The Property Barometer 2015The outlook for the Swedish property market
www.pwc.se/realestate
The Property Barometer captures current trends and assessments from Sweden’s major real estate companies and financial players
say prices in the Swedishreal estate market willincrease. See page 8
companies expect rentalincome to increase. See page 5
of companies are planning to recruit.See page 10
83%
6 of 10
54%
2 The Property Barometer 2015 The Property Barometer 2015 3
After a highly intensive conclusion to the business year 2014, many analysts believe in a continuation of the good climate for property transactions in 2015. In Emerging Trends in Real Estate Europe 2015, the survey PwC presents every year, we can note conclusions, such as it being harder to find suitable investment opportunities, the strong supply of equity continuing and the risk curve shifting in the search for returns.
We also see many of these signs on the Swedish market. Around the end of the year, we also saw two large deals being closed with international buyers.
Focusing on real estate
We also continue to have an interesting economic situation with extremely low interest rates both in Sweden and several other economies. Of course, this gives input to discussions on expectations of a rent increase in several different kinds of property.
We hope that this fourth edition of the Property Barometer will be able to serve as a guide for you in strategic and opera-tional considerations in the future.
You are welcome to contact a member of the team for a more detailed discussion. Enjoy reading!
Robert Fonovich Head of Real Estate at PwC
The investment and funding climate
The picture of the commercial property market in 2015 painted by representatives of the Swedish pro-perty industry in this year’s Property Barometer is a positive one. 73 per cent predict that rental income in the industry as a whole will increase and a growing number expect to increase their investments in their existing portfolios over the coming year.
On the funding side, most respon-dents say that the supply of equity and debt capital will improve. Over half of the surveyed companies are also planning to recruit more staff over the next 12 months.
An overwhelming majority, 83 per cent, say they expect prices in the commercial property market to in-crease. Only 1 per cent predict falling prices over the next 12 months.
Foreign investors and private com-panies are expected to sell and all categories, meaning institutions, listed companies, private companies and foreign investors, are expected to be net buyers in 2015. Office and re-sidential properties top the list of the industry’s pick of the most attractive investments while industrial premises are at the bottom. Despite the general increase in interest in industrial premises compared with previous surveys.
Finding attractive investment oppor-tunities is expected to remain difficult and the industry expects that it will still become harder over the next 12 months.
Background and purpose
In 2013, PwC Real Estate took the initiative to launch the Property Barometer survey. The Property Barometer is a quantitative survey conducted among executives in the Swedish property industry that aims to measure their views on the outlook for the Swedish property market over the coming 12-month period. Two surveys were released in the first year, 2013. From 2014 onwards, the report is published once a year. The quantitative report is augmented by qualitative inter-views with three experts, who are active in different sectors of the in-dustry. The experts are interviewed on the results of the survey and offer their views on the current situation and the outlook for the industry as a whole
Target group and selection
The target group for the survey is ex-ecutives and leading investors for 105 of the country’s largest property com-panies. In total, 80 interviews were held through an online survey and by phone with executives in January and February 2015.
4 The Property Barometer 2015 The Property Barometer 2015 5
Rental income
PwC’s analysis
In this section real estate companies give their views on the outlook for rental income over the coming 12 months, for their own company and for the industry as a whole. This aspect highlights the climate in the industry and also provides an indication of the level of business activity in the industry as a whole.
Bullish on rentsThe report shows that as many as 63 per cent of respondents expect rental income in their own company to increase over the year, but compared with previous surveys the trend is falling. In late 2013, 76 per cent of property companies said rental income would increase and last year the figure was 70 per cent. The sur-vey shows that a growing number expect rental income to remain unchanged.
Rent growth in the industry to pick up As regards the outlook for rental income for the industry as a whole, the industry representatives are more optimistic, moving into more bullish territory in this year’s survey. Two years ago less than half, 46 per cent, envisaged higher rental income in the following 12 months. In 2014, the figure increased to 67 per cent and in this year’s survey the figure has increased even further, to 73 per cent. Only 3 per cent forecast a decline.
