NORDIC ROUNDTABLE: No chip off the Euro bloc(3)

How should the Nordics be characterised by international investors? According to those operating on the ground, the answer is as one bloc, but with key differences. PERE Magazine, July/August 2012 issue.

Aberdeen Asset Management
CBRE Group

Tredje AP-fonden

It is May 30, and there is a buzz in the air in downtown Stockholm. Just four days ago, Sweden won the annual Eurovision song contest – taken seriously by many of the 26 nations taking part – and, yesterday evening, jubilant singer Loreen performed her winning single, “Euphoria,” to cheers and whoops in Hotorget Square. 

Ordinarily, a report on the Nordic real estate market would not take into account success in an international singing competition. Still, the event did at least present a metaphor for use at this year’s Nordic roundtable, which incidentally was held at CBRE Group’s offices on Master Samuelsgatan Street, opposite to where Loreen belted out her hit.

You see, one of the early points made by the roundtable participants was that investors outside the region – perhaps in Asia or the US – often think about the Nordics as being a homogenous bloc. Yet in the same way as Sweden won the Eurovision with 372 points and Norway actually came last with 6, the region is in fact a heterogeneous collection of four autonomous states – Sweden, Norway, Denmark and Finland – capable of producing differing results. 

Tonny Nielsen, head of the Nordic region at Aberdeen Asset Management, underlines the point when he says he is “often surprised” at how foreign investors view the region as one place. To him and some 300 staff in local offices across the region, it is apparent that each country exhibits different characteristics. 

“Norway is of interest because of growth, Finland because of the high income when one buys assets, Sweden because of its liquidity and Denmark because of its cheap finance,” Nielsen says. “If you want high returns and you have a lot of capital, I think Denmark is particularly interesting due to its distress.” 

Joining Nielsen in the roundtable are three other real estate professionals: Johan Bergman, managing director of Niam; Daniel Andersson, head of capital markets at CBRE in Sweden; and Klas Åkerbäck, portfolio manager of real estate at Tredje AP-fonden, the Swedish government pension also known as AP3. As locals, they all know well the differences between the constituents of the Nordic states, yet it is notable that they also can argue in favour of the bloc as a whole, contrasting it with the rest of Europe. This is particularly important to those among them that raise capital from foreign investors. 

Niam’s Bergman says: “If you can show how the Nordic governments are running budget surpluses instead of deficits and have low debt levels, one can grasp that the numbers are very different compared to the rest of Europe. The general worry about Europe works against us, but enough investors can see through that. Yes, it is part of Europe, but it is also a different part of Europe that is doing rather well. So there is good and healthy interest.” He notes in passing how private consumption in Norway, for example, is forecast to grow 3.7 percent for the next four years.

Investment magnet

Bergman can speak with confidence because, in May, Niam closed on its largest-ever pan-Nordic opportunistic fund, Niam Nordic V, with commitments of €720 million, beating the firm’s €600 million target. Moreover, 95 percent of Niam V’s investor base comes from outside the Nordics. “We can say we have seen good indirect interest in the region, as we obviously exceeded our target,” he says.

For international investors, the temptation is to put Sweden and its neighbours into a box labelled ‘small’. Of course, this is a legitimate view given the small populations and smaller size of the market compared to the UK. For overseas players, it might sometimes require a leap of the imagination to consider the Nordics as a significant region to place capital. 

Still, there exists data to back up the view that this is somewhat misguided. The Nordic region has been either the third or the fourth largest ‘market’ in the last seven years behind the UK, Germany and France. It was fourth in 2011, notes CBRE’s Andersson.

Indeed, the first quarter of this year delivered an astonishing result, when the Nordics registered as much deal flow as Germany, the second-biggest European market. CBRE’s data revealed that, in the first quarter of 2012, deal volume in the largest market, the UK, reached €8.5 billion, but the Nordics and Germany tied for second place with €5.1 billion each. 

In the firm’s bulletin on the figures, CBRE said the Nordic region was the “notable exception” to a general slowdown across Europe compared to the last quarter of 2011. “The region remains a favourite among risk-averse property investors, and it is interesting to note that activity was evenly spread throughout the region with a year-on-year increase in the smaller Nordic markets of Norway, Denmark and Finland. Norway experienced exceptionally high activity during Q1 2012 at €2.2 billion, surpassing Sweden, traditionally the most-liquid market, as the most active,” it noted.

The CBRE report went on to suggest that government finances were “favourable” compared with the rest of Europe, as were the prospects for economic growth. Indeed, solid fundamentals have driven an increase in the number of foreign buyers looking to enter the region. “Sweden remains a key target for many investors, and we are witnessing increasing interest in other Nordic markets,” the report stated.

Second thoughts

Andersson provides additional colour on the situation in Sweden. He notes that last year CBRE had a “great first half of the year” in Sweden thanks to high transaction levels. The prime end of the real estate market has always “worked,” he says, and so did secondary property most of last year.

