acquisition of Sponda (EUR 3.7 billion) and the Finnish portfolio of Logicor (slightly below EUR 1 billion) being acquired by CIC.

TRANSACTIONS EXCEEDING A VOLUME OF EUR 150 MILLION During 2017, more than ten property transactions exceeding a volume of EUR 150 million were made in Finland. In addition, during the second half of 2017 several individual office property transactions were completed in the HMA. A fund managed by Deutsche Asset Management in Germany acquired two office buildings and a parking facility (parts of Nokia’s former head office) in Keilaniemi, Espoo. The transaction volume for the 31,000 sqm property amounted to EUR 164 million (EUR 5,290 / sqm). Further, CNP Assurances and Hines acquired a new office property in Helsinki CBD at Kasarmikatu 21.

DECREASED YIELDS The yields for prime office and retail properties decreased during 2017. Prime yields for Helsinki CBD office properties are currently at a level of 3.7 per cent. Moreover, the yield levels have decreased in prime office submarkets such as the Keilaniemi district in Espoo.

MAJOR RESIDENTIAL PROPERTY TRANSACTIONS The most significant transaction on the residential property market was when Barings Real Estate Advisers acquired seven residential properties (housing 301 apartments) from Varma Mutual Pension Insurance Company, amounting to a transaction volume of EUR 43 million. Another major residential property transaction was made in October when the construction company SRV and Local Tapiola Asuntosijoitus Suomi Ky agreed on the construction of approximately 300 rental apartments (for approx. EUR 60 million) in the cities of Espoo, Kerava and Turku.

INCREASED CONSTRUCTION ACTIVITY Construction activity continued to increase in Finland, in growth areas in particular. In 2017, more than 100,000 sqm of new retail premises and more than 85,000 sqm of new office premises were constructed in the HMA. Overall, the volume of retail and office production increased by 3.8 per cent on a year-on-year basis. During the same period, the volume of residential property construction increased by 7.6 per cent.

70%

INTERNATIONAL INVESTORS

21

● THE ESTONIAN PROPERTY MARKET

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE ESTONIAN PROPERTY MARKET INCREASING DEMAND FOR ESTONIAN PROPERTIES In 2017, the real estate market in Estonia was active and the transaction volume amounted to EUR 188 million, with the second quarter being the most active during the year. The retail segment accounted for almost half the transaction volume – 48 per cent. Many new attractive commercial

projects are currently under construction. Therefore, the demand for real estate is increasing, which in turn puts downward pressure on yields.

Prime office and retail properties are currently trading at a yield of 6.50 and 6.75 per cent respectively, which is a decrease from previous years. In 2017

residential market in Tallinn continued to demonstrate strong growth with a 16 per cent increase since 2016.

Contact: Gintaras Tolocka, g.tolocka@newsec.lt

Interesting occurrences on the Estonian property market in 2017:

RESIDENTIAL PRICES REACH ALL TIME HIGH

INCREASED INTEREST IN RETAIL PROPERTIES

During the year, the average price of apartments in Tallinn reached an all-time high of 1,750 euros per sqm, which is 8 per cent higher than the previous peak in 2007. Despite the high volume of new development, prices continued to rise throughout the year. Due to rapidly rising wages and salaries, price increases are expected to continue short term.

The construction of two large shopping centers, T1 and Porto Franco, is currently under development in Tallinn. Due to delays in the construction phase, the inauguration is expected to take place Q4 2018 for T1 and in 2019 for Porto Franco. One of the largest retail transactions during the year was when Postimaja shopping center, located in Tallinn CBD, was sold to the Baltic Horizon Fund.

The Baltic Horizon Fund paid EUR 34.4 million for the center and has the ambition to develop the property further in order to create synergy with other nearby properties in the fund’s portfolio.

INCREASED NUMBER OF BUILDING PERMITS More than one hundred apartment projects are currently under development in Tallinn. In 2017, 2,500 new apartments were completed, which is approximately 23 per cent more than the number of apartments completed in 2016. Owing to a 64 per cent increase in building permits issued on a year-on-year basis, planned residential construction in 2018 is expected to increase even further.

22

CONSTRUCTION OF A NEW HOTEL IN CENTRAL TALLINN The French hotel group AccorHotels announced in 2017 that the company is investing more than EUR 12 million into building a new hotel with 190 rooms in Tallinn City Centre. The project has an estimated construction start in Q1 2018.