Traditional drivers of rent increases, such as higher financing costs, higher energy prices and inflation, are not present on the market today. It is therefore reasonable that the tenants have the chance to argue for lower rent adjustments in connection with rent negotiations.
The fact that the industry represen-tatives are more optimistic regarding rent growth is a sign that the service sector is growing. Ongoing new pro-duction projects are also contributing to increasing the average base rent. The trend is probably not as strong for the total rent cost per employee.
Patrik Texell
Authorised Property Valuer, MRICS
0 10 20 30 40 50 60 70 80
Not applicableDon’t know
DecreaseUnchangedIncrease
Q1 2013
Q3 2013
Q1 201470%
76%
73%
22%
12%
18%
3%
5%
1%
5%
6%
8%
0%
0%
0%
Q1 201563%
30%3%
5%0%
Do you expect rental income in your companyto increase, decrease or remain unchangedover the next 12 months?
0 10 20 30 40 50 60 70 80
Don’t knowDecreaseUnchangedIncrease
Q1 2013
Q3 2013
Q1 201467%
62%
46%
29%
32%
45%
2%
4%
4%
4%
2%
2%
Q1 201573%
24%
3%
1%
Do you expect rental income in the real estateindustry as a whole to increase, decrease orremain unchanged over the next 12 months?
…expect rental income in the industry to grow.
73%
6 The Property Barometer 2015 The Property Barometer 2015 7
Net buyers – net sellers
38
13
7
3
45
In this section we study themarket players: whether pri-vate firms, institutions, listedcompanies and foreign inves-tors will be net buyers or netsellers of real estate over thecoming 12 months.
In this year’s survey it is notable that uncertainty about which players will be net buyers and net sellers has decreased compared with previous surveys. Listed companies, institutions and foreign investors are seen as being clear net buy-ers. No less than 86 per cent of property
0 10 20 30 40 50 60
Net sellersNet buyers
Q1 2013
Q3 2013
Q1 201457%
48%
48%
27%
25%
29%
16%
27%
22%
Don’t know
50%Q1 2015
40%
10%
Do you expect the following players to be netbuyers or net sellers over the next 12 months?Private companies
0 20 40 60 80 100
Net sellersNet buyers
Q1 2013
Q3 2013
Q1 201466%
66%
52%
23%
16%
31%
11%
18%
18%
Don’t know
Q1 201586%
8%
6%
0 20 40 60 80 100
Net sellersNet buyers
Q1 2013
Q3 2013
Q1 201480%
85%
88%
8%
3%
4%
13%
12%
7%
Don’t know
Q1 201584%
9%
8%
0 10 20 30 40 60
Net sellersNet buyers
Q1 2013
Q3 2013
Q1 201441%
40%
31%
42%
49%
48%
17%
10%
21%
Don’t know
Q1 201556%
31%
13%
50
Do you expect the following players to be netbuyers or net sellers over the next 12 months?Listed companies
Do you expect the following players to be netbuyers or net sellers over the next 12 months? Institutions
Do you expect the following players to be netbuyers or net sellers over the next 12 months?Foreign investors
PwC’s analysis
Considering the good supply of equity and an advantageous climate for issues of various kinds of securities, there is a desire among listed companies to invest. Depending on what phase the companies are in, we will probably see somewhat varying behaviours in terms of investments. We can also expect a few new listed property companies. In-ternational players are clearly showing more interest, especially for the really large deals, but also investors focused on certain segments.
Robert Fonovich
Real Estate Industry Managercompanies expect listed companies to be clear net buyers in 2015, for instance. At the same time, 40 per cent believe private companies will be net sellers over the coming 12-month period, with 31 per cent predicting foreign investors will be net sellers.
