Investment volume in the Nordics totalled €25.6bn during the first three quarters of 2020. This is 14% down compared to the average past five Q1–Q3 periods, relatively in line with the decline in investment volume recorded at European level (-10%).

Recent figures suggest that investment activity seems to be slowly picking up. Some €6.6bn was invested in the region during the third quarter, which is 2% up on the previous quarter. Based on the growing number of deals currently under negotiation or in the pipeline and on the fact that investment activity during the final quarter of the year is traditionally high, we expect the end-year volume to total approximately €35.5bn. This would reflect an annual decline of 17% compared to 2019 which reached a record high.

In the current low interest rate environment, investors’ appetite for real estate is there but the investment activity in 2021 will heavily depend on the availability of product to buy, notably large portfolio. All in all, we expect the 2021 Nordic investment volume will range between €36bn and €42bn.

Strong turnover result in 2019 was notably thanks to the high level of cross border investment. Unsurprisingly, cross border activity decreased this year as a result of the lockdown measures. Between January and September, cross border investment totalled €6.8bn, reflecting a decrease of 25% compared to Q1–Q3 2019. This represents 27% of the total volume invested during the first three quarters of the year compared to 33% during the same period last year. Excluding cross border investors from the Nordic region itself, interest from international investors is increasingly coming from Germany and the UK, whilst activity from US investors has been slowing down over the past two years.

Alternative assets are the big winner

Offices, which used to be the preferred or the second preferred asset class after multifamily, has lost significant ground this year, in line with the European trend. Some €6.3bn was invested in Nordic offices between Q1 and Q3 2020, reflecting a decrease of 35% in the same period last year. Offices accounted for only 25% of all investments compared to 30% last year. Nevertheless, we expect Nordic offices to continue to attract investors’ appetite in 2021. Compared to other European countries where strict lockdown measures strongly impacted their economy, the sector remains fuelled by the relatively healthy labour market, solid office-based employment growth projection and low vacancy rate.

Residential investments amounted to €6.6bn, 35% down on last year’s first three quarters on the back of a record level achieved last year. Except for Finland, the lack of investable stock is a growing constrain in this sector, which remained the second preferred assets type accounting for 26% of all investments (31% last year). Yet, multifamily remains the asset of choice for investors in the region. The Nordics population is highly urbanised compared to other European countries. On average the share of the urban population is 85.5% against 75.7% across Europe.

Alternative assets have been the big winner this year with €6.6bn invested during the first three-quarters of the year, the same amount as for multifamily and 69% up on last year. This is notably true in Sweden, Norway and Finland. Amongst these alternative assets care home investment increased by 24% compared to Q1–Q3 last year. In Finland, other public use properties such as educational, health care and police stations are also sought after investment targets.

Logistics investments in the Nordics totalled €6.6bn, 44% down on last year on the back of a record level of logistics investment recorded last year in Sweden. The sector accounts for 13% of the total Nordic investment volume, against 17% last year. The overall strong e-commerce penetration rate in the region (77% compared to 53% on average in Europe) continue to drive demand for logistics space.

Nordics retail investments totalled €2.6bn during the first nine months of the year. This is 9% below the same period in 2019. The retail market share in the Nordics is currently 10% compared to 11% in Europe. Relatively high levels of retail floor space per capita in the four countries (1.38 sq m/capita in the Nordics – 1.16 sq m/capita on average across Europe) and strong growth of online sales compared to the European average are particularly restraining retail activity in the region.

Prime yields

In Q3 2020, the average prime Nordics CBD-office yield moved in by 21bps annually and currently stands at 3.36%, compared to 3.30% on average in core countries and 3.6% across Europe. Industrial prime yields hardened by an average of 24bps over the past year to 4.74%. This compares to 4.66% for the average prime core industrial yields. The average prime residential yield remained stable over the past year, now ranging between 3.3% and 3.75% across the region. Whilst, on the other hand of the spectrum, in Q3 2020 the average prime shopping centre yield moved out by 49bps YoY to 4.74% and strong growth of online sales compared to the European average are particularly restraining retail activity in the region.

Country snapshots

SWEDEN

Approximately €12.5bn (SEK 133bn) was invested in Sweden between January and September. This is 21% down on last year which was a record year and 7% higher than the past five Q1–Q3’s average. Sweden still accounted for nearly half of the Nordics investment volume (49%). Long-term borrowing costs remain low, or negative across Europe, with the Swedish 10Y bond yield at -0.13%, which will maintain an attractive yield spread for most real estate sectors going forward. However, a low economic growth environment presents challenges and the effects of the lower bond yields could be offset by a rising risk premium and/or falling rental growth expectations. Investors tend to seek defensive options when ambiguity capture the market, which should further drive demand for properties with stable cash flows, such as multifamily, public properties, and logistics with long leases.

NORWAY

In Norway, investment activity picked up strongly in the third quarter bringing the total investment volume since the beginning of the year to €5.9bn (NOK 64.2bn). This is 3.4% down on last year and only -1% compared to the past five-year average – a robust result given the current pandemic context. Norway remained the second largest market of the region accounting for 23% of the Nordic investment volume. We expect the high activity in the investment market to continue, and the pipeline of assets coming to market in January is probably the strongest ever recorded. The supply is looking very good, but supply/demand balance will still be challenged as the demand is even higher for quality assets, as well as risk is back on for an increasing number of investors. This is expected to push prime yields even further down and also lead to secondary yields coming down as the year progresses.

FINLAND

The investment volume in Finland reached €4bn during the first three quarters of the year, marking a decline of 16% compared to the same period last year. The timing of major deals causes large fluctuation in quarterly and in annual volume. The lack of supply of major size or desired properties limits the realisation of transactions. Although active investment demand is expected to continue, the overall volume appears to be declining from previous record-breaking years, however, not reflecting a decrease in investor interest. Unlike previous years, historically large transactions are not expected. Investment potential continues to increase in alternative sectors such as public use properties and new concepts of living and working. For example, it is increasingly common for public sector organisations to rent their premises needed from private sector investors.

DENMARK

Some €3.4bn (DKK 25bn) was invested in Denmark over the course of the past nine months, representing a drop of 42% compared to the same period last year and 45% compared to the past five-year average. We expect the Danish investment market will remain attractive due to strong fundamentals compared to other European countries in a difficult time. The yields for core assets has decreased, we expect this trend to continue combined with international investors looking at other cities than Copenhagen. More investors are developing operational brands especially within the student and senior housing sectors in order to optimise the assets.