48%

RETAIL SEGMENT

PART OF TOTAL TRANS­ACTION VOLUME

+23%

MORE APARTMENTS COMPLETED COMPARED TO 2016.

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE LITHUANIAN PROPERTY MARKET ●

THE LITHUANIAN PROPERTY MARKET IMPORTANT YEAR FOR SMALLER LITHUANIAN CITIES Over the past few years, the Lithuanian real estate market has been very active. With a continuing interest for commercial and residential properties from both local and international investors, 2017 was no exception. Even though many development projects are planned in Vilnius in the near future, 2017 was an important year for smaller Lithuanian cities such as Kaunas and Klaipeda. Developers are starting to demonstrate higher levels of confidence in these smaller cities, leading to larger investments in commercial and residential projects outside of Vilnius. Additionally, international institutional investors and funds are also demonstrating strong interest in high quality commercial property projects. In total throughout the year, the transaction volume on the Lithuanian property market amounted to EUR 315 million, which is 15 per cent higher than the corresponding figure for 2016.

Retail and offices were the most active segments during the year and accounted for nearly 80 per cent of the transaction volume. In addition, the logistics segment took nearly 15 per cent market share. Prime office and retail properties are currently yielding 6.5–6.75 per cent, while prime industrial properties yields are at 7.75–8.00 per cent.

Contact: Gintaras Tolocka, g.tolocka@newsec.lt

Interesting occurrences on the Lithuanian property market in 2017:

A TRANSFORMING OFFICE ENVIRONMENT In the past few years, the Vilnius area has been the prime market for office properties in Lithuania. The Kaunas office market was almost non-existent until 2017, when 11 new office properties with a total area of 44,000 sqm were inaugurated. Moreover, 17 new properties with a total area of 99,000 sqm are coming to the market in the near future. Kaunas office market is changing remarkably and is expected to have first true A-class buildings in 2018–2019.

LARGE RETAIL TRANSACTIONS The largest retail portfolio transaction occurred when W.P. Carey acquired 70 per cent of the shares of UAB Baltic Retail Properties for a transaction volume of EUR 127 million. The retail portfolio consists of a total area of 180,000 sqm, with the primary component of the deal being 11 retail stores located in different Lithuanian cities.

FREE ECONOMIC ZONES Lithuania has six Free Economic Zones operating in the regional cities of the country. In 2017, these FEZ’s attracted significant foreign investors such as Continental, Hella, Devold, IMG and Dovista.

Over the next few years, these international companies are planning to invest hundreds of millions EUR, creating thousands of new jobs in the regional cities of Lithuania.

EXPANDING HOTEL MARKET In 2017, the hotel market in Lithuania expanded and is expected to continue growing in the near future. Six new projects are currently under construction and seven projects, with up to 2,000 guest rooms, are in the planning stages. Most of these new projects will be situated in the central parts of Vilnius, and 75 per cent will be dominated by international hotel groups. Indeed, a number of international hotel groups, such as Hilton, Marriott and Design Hotels will start operating in Vilnius and open their first hotels over the next couple of years.

INCREASING RESIDENTIAL PRICES In 2017, residential property developers sold almost 3,800 apartments in Vilnius, which is 10 per cent lower than the corresponding figure in 2016. For a few quarters in a row, owing to the high level of production, the supply of apartments has been greater than demand leading to a lower amount of transactions. How­ever, the average price for newly produced apartments increased by 3.5 per cent and is now above EUR 1,800/sqm.

+15 %

VOLUME FOR THE YEAR

23

● THE LATVIAN PROPERTY MARKET

24

NEWSEC PROPERTY OUTLOOK • SPRING 2018

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE LATVIAN PROPERTY MARKET ●

THE LATVIAN PROPERTY MARKET HIGHER EXPECTATIONS ON OFFICE PREMISES In 2017, the Latvian property market was active. The positive trends during 2017 were primarily the resumption of prolonged project construction, development continuation and the reconstruction of existing office and retail properties. The changing environment is mainly due to a lack of high quality premises and more extensive client requirements in terms of sustainability. In addition, new companies are entering the Latvian market and have higher expectations on their office premises. In total, the transaction volume on the Latvian property market in 2017 amounted to EUR 160 million, which is a substantial decrease from the previous year when the corresponding figure was EUR 330 million.