8 The Property Barometer 2015 The Property Barometer 2015 9
PwC’s analysis
Willingness to invest has grown in all property categories. We find the largest positive change in industrial premises, which may be a sign of greater willingness to take risks and a more active search for higher returns. Residential properties have been very attractive in recent years and it will be interesting to follow the trend in the next 12 to 24 months when residential portfolios will most likely be sold by various municipal property companies. The property category that attracted the most international investors in the past year is retail properties and with a weaker Swedish krona, we will probably see more international equity seeking these kinds of assets.
Carl Wingmark
Operating Director, Real Estate Corporate Finance
Where do you see prices going in the Swedishmarket as a whole over the next 12 months?
0 20 40 60 80
Don’t knowDecreaseUnchangedIncrease
Q1 2013
Q3 2013
Q1 2014
64%
46%
35%
31%
48%
53%
1%
3%
8%
4%
2%
4%
Q1 2015
83%
15%
1%
1%
100
0 10 20 30 40 50
Residential
Industry/logistic
Retail
Office
Don’t knowNet sellersUnchangedNet buyers Not applicable
Q1 2015 (Q1 2014)
40%
24%
10%
3%
24%
24%
26%
16%
4%
30%
21%
25%
10%
4%
40%
40%
18%
6%
3%
34%
(31)
(29)
(17)
(2)
(21)
(17)
(36)
(14)
(1)
(32)
(11)
(27)
(16)
(2)
(45)
(26)
(26)
(15)
(1)
(32)
What is your company’s attitude to its property holdings in the followingsectors in the next 12 months? Will you be net buyers or net sellers?
Most attractive property investments The desire to invest is growing. The industry expects office and residential properties to offer the most attractive investment opportunities over the next 12 months. Industrial and warehouse premises are considered to be of least interest.
Looking at all categories, around a quarter of the property companies say their willingness to invest will be more or less unchanged. In terms of net sales, retail properties come out on top.
Another interesting aspect is how pro-perty companies view investments in existing portfolios. Nearly six out of ten companies (58 per cent) expect invest-ments in existing property portfolios to increase while 30 per cent say they will remain unchanged and 5 per cent predict a decrease. This is identical to the outcome in last year’s survey.
10 The Property Barometer 2015 The Property Barometer 2015 11
The respondents’ own companies – present situation compared with 2014
Here the surveyed real estatecompanies are asked aboutchanges in their workforce,access to capital and how easyor difficult it will be to findattractive properties in whichto invest over the coming12 months.
Expect to recruitOn the question of whether companies are planning to increase, reduce or keep their workforce unchanged, it is clear that the industry is intending to recruit.
This year, 54 per cent say they intend to expand their workforce, up from 41 per cent last year. Those not intending to change the number of employees account for 38 per cent. Those planning on making cuts account for 6 per cent, which is the same level as in 2014.
0 10 20 30 40 50 60
Inte tillämpligt för verksamhetenVet ej
MinskaOförändradeÖka
Q1 2013
Q3 2013
Q1 201441%
55%
46%
50%
36%
43%
5%
7%
8%
0%
2%
1%
5%
0%
1%
Q1 201554%
38%6%
1%1%
Is your company planning to increase, reduceor leave unchanged the number of employeesover the next 12 months?
Access to capital said to improveOn the issue of funding options, the survey shows that a majority (54 per cent) expect improved access to equity financing. Compare this with 2014, when 44 per cent expected an increase. As many as 59 per cent also believe that access to loan capital will increase in the next 12 months.
Concerning access to alternative sources of financing, such as bonds, a third of respondents say access will remain unchanged.
