ROUNDTABLE | NORDICS: A world of its own

With Denmark’s banking system in disarray, Icelandic subsidiaries grinding out sales and pockets of localised distress in Sweden, the Nordic countries are no longer just about being a safe haven. PERE magazine July,August 2011 issue.


Five real estate professionals discuss the diverse array of opportunities among the Nordic countries as its real estate markets evolve beyond their safe haven status

Aberdeen Asset Management
CapMan Real Estate
ING Real Estate Investment Management
Reviva Capital

As soon as this year’s Nordic-focused roundtable got underway, it was clear some things had changed in the region.

Remarkably, Denmark’s banking system had somehow imploded when most of the world wasn’t looking.
Much has been made of Ireland and its troubled banks, and rightly so.

Less known, however, is the fact that the Danish government has taken over 10 banks at last count, thereby raising the prospect of distressed asset sales.

It was against that invigorating background that PERE’s five Nordic participants – Johan Bergman, chief executive officer of Niam; Ari Danielsson, managing director of Reviva Capital; Peter Helfrich, managing director of the Nordics at ING Real Estate Investment Management (REIM); Mika Matikainen, partner and deputy head at CapMan Real Estate; and Tonny Nielsen, head of investment management for the Nordic region and Eastern Europe at Aberdeen Asset Management – met in downtown Stockholm. Together, they pooled their knowledge of this “world within a world”, hitherto regarded by investors as just a safe haven.

Saving Denmark’s bacon

To begin with, it seemed logical to ask about the differences between the real estate markets of Sweden, Norway, Denmark and Finland. According to Niam’s Bergman, Denmark has been slow to recover from an economic standpoint relative to Sweden and Norway, still he rates Denmark slightly above the other two countries from a buying perspective. That is when the issue of its banking system arose.

Indeed, it was just this February that Amagerbanken became Denmark’s tenth bank to collapse. Just like Ireland’s banks, Amagerbanken lost a lot of money lending to property developers and investors in commercial real estate. It also lost money on currency speculation and some wind energy projects, according to Denmark’s financial services authority, Finanstilsynet. It was read its last rites on 4 February when the bank missed a deadline to prove its solvency. The government body that manages failed Danish banks, Finansiel Stabilitet, subsequently put Amagerbanken’s assets up for sale.

With an eye on such distress, Niam, which manages opportunity funds targeting northern Europe, opened an office in Copenhagen five months ago – its first presence in Denmark. “We see the potential for volatility, and we like volatility,” Bergman says. “That’s the simple reason we opened the office: to be on the inside when it all happens.”

Luxembourg-based Reviva Capital, which was set up just one year ago as a distressed advisor to clients such as banks and already manages €1.5 billion in assets, has spotted the opportunity in Denmark as well. With a business plan to expand its services throughout Europe, co-founder Danielsson said his firm is in discussions with some parties to see if it can help.

“If one looks at the Scandinavian countries, it is Denmark that has the most severe banking crisis,” Danielsson says. “There were a lot of smaller players that outgrew their own capacity, getting into cross-border lending or following their customers too fast. The banking sector is just now in the consolidation phase – they are sweeping the floor.”

Adding more colour, CapMan’s Matikainen explains that the “over-banked” sector in Denmark saw individual retail investors pooled into property investment clubs for tax purposes. Something like €300 million of junior debt was built up for assets, often secondary, in Sweden, Germany and the UK, leading to a pretty distressed situation.

Aberdeen’s Nielsen – the only one of the five participants actually based in Denmark –emphatically endorses the view of those looking to do business in the country. “We see opportunity mainly in Denmark, and mainly because of finance,” he says. “Banks want to de-lever.”

As a result, Denmark, the smallest of the Scandinavian countries with a population of just 5.5 million, suddenly has become interesting to real estate professionals. In 2010, Denmark was voted the world’s “happiest country,” according to a Gallop poll flagged up on the country’s official website, but it seems the people who will be happier still are those that can make money from its banks.

Iceland’s slow thaw

Denmark is only following the lead of Iceland, which was the first country in northern Europe to suffer a meltdown in the wake of the global financial crisis. Icelandic banks went berserk in their heyday, expanding exponentially overseas. Then it all imploded, and the dismantling of their foreign investments has been taking place gradually ever since.

Some of the firms represented around the table already have benefited from the Icelandic rollercoaster. One of them is CapMan, a Finnish private equity firm that branched out into property in 2005. In 2007, it sold all of its real estate just before the bubble burst, and one enthusiastic buyer for a large portfolio was a group of Icelandic investors. The loan taken out to acquire the properties was syndicated, and the investment subsequently ran into difficulty.