Contact: Gintaras Tolocka, g.tolocka@newsec.lt

Interesting occurrences on the Latvian property market in 2017:

RIGA’S LARGEST OFFICE COMPLEX

RETAIL CHAIN TRANSACTION ACTIVITY

In 2017, the largest office complex in Riga, Place Eleven, entered the market with total area of 24,000 sqm divided over 14 storeys. The total amount of investment into the project exceeded EUR 20 million.

Prime office properties are currently yielding 6.8 per cent with an average price of EUR 13–16/sqm for A-class offices.

The closure of the “Prisma” stores in Latvia and Lithuania was a significant event in 2017. The event led to increased competition among large trade chains in terms of identifying the most profitable and vacant premises, including the inauguration of two supermarkets in previously Prisma-owned premises. Further, the German low-price grocery store Lidl has plans to enter the Latvian market which has led to high levels of retail chain transaction activity.

AKROPOLE SHOPPING CENTRE In December 2017, an agreement for the bank co-financing of the construction of the Akropole shopping centre was signed, worth EUR 106.5 million. The total project investment is EUR 177 million, which means that it is the largest development project in Latvia and in the Baltics during 2017. Akropole will be the first newly constructed multifunctional shopping and entertainment centre in Riga since 2009. The centre will have a total area of 100,000 sqm, with 10,000 sqm intended for offices.

EXPANSION OF SHOPPING CENTRES In 2017, two large shopping malls in Riga, Alfa and Origo, initiated their expansion. The development and expansion of these properties is expected to cost tens of millions EUR and will be conducted with the help of the latest technologies, in accordance with BREEAM certifications.

INCREASED INTEREST FROM INTERNATIONAL INVESTORS Due to Riga’s strategic location, the city is growing and is attracting international investors and hotel groups. For example, the world renowned Grand Hotel Kempinski entered the Riga market towards the end of 2017. The hotel-project amounted to a total investment amount of EUR 30 million.

–52 %

VOLUME FOR THE YEAR NEW COMMERCIAL PROJECTS

25

● NORDIC PROPERTY FINANCING

NEWSEC PROPERTY OUTLOOK • SPRING 2018

NORDIC PROPERTY FINANCING

INCREASED LEVELS OF ALTERNATIVE LENDING AND INTERESTING FUTURE FOR CROWD FUNDING The Swedish financing market is tightening and the banks are in general becoming more reluctant to lend. Project financing is becoming narrower but the capital market is strong and continues to grow. However, the capital market also remains slightly more volatile than what could be expected. In addition, alternative lending such as direct lending is evolving. A number of players are trying to streamline the direct lending market, which constitutes an attractive alternative lenders market while the traditional banks are hauling back.

Traditional banks With a few clear exceptions, the senior lending banks appear to be more careful when considering new business.

LTVs are decreasing and banks reject a large number of borrowers as they feel uncertain regarding the future economic situation. A number of banks are still accepting new business and are thereby given the opportunity to cherry-pick and attract high quality borrowers.

Fixed income The bond market is still strong and growing. There is an increasing appreciation for the value of security mass and an even more diversified spread regarding LTV and price. Bond investors are hungry for volume and hopefully, there will be room for both larger and smaller lenders.

Direct lending An increasing number of transactions are performed with direct lending from institutions and an investment

bank or an agent of some kind in between. This is a strong opportunity for the institutions to be able to receive yield for sound risk and for lenders to receive loans from strong actors.

A couple of players are working on streamlining this market, which is highly intriguing. This could lead to the market becoming more transparent and a smoother way to conduct business.

Smaller banks and bilateral lenders The market for smaller banks and bilateral lenders is growing. Due to a sound understanding for the business and an effective credit process, a number of actors occupy a continually strong position. Some actors are growing and it will be exciting to follow them as they evolve in market cap and have increasing opportunities for volume.

Crowd funding Given the possibility to fill the gap left by senior lenders and equity,

crowd funding will have an even more eventful future. In this field, one actor is particularly interesting to follow as they are increasing their investor base further and are streamlining their credit process. For high net worth individuals and similar, crowd funding should become an even more interesting choice to receive a diversified yield on their placement.

In general, there will no doubt be challenges to come. Therefore it is increasingly important to focus on a stable cash flow and healthy gearing.

However, with the right contacts, the right structure and the right documentation we will continue to have a robust and strong financing market.

Contact: Mats Karlsson, mats.karlsson@newsec.se

» In general, there will no doubt be challenges to come.

