Newsec Property Outlook - Autumn 2023

Key insights:

Offices Stand Strong in the Nordics

The global COVID-19 pandemic has led to reduced office occupancy, especially in cities like New York and San Francisco. In contrast, Nordic countries, with their mixed-use office areas integrated with residential, retail, and other services, have seen a rebound in office occupancy rates. This emphasizes the distinct nature of Nordic office markets and suggests continued viability of traditional offices in the region. Amidst the evolving landscape of the global workspace, Newsec has analyzed the often-undervalued asset class of suburban office hubs. These spaces have great potential, largely because of the shifting modern work trends that favor localized, suburban workplaces. They also present competitive rent levels that could thrive in the current macroeconomic environment.

Exploring the Suburban Potential

Focusing on the Nordic capitals, while consciously excluding the Baltic capitals due to their unique set of market characteristics, Newsec has highlighted potential office hubs by using the 'stock per capita' as a main criterion. In Stockholm, Barkarby and Farsta emerges prominently, characterized by their exponential community growth and infrastructural plans. Lillestrøm in Oslo stands out with its combination of modern office assets and connectivity to central Oslo. Meanwhile, Copenhagen’s Lyngby-Taarbæk district is underscored by its anticipated population and office workforce influx, while the Sörnäinen district, with its well-connected routes and office establishments, is the winner in Helsinki.

The “middle yield”- segment and smaller transactions are prominent trends on the Nordic-Baltic Property Market

Russia's invasion of Ukraine has caused global economic shifts, such as high inflation, rising interest rates, and tighter monetary policies which have led to yield expansion across all property segments. Diving into the dynamics of property yields, the so called “middle yield” segment, typically characterized by yields ranging between 5.5% to 7.5%, has recently become more prominent with the share of transaction volume within the segment increasing since 2019. In addition, rising financial costs and conservative loan-to-value ratios influenced a trend of smaller transaction sizes, with an increasing share of transactions below 15 million Euros.

Light at the End of the Tunnel

The year 2022 was an extraordinary one for the real estate market, as it marked the first time the lending rate exceeded prime yields since 2007. This shift influenced investor behavior in 2023, making many hesitant, especially concerning investments in low-yielding properties. However, by June, signs of recovery became evident in the Nordic and Baltic markets, with somewhat increased transaction volumes. Looking ahead, market consensus suggests a decline in policy rates and the common lending rate in the following years. With the historical relationship between prime yields, policy rate and common lending rate, Newsec projects that prime yields will once again surpass the lending rate somewhere between 2024 and 2025. If these projections come true, the real estate market could see renewed growth.