Another company to benefit is ING REIM. Last August, it bought the crown jewel of the portfolio that CapMan sold. Brondankulma is a prime office property in the heart of Helsinki’s central business district, and ING’s Nordic fund pounced on the opportunity. “Opportunities all around the table!” proclaimed one person to laughter on hearing how three firms including Reviva had found positive angles in Iceland's challenging situation”.

Matikainen says the asset ING bought would become a good one because of the location and the view that it has been mismanaged.  “Nothing was done, but there is hidden value in the property, so it will probably work for your return expectations,” he tells Helfrich. “In that portfolio we sold to Icelandic investors, there will be some secondary assets that will be tougher to sell, but the assets that are easier to sell will be put on the market.”

However, Matikainen broadly observes that, instead of taking “a haircut today”, the model for lenders and borrowers generally is to work together, perhaps with local managers, to recover some of the losses over the next two to three years.  This certainly seems to be borne out by the approach of both Reviva Capital and Aberdeen.

Reviva Capital started out by managing distressed debt for two Luxembourg banks that used to be subsidiaries of Icelandic banks, so Danielsson has had a ringside seat on some of the problems and opportunities stemming from the sector. Currently, the firm is managing underlying assets in Scandinavia, Germany and the UK where the original borrowers were German, Danish, Swedish or Norwegian. The only Icelandic aspect is to these assignments is that the holding company of the bank that was the lender is from Iceland.

Danielsson notes that those assets predominantly have not been sold. That is because Reviva’s strategy is to play by the “Swedish rulebook” of the early 1990s, stabilising assets, maximising values and selling only once ready. Along the way, the firm is dealing with the resolution committees and trustees of the failed banks. He says the firm will be selling assets in the Nordics over the next two to three years, but they won’t be distressed assets.

Although not music to the ears of buyers, Nielsen says he is “fully supportive” of the way banks are holding assets for a period of time. Indeed, his firm, Aberdeen, is helping some banks do so via a number of separate mandates.

“We have been taking over some distressed assets on behalf of the banks,” Nielsen says. “They are not quite equipped to handle some of these properties, so we are performing asset management duties. The whole idea is to exit in three to five years.”

Obviously, the picture is mixed. There is some distress in the Nordics, but not on a huge scale as borrowers and lenders fight for their interests. The Danish banking crisis has yet to play out, and the Icelandic crisis is seeing assets being sold off only gradually. Furthermore, no other Nordic banks really ran into problems comparable to those of the Danish and Icelandic banks.  

Still, the roundtable participants need to put money to work, so the question becomes how they are doing so. For the answer to that, one must go back to macroeconomics as a starting point.

Sweden, Norway 1: Denmark, Finland 0 

The general consensus among the roundtable participants is that Denmark and Finland have been disappointing in terms of economic and real estate growth, yet they exhibit perhaps the greatest opportunities on the buy side. Sweden and Norway, however, offer the best performing economies.

Helfrich, whose firm has been operating a core-plus Nordic fund for five years and has around €1.1 billion in assets, points out that the Swedish economy is strong but one needs to be “picky” about investing in the country given the amount of capital chasing certain assets. In contrast, Finland seems to be more attractive perhaps because of a “lack of foreign capital” over the past two years.

That said, ING REIM’s Nordic team has just been involved in buying an asset in Sweden for its Nordic fund. It paid €44.7 million for Baronen Shopping Center in central Kalmar in Sweden from the family office of Gustaf De Geer, reflecting an initial yield of slightly below 7 percent.

Notably, the asset is in a secondary location in Sweden, and this is no coincidence. As a rule, ING REIM is trying to avoid the capital cities because prices seem too high. The firm’s investment professionals therefore are looking further afield for prime property.

“We decided one year ago to forget about the capitals and the central business districts unless there were some inefficiencies to exploit,” Helfrich says. “We are looking at more secondary cities, where we think the most value can be found.”

Of course, ING REIM also has been busy with its current portfolio, especially in Finland. There, it is hoping to deliver the Kluuvi shopping centre in Helsinki’s city centre – a property it has been developing throughout the credit crunch. Credit is due to the firm for that.

For its part, Niam has been both buying and selling. It recently sold nine office properties in mid-sized cities across Finland – owned together with Goldman Sachs’ Whitehall Funds – for €60 million. It also sold a portfolio comprising seven city centre properties in Gothenberg, Sweden, to a quoted property company.