However, with the right contacts, the right structure and the right documentation we will continue to have a robust and strong financing market«

26

NEWSEC PROPERTY OUTLOOK • SPRING 2018

NORDIC PROPERTY FINANCING ●

DO YOU WANT TO LEARN MORE ABOUT A SPECIFIC SEGMENT? CHECK OUT OUR MARKET REPORTS TO GET THE LATEST UPDATES Through Newsec’s digital customer portal you get access to all our market reports with the latest and sharpest analyses.

To learn more, please visit: newsec.se/marknadsrapporter, or contact: fredrik.lovberg@newsec.se

27

● OUTLOOK FOR THE NORTHERN EUROPEAN PROPERTY MARKET

NEWSEC PROPERTY OUTLOOK • SPRING 2018

OUTLOOK

FOR THE NORTHERN EUROPEAN PROPERTY MARKET Due to our local presence in all the Nordic countries as well as in the Baltics, Newsec is able to make predictions continuously about the commercial property market in Northern Europe. The basis for our forecast is our perspective regarding the macroeconomic development of the countries in the region and how that, in turn, will affect the commercial property market.

associated risk, office properties in Stockholm is the most profitable within the segment. However, the total return earned in the office segment is expected to decrease from this year’s level of 7.5 per cent to 3.7 per cent in 2019. In addition, the estimated total return in the residential and retail segments in the Nordics ranges from 2–3 per cent, which constitutes signif-

When looking at the various segments in the Nordic region, the segment expected to earn the highest total return in 2018 is logistic properties, with logistics in Finland being the sub-segment earning the highest risk-adjusted return. In addition, the office segment in the Nordics is expected to earn levels of return slightly below logistics and in relation to the

» Investors chasing maximum capital growth during the years 2018–2020 should allocate capital towards offices in prime locations in Copenhagen and Oslo« Expected Average Capital Growth 2018E–2019E Average Capital Growth, Percent

Source: Newsec

12 10 8 6 4 2

28

Residential

Office Malmö Prime

Retail Stockholm CBD

Logistics Malmö – Category A

Retail Riga Prime

Office Tallinn Prime

Residential HMA Prime

Retail Tallinn Prime

Retail Vilnius Prime

Retail Malmö Prime

Office HMA CBD

Office Stockholm CBD

Office Riga Prime

Office Vilnius Prime

Retail HMA Prime

Logistics Tallinn Prime

Retail Copenhagen Prime

Logistics HMA – East Prime

Logistics Göteborg – Category A

Logistics Riga Prime

Retail Göteborg Prime

Office Göteborg Prime

Logistics Vilnius Prime

Residential Stockholm Prime

Logistics

Logistics Stockholm – Category A

Retail

Logistics Oslo – Category A

Retail Oslo Prime Retail

Residential Malmö Prime

Office Oslo CBD

Office

Residential Göteborg Prime

Office Copenhagen Prime

0 -2

icantly lower levels than previously.

For comparison, the average level of total return during the past ten years in these two segments is 9 per cent.

In the Baltics, the logistics segment is expected to earn levels of total return well above the levels of the office and retail segment in 2018. In the future however, the latter two segments are expected to take market share from the logistics segment and there are expectations that both the retail and office segments will earn total returns in the region of 10 per cent. The logistics segments will still earn the highest level of total return, but at a substantially higher level of risk.

Investors chasing maximum capital growth during the years 2018–2020 should allocate capital towards offices in prime locations in Copenhagen and Oslo. However, these segments have a volatility of 6 and 11 per cent respectively, indicating that the risk averse investor should favour Copenhagen.

Other segments that have high levels of expected average capital growth are retail properties in Oslo and residential properties in prime locations in Gothenburg. However, these segments have approximately the same levels of standard deviation as the previously mentioned segments.

Segments expected to have negative capital growth are primarily office properties in prime Malmö and retail properties in Stockholm CBD.