However, Andersson predicts volumes this year will probably fail to match 2011, although the final figure will still be good. That is primarily down to how bank financing for secondary property has become much tighter and the fact that there is little pressure on owners of secondary assets to sell. At the same time, the ‘prime’ segment appears to be smaller because investors have become even choosier. “The asset has to tick every single box now to sell at a good price,” he says. 

As an example, Andersson cites the sale of a logistics property at Gothenburg harbour that “ticked all the boxes” and attracted 10 to 15 bids. However, when it came to selling something less than perfect, the asset would only receive one or two attractive bids. “The buyers tend to be Swedish institutions and German open-ended funds,” he says. “As soon as you don’t attract those, the bids drop away.” 

Andersson argues there is “significant interest” from foreign investors to invest in Sweden, but the problem is there is always a Swedish institution being more competitive, especially when an asset for sale is in the central business district of Stockholm. Indeed, if a prime office asset comes up for sale in Stockholm, CBRE is unlikely to put in a bid on behalf of a foreign client as it most likely will go to a Swedish institution. In contrast, retail property is a “sweet spot” for international clients, he says, and that is the only segment where he sees foreign investors being the most competitive for the moment. 

That said, Bergman notes that there is nevertheless good “direct” interest in the Nordics, as well as indirect, and that liquidity is healthy. “We see some of the continental and UK funds making an entry,” he says. At the same time, he notes that there is a “healthy spread between prime and not-so-prime property.” Estimating the spread to be around 200 basis points between what is deemed to be risk-free and risky, he argues that there exists the case for moving assets between the two. That is, after all, what Niam has done with its previous opportunistic funds.

Interestingly, Bergman notes that Niam is going to add a new strategy to its existing opportunistic series by introducing a core-plus strategy. “We see opportunity there as well,” he says. “This strategy started because we saw there were very good deals that weren’t for our opportunity funds. By good deals, I mean centrally located products that are less risky and require less work but still make sense to do because the fundamentals are there.”

Andersson agrees, adding that “there is a gap in the market there.”

The AP3 way

Åkerbäck, who is responsible for real estate investments at Swedish government pension fund AP3, expands the point about the “flight to quality” as something that holds for every asset class. The way he sees the market, institutional investors are looking at the UK, Germany and the Nordics. “The Nordics do not scare people,” he says. “Right now, investors favour strong governments and fiscal discipline – the Nordics fit that.”

AP3 is the only institutional investor at the table, so Åkerbäck brings a unique perspective to the Nordic debate. AP3, he explains, actually competes with the other government pension schemes – AP1, AP2 and AP4 – in terms of performance. Rather than create a ‘super fund’, the Swedish government decided instead to create four separate funds in order to promote competition and the ability to compare and contrast strategies.

In the local property market, the AP pension system is a huge force. For example, together they own Vasakronan, Sweden’s largest property owner with some $11 billion of assets, which is run as an independent entity with its own management team. At the same time, AP3 has diversified outside of its national borders by investing in overseas property funds as a limited partner.

Åkerbäck explains that, over the past couple of years, AP3 has profoundly changed the way it thinks about investing. Tearing up the old allocation model, it now approaches things from a risk perspective.

The €20 billion fund no longer has a real estate allocation but an allocation to inflation-linked assets that includes infrastructure and timberland. It also has shifted its focus to portfolio transactions or ‘very-defined’ blind pools. “That is because we want to be able to underwrite the risk profile ourselves,” he says.

A classic example of this approach arrived in March, when AP3 joined a consortium led by the listed German property company Patrizia to acquire 21,000 residential units located in and around the city of Stuttgart from Germany’s LBBW in a €1.43 billion deal. The consortium consists of five German insurance companies, three German pension funds, a Swiss pension fund and AP3, and its winning bid beat out private equity giants reported to include The Blackstone Group and Cerberus Capital Management. 

The deal is eye-catching stuff, and Åkerbäck notes how AP3 contributed around €150 million of the roughly €600 million total equity cheque, giving it a 25 percent stake in the portfolio. “When you find an environment with low unemployment, good GDP growth, no big supply coming online or structural vacancies – a situation also true of the Nordics as well – then one can get into a comfort zone and execute on these kinds of deals,” he says. 

Further explaining the new approach at AP3, Åkerbäck says it has shifted from a capital to a risk allocation model. AP3 now has seven risk classes, which include equities, fixed income, credits, inflation-linked assets, currencies, absolute return strategies and ‘other’. “My job is sourcing deals that make sense in the real assets group,” he adds.

A big stake 

In a similar way, Nielsen’s command at Aberdeen Asset Management involves overseeing the sourcing of deals in the Nordics that make sense for clients either in discretionary mandates or for one of its nine funds in the region. The firm is a very large player – considered the largest in the region by some – and last year engineered some notable transactions. For example, its Aberdeen Property Fund Denmark bought €90 million of commercial property from the TDC Pension Fund. The deal was interesting because TDC received 50 percent of the sales price via shares in the fund, becoming the largest investor in it.

Leif Stidsen, chief executive of the TDC Pension Fund, said at the time: “Being a shareholder in the property fund instead of a direct owner of a property portfolio makes strategic sense to TDP. This is because we get higher potential returns through Aberdeen’s active management while also gaining exposure to a more diversified property portfolio.”