On the buy side, Niam acquired Lennart 17 in Västerås, Sweden, for SEK187 million from a bankruptcy estate. The property comprises 13,500 square metres, primarily consisting of the shopping centre, Centra. That got added to Niam’s amalgamated Swedish retail property portfolio, which the firm consciously has assembled due to Sweden’s strong consumerism.

However, the deal that the roundtable participants were most interested in was the purchase of an asset in Stockholm located next to the world’s largest IKEA. For SEK870 million, Niam bought Heron City Stockholm from Heron International, the property company of famed UK developer Gerald Ronson.

The 484,000-square-foot retail development, which was finished in 2001, attracts six million people per year. “It was built as adventure shopping,” says Bergman, “but we are getting away from the leisure track altogether and are turning it into a really good shopping centre.”

The investment was a milestone for Niam, as it is the last one for Fund IV. New investments will go into Fund V, which it currently is raising.

Aberdeen, like ING REIM, feels that prime property currently is priced high at the moment, so it is taking advantage of that by selling prime stock. It is recycling the capital in order to “go up the risk curve,” says Nielsen.

In Oslo, Aberdeen recently sold an office for 850 million Knut (€120 million) and a 4.8 percent yield. Nielsen’s view is there is no reason to keep property if there is little prospect of a better return by hanging onto it.

Nielsen also dropped a mini bombshell by revealing that Aberdeen is trying to move into residential property in the Nordics, starting with Sweden. The strategy is derived in part from the investor point of view.

“A lot of investors have realised during the crisis that perhaps they are over-allocated to offices,” Nielsen says. “That turned out to be more volatile and has been hit.  Most are beginning to think they should have some kind of allocation to residential, so we are setting up residential funds now.”

This stimulated discussion about the challenges of investing in Sweden’s regulated residential market, where there is a “points system” if one wants to increase rents. Nevertheless, Aberdeen has soft commitments for its Swedish residential fund.

Meanwhile, CapMan has invested in a hotel asset in Helsinki. That asset has been added to its already sizeable hotel portfolio, which was purchased for €800 million in early 2008.

Despite potential unfortunate timing, that portfolio is now beginning to improve, thanks in part to increased travel compared to three years ago. “Due to long and predominantly fixed leases with upside potential from turnover, it is basically like taking on a bond if you trust the hotel operator,” Matikainen says.

CapMan also has bought an empty office building in a part of Helsinki where some tenants that don’t want to pay city centre rents are looking, and it has completed two asset sales from its 2005-vintage fund in the second quarter of this year. Lastly, the firm is developing a shopping centre in a city of 60,000 people some 60 kilometres north of Helsinki.

As far as Reviva Capital is concerned, deals are happening within the portfolio it manages and it is stepping into new situations. Most of the big debt write-downs happened in 2009 and 2010, but there is still a lot of movement happening among smaller exposures. Indeed, some debtors have been able to obtain new financing and simply repay the loan at full recovery. In other cases, banks are forcing assets in the money to be sold.

With the Danish banking system in disarray, Icelandic subsidiaries slowly working through assets, pockets of localized distress and, of course, good old-fashioned asset management to be done, there seems to be quite a bit to keep real estate professionals in the Nordics busy for some time.

Johan Bergman
Chief executive officer
Bergman is chief executive officer of Niam, an opportunistic real estate investment firm founded in 1998. Prior to joining the Stockholm-based firm in 2006, he spent 16 years with Skanska Corporation, most recently as one of four executive vice presidents responsible for five of the company’s 15 businesses, including commercial property development in the Nordic countries.
Niam currently is out raising its latest fund, which is expected to have an investment capacity of €2 billion when closed later this year. Its predecessor vehicle, Niam Fund IV, was raised in 2008 and corralled around €700 million, making it one of the largest opportunistic real estate funds targeting the Nordics. The firm employs 36 people and, apart from its headquarters, has offices in Norway, Finland and most recently Denmark – a bureau that just was opened in February.

Ari Danielsson
Managing director
Reviva Capital
Danielsson co-founded Reviva Capital one year ago as a Luxembourg-based advisory firm, and he and the Reviva team currently manage €1.5 billion in assets through various assignments on behalf of clients, primarily banks. He is a former managing director at Glitnir Bank Luxembourg, a subsidiary of the Icelandic bank, so perhaps it is not surprising that Reviva’s largest mandates to date are two Luxembourg banks that used to be subsidiaries of Icelandic entities. The firm advises on real estate located primarily in Scandinavia, Germany and the UK and currently employs 20 people, all of whom are experts in debt restructuring, asset recovery, credit and investment banking.

