Investment Market Update 2019 H1

Norwegian Market Performance

• Transaction volume of close to NOK 88.5 billion during 2018 vs. NOK 90 billion in 2017
• Average deal size has increased, with 263 transactions recorded for 2018 vs. 325 in 2017
• Closed-ended funds the largest net buyers (NOK 19.1 billion) and unlisted property companies the largest net sellers (NOK 16.1 billion)
• Continued strong foreign interest, however divestment volumes surpass acquisition volumes
• Absolute and relative increase in Retail and Logistics/Industrial transaction volume
• High activity for Regional and The Greater Stavanger region transactions

The 2018 transaction volumes picked up after a slow start to the year. Investor interest has been particularly strong for the greater Stavanger region and regional assets outside the main cities, underlined by the transaction volume as well as the two segments’ relative share of the total Norwegian transaction volume. Furthermore, the Retail and Logistics/Industrial segments have taken a larger share of the transaction volume, while the office volume has declined. In the retail segment, several large transactions have driven transaction volumes. Prominent retail transactions include 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. Madison International Realty has acquired Sørenga, Sørengkaia and the associated parking facilities at Sørenga, as well as entered into an unconditional SPA to acquire Munch Brygge. Furthermore, Oslo S Utvikling (OSU) has accepted a bid from Madison for the ground-level commercial assets in Barcode and the northern part of Bispevika.

Several large office transactions took place during 2018, of which several had international investors on both sell-side and buy-side. Notable examples include Jåttåvågveien 10-12, sold by NIAM to H.I.G Capital, and Helsfyr Atrium sold to Tristan Capital Partners from Starwood Capital Group. In general, transaction volumes are driven by unlisted property companies and closed-ended funds.

Oslo Market Performance

• 2018 saw Oslo transactions worth NOK 37 billion, vs. NOK 47 billion during 2017
• The number of transactions decreased from 119 in 2017 to 94 transactions during 2018
• Office asset transaction volume has decreased, with retail assets gaining momentum
• Prime yield estimate for Oslo CBD remains at 3.75%, whereas prime yield for Oslo fringe assets remains at 4.25%

The Oslo market has seen activity decrease, but volumes are still high. After several years of constrained supply, Retail assets gained momentum fuelled by some very large transactions. The volume of office transactions has been lower than the previous few years. The decreased volume is mostly attributable to limited supply, rather than impaired investor interest. Most notable for the Oslo market is the decrease in prime yield estimates for long-lease fringe assets during early 2018.

Financing

• The Norwegian Central Bank raised the key policy rate by 25 bps in September 2018, and analyst consensus suggests further increases in 2019
• Banks are more selective about asset and borrower, but still looking for increased lending
• Bond issuance has declined, but 2018 still recorded the second highest volume ever after a record 2017 volume
• The 10-Y SWAP rate rose 30-40 bps in the beginning of 2018, but have now stabilised slightly above 2%

The Norwegian Central Bank increased the key policy rate with 25 bps in September 2018, after keeping the rate unchanged at 0.5% since April 2016.

In general, the banks are increasingly selective about asset and borrower, but are interested in exposure to real estate through continued lending. The banks favour lower leverage with relatively lower margins than before.

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. After a thriving 2017 with issuances totalling an all-time high of NOK 36 billion, the volume for 2018 ended around NOK 25 million, after a low volume in the fourth quarter. The volume still represents the second highest volume ever recorded.

Outlook

• Expected investment volume of NOK 80-90 billion for 2019
• Expectations for sales yields to have bottomed out, but to remain stable for some time

The market activity has continued at the same pace in 2018 as observed in 2017, and we expect investment volumes in the range 80-90 billion for 2019. It is likely that large corporate or portfolio deals will happen. Increasing activity from foreign investors combined with accessible and relatively inexpensive financing indicate continued high demand in the time to come. Yet, we expect the constrained supply for centrally located prime assets to persist. Despite the expectation of increasing interest rates, we expect yields to remain stable for some time, alt least for the coming year, before rising slowly.