0 10 20 30 40 50 60
Inte tillämpligt för verksamhetenVet ej
OförändratMinskaÖka
Q1 2013
Q3 2013
Q1 201444%
53%
60%
49%
6%
2%
4%
37%
35%
4%
3%
2%
0%
1%
1%
Q1 201554%
34%5%
5%3%
0 10 20 30 40 50 60 70 80
Inte tillämpligt för verksamhetenVet ej
OförändratMinskaÖka
Q1 2013
Q3 2013
Q1 201452%
65%
54%
30%
1%
8%
7%
23%
33%
11%
10%
5%
0%
1%
0%
Q1 201559%
30%0%
9%
3%
0 10 20 30 40 50
Inte tillämpligt för verksamhetenVet ej
OförändratMinskaÖka
Q1 2013
Q3 2013
Q1 201429%
24%
37%
34%
1%
1%
2%
21%
29%
27%
45%
22%
8%
8%
11%
Q1 201525%
35%1%
29%
10%
Do you expect that your company’s access to capital for investments will increase, decrease or remain unchanged over the next 12 months?
Equity capital
Loan capital Alternative funding
Not applicableDon’t know
UnchangedDecreaseIncrease
12 The Property Barometer 2015 The Property Barometer 2015 13
Robert Fonovich
Real Estate Industry Manager
Here, views are in line with the other European markets. We see a partial paradox here as we had a total transac-tion volume in 2014 that essentially touched on the levels before the financial crisis. One explanation may be found in the lower weighted costs of capital that mean that more transactions “can be brought home”, as well as an interest in expanding the investment universe to more markets and new segments. Here, examples can be seen among both insti-tutions and listed companies.
Increasingly difficult to find attractive investments The industry clearly indicates that it will become increasingly difficult to find attractive investment opportunities in 2015. Looking at the figures from all previous surveys since 2013, the share saying it will become more difficult has ranged from 25 to 50 per cent, but increased to 76 per cent this year. Consi-dering the trend since the survey began two years ago, less and less believe in an unchanged situation or that it will get easier to find investment opportunities over time.
PwC’s analysis
Following a period of higher bond volumes, we are now seeing stabilisation and a grea-ter focus on bank financing. However, we believe that there will be continued interest in alternative sources of financing with both bonds and institutional loans (direct or indirect).
Confidence in greater access on equity capital is based many funds seeing a good market for new products combined with an attractive market for new issues among listed companies.
Over the next 12 months, do you believe thatfinding attractive investment opportunitieswill be easier or harder or that there will beno change?
0 10 20 30 40 50 60
Don’t knowHarderUnchangedEasier
Q1 2013
Q3 2013
Q1 20144%
9%
20%
46%
55%
49%
50%
32%
26%
4%
4%
1%
Q1 20154%
18%
76%
3%
70 80
…believe that the prices will increase in the future.
Continued confidence in rising prices In the survey, the property companies also assess the outlook for prices in the Swedish property market over the coming 12 months. The signal is clear: prices are set to continue rising. No less than 83 per cent predict this scenario, compared to 64 per cent in 2014 and 35 per cent in the same period two years ago. Previously, a larger proportion expected prices to remain unchanged. In 2013, for example, a majority of re-spondents said prices would remain the same. This can be compared with this year’s outcome where only 15 per cent expect unchanged price levels. Only 1 per cent believe prices will drop during the year.
83%
14 The Property Barometer 2015 The Property Barometer 2015 15
Uncertainty regarding proposed restrictions on interest deductibility The industry is split on the issue of interest deductions. Nearly half, 48 per cent, of companies say restrictions on the right to deduct interest payments will have little or no impact on their company. Of these, 15 per cent say it will have no impact at all.
More than four out of ten companies, 45 per cent, believe that restrictions on the right to deduct interest payments will have a relatively large or very large impact on their company. Of these, 16 per cent say that restrictions will have a very large impact on their business.
It is interesting to note that nearly one out of ten companies (8 per cent) are unable to assess the consequences of the proposed restrictions.
PwC’s analysis
In our latest survey, only 10 per cent of the respondents believed that upcoming changes would have a negative impact. Since then, proposed changes have been presented and the industry has also been given time to process the effects. Companies have been able to confirm that the proposal entails a redistribution of the tax burden where the property industry has been explicitly pointed out as an industry that is perceived as being taxed less than others. Consequently, it is hardly surprising that 45 per cent believe that the proposal will have some or very large impact.