NEWSEC PROPERTY OUTLOOK • SPRING 2018

OUTLOOK FOR THE NORTHERN EUROPEAN PROPERTY MARKET ●

Total Return | Baltic Region

Total Return | Nordic Region Percent

Source: Newsec

18

Source: Newsec

25

16 14

20

12

15

10 8

10

6 4 2 0

Percent 30

20

5 2012

2013

Prime Office

2014 Prime Retail

2015

2016

Prime Residential

2017

2018E

Prime Logistics

0

2012

2013

Prime Office

2014 Prime Retail

2015

2016

2017

2018E

Prime Logistics

29

● MACROECONOMIC DATA

NEWSEC PROPERTY OUTLOOK • SPRING 2018

MACROECONOMIC DATA Get the complete forecast

Sweden Interest Rates

Economic Indicators Per cent

Source: SCB, Newsec

Per cent

Source: Swedbank, Swedish Central Bank

3

4 3

2

2 1 1 0

0 -1

2011

2012

2013

2014

2015

GDP, Annual Percentage Change Inflation, Yearly Average

2016

2017

2018E

-1

2011

2012

2013

2014

Central Bank Interest Rate

Private Consumption

2015

2016

2017

2018E

STFIX 5Y

STIBOR 3M

Employment

Norway Economic Indicators

Interest Rates

Per cent

Source: BNP

5

Per cent

Source: BNP

4

4 3 3 2

2

1 1

0 -1

2011

2012

2013

2014

GDP, Annual Percentage Change Inflation, Yearly Average

2015

2016

2017

2018E

0

2011

2012

2013

2014

Central Bank Interest Rate

Private Consumption

2015

2016

2017

2018E

SWAP 5Y

NIBOR 3M

Employment

Finland Interest Rates

Economic Indicators Per cent

Source: BNP

Per cent

Source: BNP

3

4 3

2 2 1

1 0

0 -1 -2

2011

2012

2013

2014

GDP, Annual Percentage Change Inflation, Yearly Average

30

2015

2016

2017

Private Consumption Employment

2018E

-1

2011

2012

2013

Central Bank Interest Rate

2014

2015

2016

EURIBOR 3M

2017 SWAP 5Y

2018E

NEWSEC PROPERTY OUTLOOK • SPRING 2018

MACROECONOMIC DATA ●

ZOOM IN

Denmark Interest Rates

Economic Indicators Per cent

Source: BNP

Per cent

3

3

2

2

1

1

0

0

-1

2011

2012

2013

2014

GDP, Annual Percentage Change Inflation, Yearly Average

2015

2016

2017

2018E

-1

2011

Source: BNP

2012

2013

2014

Central Bank Interest Rate

Private Consumption

2015 CIBOR 3M

2016

2017

2018E

SWAP 5Y

Employment

Estonia Interest Rates

Economic Indicators Per cent

Source: BNP

Per cent

Source: BNP

3

10 8

2

6 4

1

2 0

0

-2 -4

2011

2012

2013

2014

GDP, Annual Percentage Change Inflation, Yearly Average

2015

2016

2017

2018E

-1

2011

2012

EURIBOR 3M

Private Consumption

2013

2014

2015

2016

2017

2018E

SWAP 5Y

Employment

Latvia Interest Rates

Economic Indicators Per cent

Source: BNP

6

Per cent

Source: BNP

3

4

2

2 1 0 0

-2 -4

2011

2012

2013

2014

GDP, Annual Percentage Change Inflation, Yearly Average

2015

2016

2017

Private Consumption

2018E

-1

2011

2012

RIGIBOR 3M

2013

2014

2015

2016

2017

2018E

EURIBOR 3M

Employment

31

● MACROECONOMIC DATA

NEWSEC PROPERTY OUTLOOK • SPRING 2018

MACROECONOMIC DATA Get the complete forecast

Lithuania Interest Rates

Economic Indicators Per cent

Per cent

Source: BNP

6

3

4

2

2

1

0

0

-2

2011

2012

2013

2014

GDP, Annual Percentage Change Inflation, Yearly Average

2015

2016

2017

-1

2018E

Employment

GDP Growth GDP Growth 2017—2018E Source: Newsec/BNP

4

3

2

1 2017 2018E

0 Sweden

2017

32

Norway

Finland

2018E

Denmark

Estonia

Latvia

2012

VILIBOR 3M

Private Consumption

Per cent

2011

Source: BNP

Lithuania

2013

2014

EURIBOR 3M

2015

2016

2017

2018E

NEWSEC PROPERTY OUTLOOK • SPRING 2018

PROPERTY DATA ●

PROPERTY DATA

ZOOM IN

Office rents Prime Office Rents (CBD) | Nordic Region

Source: Newsec

Per cent

EUR/m2

9

1000

8

900

7

800

6 5

700 600

4

500

3

400

2

300

1 0

200

-1

0

Prime Office Rents (CBD) | Baltic Region

Malmö

Oslo

Helsinki

Copenhagen

EUR/m2

7

210

6

180

5

150

4

120

3

90

2

60

1

30

100 Stockholm Gothenburg

Source: Newsec

Per cent

0

Tallinn

Riga

Vilnius

Average Annual Rental Growth 2011—2017 (left axis)