Nielsen says it obviously is pleasing that more institutional investors are moving from direct to indirect property to diversify their portfolio. He notes that, while the bigger institutional investors from Sweden have been “lacking” in this trend, it has been more common in Denmark and Finland. 

Last year, Aberdeen’s deal volume in the Nordics reached €330 million, with most of the assets being in the office segment. Though this transaction volume didn’t punch the light out, Nielsen was satisfied by the volume. 

Moreover, Nielsen is encouraged by the relative strength of the region. Aberdeen is forecasting annual GDP growth rate of 1.8 percent for the Nordic region between 2012 and 2016, compared to 1.3 percent for the Eurozone. This translates into stronger rental growth forecasts and higher total return forecasts. “I think that the timing is very positive for entering into the market,” he adds. 

Nielsen says Aberdeen has two initiatives under way that will provide new channels for capital to flow into the region. In the first, it expects to launch a residential property fund in Sweden. In the second, it is likely to re-open an open-ended pan-Nordic fund.

A bonding experience

Although there is the ever-present battle to attract capital, it is how one deploys it that matters in the end. For opportunistic investors such as Niam, there are deals around. 

The very first investment Niam made for its most-recent vehicle, Fund V, was a residential property in Copenhagen, which was sold by a bank. Indeed, the firm opened an office in Denmark last year precisely to capture such distress among the banking community.

The other challenge is financing. CBRE’s Andersson notes how important close personal relationships are with the banks if one is to succeed on the buy-side. That is something that Niam says it has, yet financing is still not easy. “It is not that the banks are pulling out, but they are not going in,” says Bergman. “The banks are definitely being more cautious than a year ago.”

In fact, in one recent case, Niam decided it was better to bypass the usual lending market in favour of financing a deal via the bond market. Bergman’s news on this was a revelation to the roundtable’s participants. Although he declined to disclose the names of parties involved, he noted that the bonds were built around a property portfolio spread around Norway. 

“It is not as if it is impossible to get financing. Indeed, we have sold assets in Norway where the buyers could get bank loans,” Bergman says. “In the case I just mentioned, we think the banks were too aggressive. It is not to say we will always go down the bond route, but it is good to have this alternative.”

According to Andersson, other groups also have been mulling bonds. It all serves as a reminder that banks shouldn’t be too conceited in thinking there can be no alternative to their terms and conditions.

Other than the financing situation and the general retreat of some banks, the story coming out of the Nordics is a positive one. As PERE wrapped up the discussion, it was apparent that everyone had a fundamental interest to educate foreign investors about the virtues of the region.   

“It is in all of our interests to get continuously strong interest from foreign capital to invest in the whole region, and I think we will see that moving forward,” concludes CBRE’s Andersson. Maybe Eurovision winner Loreen and her hit “Euphoria” will even help. 


Johan Bergman
Managing director
Bergman is managing director of Niam, the Nordic’s largest private equity real estate firm, which is owned by Sweden’s Stronghold Group. This year, the firm closed its largest opportunity fund to date, Niam Nordic V, on €719 million in equity commitments in May. The investor base of Niam Nordic V is mainly North American, Asian and European institutional investors and, as of May, it had invested approximately 15 percent of its committed equity. 
Despite its recent success, Niam started off modestly. Established in 1998, its first fund was a €70 million vehicle dedicated to Swedish property. 

Tonny Nielsen
Head of investment management
Aberdeen Asset Management
Nielsen is head of investment management for the Nordic region at Aberdeen Asset Management. He joined the firm in 2002 and now heads its investment management business for the Nordic region from its offices in Copenhagen. 

Aberdeen employs around 300 people in the region and has a number of active investment funds ranging from regional to country-specific. The firm also manages a number of segregated mandates for clients in the Nordics and performs advisory work on behalf of such clients as Nordic banks. 

Klas Åkerbäck
Senior portfolio manager
Tredje AP-fonden 
Åkerbäck is the senior portfolio manager for international real estate at Tredje AP-fonden (AP3), otherwise known as the Third Swedish National Pension Fund. Based in Stockholm, he is responsible for sourcing investments that fit into the €20 billion pension’s inflation-linked assets group. AP3 recently altered its allocation model from a capital-based to a risk-based model with seven risk classes, including equities, fixed income, credits, inflation-linked assets, currencies, absolute return strategies and ‘other’.

Daniel Andersson 
Head of capital markets
CBRE Group
Andersson is head of capital markets for CBRE in Sweden, based in the firm’s Stockholm office. He joined the property services firm in 2010, having previously served as acquisition director in the Nordics for GPT Halverton. Prior to that, he was a consultant at Jones Lang LaSalle for its Nordic capital markets group. 

Earlier this year, CBRE called the Nordic region a ‘notable exception’ to the general slowdown in property investment activity across Europe, with an increase of nearly 50 percent in activity during the first quarter of the year compared with the first quarter of 2011. The firm also has a habit of being mandated to market high-profile deals. Recently, it was appointed to manage the sale of Europe’s second tallest residential building, the iconic Turning Torso in Stockholm at 190 metres high.