Since October, when the period for comments on the proposal expired, legislators have been relatively quiet and there is uncertainty as to when and what changes can be expected. According to the proposal, the new rules were to enter into effect as early as 1 January 2016. New information from the Ministry of Finance however reveals that this is no
longer the case. In light of the criticism expressed by the majority of the bodies asked to submit comments, it is also reasonable to assume that if legislators intend to move forward with any of the proposals presented, a more extensive technical work-over is needed.
The predictability of what will happen moving forward is also complicated by the work being conducted by the OECD in the scope of the BEPS efforts. Last Christmas, the OECD presented a document for discussion on how interest deduction limitations can be structured. In some respects, the proposals in the re-port are similar to those presented by the Swedish Corporate Tax Committee last June, but there are also some differen-ces. The OECD proposal also demands significant international cooperation and consensus. Even if the future remains uncertain, we can expect changes to the rules on interest deductions.
Katarina Menzel
Real Estate Tax
Key external factors for the transaction market Finally, the industry assesses which external factors will have the biggest impact on the transaction market. Top of the list are employment and the stock market while domestic politics and inflation are at the bottom.
The assessment factors have been changed in this year’s survey in re-sponse to national and international economic and social developments. Comparisons with previous surveys are therefore not possible.
Ulf Westerberg
Real Estate Assurance
PwC’s analysis
Many arrows in the survey point up and offer a positive feeling. Geopoliti-cal risks are increasing dramatically, however, and causing uncertainty. The development of the crisis in the Ukraine, unrest in the Middle East and weak economic growth in Europe are cause for concern. A serious crisis can have major effects on both the economy and the credit market.
16 The Property Barometer 2015 The Property Barometer 2015 17
A few voices on the outlook for the property market
What do you think is most exciting thing in the Swedish property industry right now?
”It’s a dynamic industry with many large-scale residential projects, a large willingness to invest and demand for housing is greater than ever on Besqab’s markets of Stockholm and Uppsala. There is more of a broad political consensus on the need to build more housing for more people. In order for this ambition to be converted into results, it demands more effective planning processes, rule simplifica-tions and broad political agreements on long-term decisions regarding things like infrastructure. The hope is that the large demand will be the driver of the work.”
The survey shows that rental income in the industry as a whole is expected to increase in the next 12 months. At the same time rental income for the respon-dents’ own companies is said decrease. What do you think this is due to?
”The development of the surroun-dings indicate a positive development for the market and the potential for higher revenues is clear. It is also pos-sible that actions like development or investments that contribute to higher rental income will provide returns on a perspective longer than 12 months.”
The survey shows that, during the forth-coming year, institutions are expected to comprise major net buyers, while foreign investors are expected to be net sellers. Does this match your view of the situation?
“Developments indicate a positive mar-ket trend; the potential for increased revenues is very clear. It is also possible that measures such as development projects or investments contributing to increased rental revenues can result in improved yields in a perspective in excess of 12 months.“
In the survey, 76 per cent say that it will get harder to find attractive investment opportunities in the future. What is your take on this?
”It’s the result of a property market that’s heating up in Sweden, especially in the metropolitan regions with many players, both Swedish and international. There is considerable competition for properties where a detailed develop-ment plan can enable residential deve-lopment. Here, Besqab’s strategies have been successful and attractive acquisi-tions have been made during the year. Large demand relative to supply leads to high prices as usual.”
What do you generally believe about the future of the Swedish property industry?
”Based on Besqab’s perspective, market drivers are beneficial where we see a continuation of high demand for new housing for many years to come.”
What do you think is the absolutely most important change/issue/clearest trend?
”Continued political willingness and consensus to build more for more people. The outer areas will become urban areas as the city grows and more locations are made attractive for people to live in. This means that infrastruc-ture must keep up with growth of, for instance, expanded rail service. Our most important task is to meet society’s needs for housing and create attractive residential areas.”