Average Annual Rental Growth 2011—2017 (left axis)

Average Annual Rental Growth 2018E—2020E (left axis)

Average Annual Rental Growth 2018—2020E (left axis)

Rent Level 2018E (right axis)

Rent Level 2018E (right axis)

0

Office yields Prime Office Yields | Baltic Region

Prime Office Yields | Nordic Region Per cent

Source: Newsec

Per cent

Source: Newsec

10

6,0 5,5

9 5,0 8

4,5 4,0

7 3,5 3,0

2011

2012

2013

Stockholm Oslo

2014

2015

Gothenburg Helsinki

2016

2017

2018E

6

2011

2012

Tallinn

Malmö Copenhagen

2013

2014

Riga

2015

2016

2017

2018E

Vilnius

Retail rents Prime Retail Rents | Nordic Region

Source: Newsec

Per cent

EUR/m2

12

4000

9

3000

6

2000

3

1000

0

Stockholm Gothenburg

Malmö

Oslo

Helsinki

Copenhagen

0

Prime Retail Rents | Baltic Region

Source: Newsec

Per cent

EUR/m2

3

300

2

200

1

100

0

Tallinn

Riga

Average Annual Rental Growth 2011—2017 (left axis)

Average Annual Rental Growth 2011—2017 (left axis)

Average Annual Rental Growth 2018—2020E (left axis)

Average Annual Rental Growth 2018—2020E (left axis)

Rent Level 2018E (right axis)

Rent Level 2018E (right axis)

Vilnius

0

33

● PROPERTY DATA

NEWSEC PROPERTY OUTLOOK • SPRING 2018

PROPERTY DATA Get the complete forecast

Retail yields Prime Retail Yields | Nordic Region

Prime Retail Yields | Baltic Region

Per cent

Source: Newsec

6,0

Per cent

Source: Newsec

10

5,5

9

5,0 8 4,5 7

4,0 3,5

2011

2012

2013

Stockholm Oslo

2014

2015

Gothenburg Helsinki

2016

2017

2018E

6

2011

Malmö Copenhagen

2012

Tallinn

2013

2014

Riga

2015

2016

2017

2018E

Vilnius

Logistics rents Prime Logistics Rents | Nordic Region

Source: Newsec

Per cent

EUR/m2

6

150

4

100

2

50

0

Stockholm

Gothenburg

Malmö

Oslo

Helsinki - East

0

Prime Logistics Rents | Baltic Region

Source: Newsec

Per cent

EUR/m2 100

10 8

80

6

60

4

40

2

20

0

Tallinn

Riga

Vilnius

Average Annual Rental Growth 2011—2017 (left axis)

Average Annual Rental Growth 2011—2017 (left axis)

Average Annual Rental Growth 2018—2020E (left axis)

Average Annual Rental Growth 2018—2020E (left axis)

Rent Level 2018E (right axis)

Rent Level 2018E (right axis)

0

Logistics yields Prime Logistics Yields | Nordic Region

Prime Logistics Yields | Baltic Region

Per cent

Source: Newsec

Per cent

8

11

7

10

6

9

5

8

4

2011

2012

Stockholm Oslo

34

2013

2014

Gothenburg Helsinki - East

2015

2016 Malmö

2017

2018E

7

Source: Newsec

2011

2012

Tallinn

2013 Riga

2014

2015 Vilnius

2016

2017

2018E

NEWSEC PROPERTY OUTLOOK • SPRING 2018

PROPERTY DATA ●

ZOOM IN

Residential rents Prime Residential Rents | Nordic Region

Source: Newsec

Per cent

EUR/m2

10

500

8

400

6

300

4

200

2

100

Prime Residential Yields | Nordic Region Per cent

Source: Newsec

5

4

3

0

Stockholm

Gothenburg

Malmö

0

Helsinki

2

1

2011

Average Annual Rental Growth 2011—2017 (left axis)

2012

2013

Stockholm

2014

Gothenburg

2015

2016 Malmö

2017

2018E

Helsinki

Average Annual Rental Growth 2018E—2020E (left axis) Rent Level 2018E (right axis)