Peter Helfrich
Managing director, Nordics
ING Real Estate Investment Management
Helfrich currently is managing director of the Nordics at ING Real Estate Investment Management (REIM), although he will soon be switching roles to become head of Germany, starting 1 August. He moved to Stockholm in 2006 to establish the ING REIM business in the region and launch the ING Real Estate Nordic Property Fund, which currently has around €1.1 billion in assets. The fund is a semi open-ended unlisted real estate fund focused on the Nordic region that recently added to its diversified portfolio with the purchase of the Baronen Shopping Center, a prime shopping centre property in central Kalmar, Sweden, for €44.7 million.

Mika Matikainen
Partner and deputy head of CapMan Real Estate
Matikainen is deputy head of CapMan Real Estate, a division of CapMan that was established in 1989 and manages around €3.4 billion in third-party capital. Around 80 percent of the firm’s overall capital is derived from Finnish and international pension funds, insurance companies and fund of funds. Apart from its headquarters in Helsinki, the firm has offices in Stockholm, Oslo, Moscow and Luxembourg. Its real estate funds business invests in commercial and hotel properties, as well as development projects, and currently is expanding its real estate offering throughout the Nordics.

Tonny Nielsen
Head of investment management for the Nordic
region and Eastern Europe
Aberdeen Asset Management
Nielsen joined Aberdeen Asset Management in 2002 and now heads the firm’s 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.

Follow the money

Fund managers and advisors may be busy, but it is prudent to watch what investors are doing

The good news for those operating in the Nordics is that investors are interested in the region.

Indeed, Peter Helfrich of ING Real Estate Investment Management (REIM) reports that its semi open-ended Nordic property fund is seeing capital inflows after nearly two years at a virtual standstill. 

CapMan also is convinced there is appetite as it pursues a plan to extend its investor base internationally and expand its investment focus to Nordic countries other than Finland. “Our feeling is that there is a lot of interest in the Nordic region from European and global investors,” says Mika Matikainen.

Aberdeen Asset Management is adamant about that demand as well. The firm probably has the largest footprint in the Nordics – with 300 staff in the region and 10 active investment funds, both regional and country-specific, as well as separate accounts – so arguably it has the most to gain. Still, Tonny Nielsen affirms that investors certainly are looking at the region.

Delving more deeply into the issue, however, it seems most institutional investors are lacking exposure to Norway and Denmark. This possibly can be explained by those two markets being “less transparent,” Nielsen says.

Speaking of investors from the region, there are some clear cultural differences between them, Nielsen notes. For example, Swedish institutional investors have tended to be direct domestic investors, while Norwegian investors seem limited to using zero leverage, causing them to lag behind their counterparts from other countries.

In contrast, Finnish and Danish investors are perhaps the most globally sighted. “Several years ago, they realized they needed to diversify in the same way they did with bonds and equities,” says Nielsen.

According to Matikainen, Finnish institutional investors that invested indirectly in 2005 and 2006 did so because they could get leverage to boost returns. However, when they got hurt in 2008 and 2009, appetite for indirect investments in their own country collapsed, despite losses stemming largely from their international opportunistic investments.

ING REIM’s Helfrich agrees with the thesis that the Finns and the Danes have become very diversified in both listed and unlisted real estate across the globe, albeit indirectly. Swedish institutional investors, however, have tended to like the direct route and to focus on the domestic market, which is why a recent move by The First and Second Swedish National Pension Funds (AP1 and AP2) to invest €500 million in European real estate and broaden their European portfolios is so surprising.

Helfrich did not question the rationale for foreign diversification, rather his point was that it seemed to be a return to the 1980s. “Swedish institutions started investing abroad without local knowledge and operations and look what happened then,” he says. “There were huge losses at beginning of the 1990s. I do think going abroad is the right decision, but not if this is about buying an office in Berlin and one in Paris and paying too much.”

To be fair, AP1 and AP2 are using the “resources, competence and expertise of (advisor) Catella”, so they are not going completely naked. They also have Rickard Backland, former chief executive of Aberdeen Property Investors, as chairman of the new company.
Niam’s Johan Bergman notes that there also seems to be a need to go abroad. In 2008, AP Real Estate, owned by the First, Second, Third and Fourth National Pension Fund, bought a giant portfolio from the Swedish government property company, Vasakronan. That deal gave the pension funds SEK 80 billion (€8.4 billion) of Swedish real estate, mainly in Stockholm, Gothenburg, Malmo and Uppsala. “If they want more property, they have to go elsewhere,” he adds.