Investment Market Update 2019 H2

Norwegian Market Performance

• Transaction volume is NOK 50 billion first nine months of 2019 vs. NOK 56 billion in 2018
• Closed-ended funds are the largest net buyers (NOK 8.7 billion), with foreign investors the largest net sellers (NOK 7.3 billion)
• Despite net divestment for foreign investors, Akershus Eiendom has registered strong interest from internationals in transaction processes
• Rise in Big-Box retail transactions
• Oslo market main driver with around 55% of the volume

Solid pace from last three years continues

The 2019 transaction volume had a strong start to the year, before stabilising in line with 2018. Investor interest has been particularly strong for central Oslo assets, underlined by the absolute transaction volume as well the relative share of total transaction volume. The number of transactions above 1bn in the first three quarters is equal to that of the three first quarters of 2018 with 9 transactions, but the average deal size has decreased somewhat with 160 transactions recorded as of Q3 2019, vs. 171 as of Q3 2018 at a slightly lower volume.

Compared to 2018, the regional volume has declined, but this is mainly due to the absence of large regional transactions. The observed activity in the transaction market is high at the end of Q3, with expectations of several larger properties or portfolios being offered for sale in Q4.

The types of investors buying and selling are unchanged since 2018, with closed-ended funds and unlisted Norwegian property companies as the most active investors. Pension funds are now buying a larger share compared to 2018, but they also invest through property funds, which has kept the investment pace. Foreign investors as a group are net sellers in 2018-19, but this is due to certain large assets being divested, and we still see strong interest and bids from foreign entities. The variety of players and capital sources makes the foreign activity less uniform than previous years. Visit our new research platform for a full breakdown of buyers and sellers.

Office

Several large office transactions have taken place so far in 2019, of which several include international investors. Notable examples include the DNB HQ, Dronning Eufemias gate 30, sold by SBB to DNB Life and Pensions, and the purchase of a significant part of Kongsberg Technology Park, by a closed-ended fund set up by Arctic, from several sellers including Blackstone. Other notable transactions include Workplace Oo / Vitaminveien 4, a newly built office property on Storo, which was acquired by DNB Scandinavian Property fund from Skanska Commercial Development.

In 2018, the transaction volume was to a large extent driven by unlisted property companies and closed-ended funds. While these investors remain active in the market, insurance/pension funds now account for a higher share of the office transaction volume compared to 2018. Various combinations of financial and operational players bidding together for value-add opportunities are more common than ever, and this gives the investor side more depth. The NCC sale of the 1,830 MNOK Valle complex at Helsfyr, bought in September by Union Real Estate Fund II and including both signed leases in new building, a long lease in a building under construction, and zoned land ready for new project, illustrates the increased flexibility among investors.

Retail

In the retail segment, a few large transactions have taken place, however total retail volume has decreased due to fewer transactions above NOK 1 billion. In 2018, the NOK 7 billion merger of Scala Retail Properties and Salto Eiendom and the sale of the Oslo shopping centre Alna Senter for NOK 2 billion constituted a significant share of the retail transaction volume. In 2019, the Big-Box retail segment has greatly increased its relative share of the transaction volume, driven by several portfolios including the portfolio sold from Tristan Capital Partners to Ragde Eiendom for approximately NOK 1.5 billion.

Logistics

While investor interest for logistics properties remain strong, limited supply in the market has caused the transaction volume to be somewhat lower than 2018. When properties are brought to the market, sellers achieve attractive yields and we observe that a growing group of investors are interested in logistics properties.

Oslo Market Performance

• The first nine months of 2019 saw Oslo transactions worth NOK 28 billion, vs. NOK 20 billion during the same period in 2018
• The number of transactions increased from 60 during the first nine months of 2018 to 76 transactions during the same period in 2019
• Office asset transaction volume has increased, and is now back at the level we saw in 2017
• Prime yield estimate for Oslo CBD remains at 3.75%, whereas prime yield for Oslo fringe assets remains at 4.25%

After slightly lower activity in the Oslo market during 2018, the activity has now picked up. Despite somewhat limited supply, investor interest remains strong. The strong rental growth in central areas further leads to a high number of bidders in transactions processes. Office properties leads the way with 60% of the volume.

Financing

• Banks are more selective about asset and borrower, but still aim for stable activity
• Bank margins have decreased marginally through 2019 and have been stable over the last months
• SWAP interest rates have fallen significantly over the last three months
• The Norwegian Central Bank has increased the key policy rate by 25 bps three times in 2019. Analysts are divided as to whether the key policy rate will be increased further in the short term, however a stable development is expected from early 2020 onwards.
• At least one example of a foreign bank financing a core asset bought by Norwegian investors shows increased integration with the European market, and increased depth on the financing side as well as the investor side.

In general, the banks are interested in exposure to real estate through continued lending, although they remain more inclined to offer differing margins based on asset quality and type of borrower. The bond financing market remains an important source of capital, and the pension funds are still signalling a willingness to invest in bonds backed by real estate. Despite the stricter interpretation of the correlation rule from the FSA/EIOPA, there are lenders with money allocations that do not need to conform to these requirement, favouring SPV structures and longer tenor funding.

Outlook

• Expected continued high activity for the remainder of the year
• Expected investment volume of NOK 85-90 billion for full year 2019
• Expectations of yields to have bottomed out, but to remain stable for some time
• Values for some segments will continue rising throughout 2020

We remain optimistic for the transaction market in 2019, and expect the solid activity level to persist. Despite expectations of increasing short interest rates, financing will remain accessible and relatively inexpensive, and alternative returns low. The long and short interest rates are currently moving in opposite directions, and for the moment (oct 1^st) we expect the pull in each direction to even out for most segments. The strong investor interest will, however, contribute to downwards pressure for yields on short-lease properties with potential for higher rents.

The relatively weak Norwegian Krone should also contribute to solid interest in Norwegian assets, both from domestic and foreign investors. We expect yields to start rising, albeit slowly, from 2021 onwards.