Annual transaction volumes Transaction Volumes — Annual | Nordic Region

Transaction Volumes — Annual | Baltic Region

BEUR

Source: Newsec

MEUR

Source: Newsec

500

20

400

15

300 10

200 5

100

0

2011

2012

Sweden

2013

2014

Norway

2015

2016

Finland

2017

2018E

0

2011

2012

2013

Estonia

Denmark

2014

Latvia

2015

2016

2017

2018E

Lithuania

Quarterly transaction volumes Transaction Volumes — Quarterly | Nordic Region BEUR

Transaction Volumes — Quarterly | Baltic Region Source: Newsec

8

MEUR

Source: Newsec

250 200

6

150 4 100 2

50

0

0 2011

2012

2013

Sweden

2014

2015

Norway

2016

Finland

2017

2018E

Denmark

2011

2012

Q1 Q3 2010 2010 Q1 2010

Q3 2010

Q1 2011

Q3 2011

Q1 2012

Q3 2012

Q1 2013

Q3 2013

Q1 2014

Q3 Q1 Q3 2014 2015 2015

2013

Estonia

Q1 2011

2014

Latvia

Q3 2011

2015

2016

2017

2018E

Lithuania

35 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2012 2012 2013 2013 2014 2014 2015 2015 2016

● PROPERTY DATA

NEWSEC PROPERTY OUTLOOK • SPRING 2018

PROPERTY DATA

ZOOM IN

Get the complete forecast

Office stock

Office new construction Office New Construction (Capital Office Market) Thousand m2

Source: Newsec Per cent of stock

200

10

160

8

120

6

80

4

Office Stock Q4 2017 (Capital Office Market) Million m2

Source: Newsec

14 12 10 8 6 4

40

2

0

0

Stockholm

Oslo

2017 (left axis)

36

HMA

Copenhagen Tallinn

2018E (left axis)

Riga

Vilnius

2018E (right axis)

2 0

Stockholm

Oslo

HMA

Copenhagen Tallinn

Riga

Vilnius

NEWSEC PROPERTY OUTLOOK • SPRING 2018

DEFINITIONS ●

DEFINITIONS Offices • In the Nordic region, the forecast refers to new or newly refurbished modern and flexible office premises with normal area efficiency.

• In Finland, the forecast refers to office premises with normal area efficiency in office buildings in office areas.

• The size of the premises is assumed to be around 1 000 m2.

Retail •R ent levels refer to attractive, mod­ ern High-Street or centrally located shopping-centre retail premises with a prime location on the High Street or in the shopping centre.

• I n Norway, rents refer only to shopping centres.

• The rents do not refer to premises used for groceries and daily necessities (except in the Baltic region).

Logistics

• I n the Nordic region the size of the premises is assumed to be 5 000— 20 000 m2 with 5—10 years lease agreement.

• In the Baltic region the size of the premises is assumed to be from 3 000 m2 with 3—5 years lease agreement.

• I n the Nordic region the rent excludes heating and Property Tax.

• The size of the premises is assumed to be around 250 m2.

• I n the Baltic region the market rent excludes all applicable taxes.

• In Sweden the market rent includes heating and excludes Property Tax.

• The rent excludes heating and Property Tax in all Nordic countries except Finland where heating and Property Tax are included.

Residential •T he forecast refers to attractive locations.

• In Finland the market rent includes heating and Property Tax.

• In the Baltic region the market rent excludes all applicable taxes.

• In the Baltic region, the forecast refers to new or newly refurbished stand-alone modern business centres.

• I n Norway and Denmark the market rent excludes heating and Property Tax. • In the Baltic region the market rent excludes all applicable taxes.

•T he standard assumes buildings constructed in the late 1990s and with an apartment area of around 60—70 m2.

•T he rent includes heating and Property Tax. Exchange rates All rents and transaction volumes are calculated using exchange rates from January 2018.

NEWSEC’S ANALYSIS PRODUCTS Thanks to Newsec’s comprehensive knowledge we are able to offer a number of analysis and market reports which give you a valuable summary of the property market.

Order your English report at www.newsec.com/insights/market-reports/ Order your Swedish report at www.newsec.se/insikter--rapporter/marknadsrapporter/

37

● THE FULL SERVICE PROPERTY HOUSE IN NORTHERN EUROPE

NEWSEC PROPERTY OUTLOOK • SPRING 2018

THE FULL SERVICE PROPERTY HOUSE IN NORTHERN EUROPE Newsec — The Full Service Property House in Northern Europe — is by far the largest specialised commercial property firm in Northern Europe.