Interview with: Anette Frumerie, Besqab
What are your spontaneous reactions to the results from the survey that you’ve had a chance to review? Did anything surprise you? Anything you weren’t expecting?
”The results don’t surprise me. The stars are aligned for the property indu-stry with extremely low interest rates, reasonable growth and an improving economy. Sure, growth isn’t record breaking, but reasonable – if it gets even stronger, basic indications point to an even better trend.”
The survey shows that rental income in the industry as a whole is expected to in-crease in the next 12 months. At the same time rental income for the respondents’ own companies is said decrease. What do you think this is due to?
”It’s because they’re answering slightly different questions. Rental growth is slow. Market rent is on the rise, but it will take time before we see an effect on the bottom line. We do have long durations on contracts and the indu-stry is very sluggish in terms of rental income.”
In the survey, 76 per cent say that it will get harder to find attractive investment opportunities in the future. Why do you think this is?
”Yes, that’s right. People notice that there are a lot of buyers out there and that competition is increasing. Like I said, it’s due to the low interest rates and the economy.”
In terms of the price trend on the Swedish property market, the industry believes in rising prices compared with the barometer from last year. Why do you think this is?
”Yeah, prices are rising, largely due to the factors I mentioned: low interest ra-tes and an improving economy. We also see that the Stockholm stock exchange’s index has shown good growth. The stock market is usually 6 to 12 months ahead of the property market. It’s hard for me to talk about things as far as th-ree years in the future, but these factors also indicate an upswing in the long term.”
What do you generally believe about the future of the Swedish property industry? How will the industry change in the next five to ten years? What do you think is the absolutely most important change/issue/clearest trend?
”That’s a tough question. If I were to pick one thing, it would be that the financial markets and asset managers are increasingly looking at sustainable investments and climate-smart solu-tions. We see that the financial markets increasingly talking about risks linked to sustainability. Companies that lack sustainability thinking and an environ-mentally sustainable business model can be perceived as if they don’t generally manage risks properly, while companies that have reduced risks linked to sustai-nability are perceived as more attractive to investors.”
Interview with:Fredrik Wirdenius, Vasakronan
18 The Property Barometer 2015
What do you think is most exciting thing in the Swedish property industry right now?
”The large demand. A lot of money is coming in, also from abroad. There is large demand for good opportunities. The industry is absolutely not suffering from a recession or any stagnation. Of course, the low interest rates are behind this.”
What are your spontaneous reactions to the results from the survey that you’ve had a chance to review? Did anything surprise you? Anything you weren’t expecting?
”Yes, I didn’t expect that so many respondents would say that their own rental income appears to be declining when the market is generally so expan-sive. But on a micro-level, it can still be somewhat tough, clearly.”
In terms of the price trend on the Swedish property market, the industry believes in rising prices compared with the barome-ter from last year. Why do you think this is? Do you think the trend will continue for the next three years?
”Yes, for one to two years. Maybe not three years or longer, but in the short term, yes.”
What factors will have the greatest impact on the transaction market in the next year? The survey indicates that the largest impact will come from employment, the development on the stock market and the geopolitical situation, do you share this view?
”Yes, I agree. Interest rates are of course crucial, but they are a consequence of mainly these three factors. There are geopolitical risks – not for Sweden, but indirectly, if Putin were to wake up on the wrong side of the bed so to speak and decide to invade a country, the entire world view will become shakier, which in turn affects Sweden’s exports, among other things.”
What do you generally believe about the future of the Swedish property industry? How will the industry change in the next five to ten years? What do you think is the absolutely most important change/issue/clearest trend?
”I actually believe that internationalisa-tion will increase. The property industry is traditionally a slightly unsophistica-ted industry, but I believe that professio-nalism will increase under the influence of the US and the UK, among others – leases are being harmonised with those in Europe, more foreigners are coming to Sweden to work in the industry, and the companies’ international invest-ments are increasing.”
Interview with:Nils Styf, Citycon
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Carl [email protected]+46 (0) 709-29 40 55
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