Newsec manages more properties and carries out more transactions, more lettings and more valuations than any other firm in Northern Europe.

Through this great volume, and the knowledge and depth of our various operations, we acquire extensive and detailed knowledge of the real estate market. In turn, we can quickly identify business opportunities that create added value.

and property management companies First Newsec Asset Management and TM Partner were acquired in 2012. In 2013, Newsec acquired Jones Lang LaSalle’s Swedish property management operation. In 2017, Newsec grew with the acquisitions of Norwegian Basale and Danish Datea, further strengthening the position within Property Asset Management.

Newsec was founded in 1994 and is today a partner-owned company with some 2 000 co-workers spread

across the seven Nordic and Baltic markets. Newsec has approx. EUR 39 billion under management and annually signs lease agreements of some 760 000 square meters, manages transactions of some EUR 3 billion and does real estate valuations of underlying property worth almost EUR 180 billion. Thanks to large volumes, local presence combined with in-depth understanding of a range of businesses, Newsec has a unique expertise of the real estate market in northern Europe.

Our prime market is Northern Europe, but through our alliance membership with BNP Paribas Real Estate, we offer our services on the global market. This makes Newsec Northern Europe’s only full service property house, and provides us with a unique ability to forecast the future.

A history of growth Newsec is the result of a unique history of growth, characterised by constant originality of thinking. The first issue of the comprehensive market analysis, Newsec Property Outlook, was published in 2001.

The Group expanded internationally into Finland in 2001, Norway in 2005, the Baltic countries in 2009 and Denmark in 2016. The Norwegian asset

OULU

TRONDHEIM

TAMPERE BERGEN OSLO STOCKHOLM

HELSINKI TALLINN

GOTHENBURG RIGA AARHUS COPENHAGEN

38

MALMÖ

VILNIUS

NEWSEC PROPERTY OUTLOOK • SPRING 2018

CONTACT AND ADDRESSES ●

CONTACT AND ADDRESSES Sweden

Norway

Finland

Estonia

info@newsec.se

info@newsec.no

info@newsec.fi

info@newsec.ee

Stockholm Stureplan 3 P.O. Box 7795 SE-103 96 Stockholm, Sweden Tel: +46 8 454 40 00

Oslo Filipstad Brygge 1 P.B. 1800 Vika NO-0123 Oslo, Norway Tel: +47 23 00 31 00

Helsinki Mannerheiminaukio 1 A P.O. Box 52 FI-00101 Helsinki, Finland Tel: +358 207 420 400

Tallinn Roseni av. 7 EE-10111 Tallinn, Estonia Tel: +372 664 5090

Stockholm Humlegårdsgatan 14 P.O. Box 5365 SE-102 49 Stockholm, Sweden Tel: +46 8 55 80 50 00

Trondheim Beddingen 8, 3. etg.

NO-7042 Trondheim, Norway Tel: +47 98 67 (24t)

Tampere Aleksanterinkatu 32 B FI-331 00 Tampere, Finland Tel: +358 207 420 400

Latvia

Gothenburg Sankt Eriksgatan 5 P.O. Box 11405 SE-404 29 Göteborg, Sweden Tel: +46 31 721 30 00

Denmark

Gothenburg Kungsportsavenyn 33, 5 tr SE-411 36 Göteborg, Sweden Tel: +46 31 733 86 00 Öresund Office Davidshallsgatan 16 SE-211 45 Malmö, Sweden Tel: +46 40 631 13 00

Newsec Advisory in Denmark info@newsec.dk Copenhagen Silkegade 8 1113 Copenhagen Tel: +45 33 14 50 70 Aarhus Banegårdspladsen 20 8000 Aarhus C Tel: +45 87 31 50 70

info@newsec.lv

Riga Vilandes av. 1–16 LV -1010 Riga Tel: +371 6750 84 00

Lithuania info@newsec.lt

Vilnius Konstitucijos ave. 21C, Quadrum North, 8th floor LT-09306 Vilnius, Lithuania Tel: +370 5 252 6444

Newsec Datea datea@datea.dk +45 26 01 02 Lyngby Lyngby Hovedgade 4 2800 Kgs. Lyngby Aarhus Viby Ringvej 2B, #.

8260 Viby J Næstved Ringstedgade 24, 1.tv 4700 Næstved

39

THE FULL SERVICE PROPERTY HOUSE IN NORTHERN EUROPE