Helaba Research
Real Estate Report
Authors:
Marion Dezenter
Dr. Stefan Mitropoulos
research@helaba.de
Editor:
19th September 2011
Northern European Real Estate Markets
Well Positioned
The economies of Northern Europe are in an upswing, though that upswing will slow markedly in 2012. Led by the Swedish market, office properties in the region have recovered. Office rents are rising again in 2011, and the vacancy rates are declining slightly. Rents have
been by now been able to rise also for prime retail properties. However, the potential for
rental increases should be tightly circumscribed in 2012.
Dr. Gertrud R. Traud
Economy: growth at a slower pace
Publisher:
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
Landesbank Hessen-Thüringen
MAIN TOWER
Neue Mainzer Str. 52-58
60311 Frankfurt am Main
phone: +49 69/91 32-20 24
fax: +49 69/91 32-22 44
Following what was on the whole a notable dynamic in 2011, the growth peak has now been surpassed in the Nordic countries of Sweden, Finland, and Denmark. The slowing pace of growth in
Europe and around the world should make itself felt in the exports of the small, open economies in
Northern Europe, since the Swedish krona, in particular – with investors in search of a “safer haven” – could appreciate even more. Overall, growth rates in 2011 of around 1 ½ - 4 % will show a
strong spread, as they did last year, whereby Sweden will once again lead the pack. With the exception of Denmark, growth rates will be notably above the average for the euro zone.
Similar to the rest of Europe, the public budgets in Scandinavia have suffered from anti-crisis
measures and a loss of revenues. Sweden, though, is likely to achieve a slight budget surplus already in 2011. Finland and Denmark, however, will end the year with a deficit. In the case of
Denmark, the deficit will exceed the Maastricht threshold of 3 % of GDP, but it will remain below
the average in the euro zone (expected to be around 4.5 %). We should see consolidation measures
in this country after the elections on September 15, even if the manoeuvring room for savings and
additional revenue is limited because of the weak dynamic in the economy.
Key economic figures
GDP
real, % yoy
This publication was very carefully researched
Inflation (HCPI)
%
Unem ploym ent rate
harmon., %
Population
mn
2010
2011f
2012f
2010
2011f
2012f
2010
2011f
2012f
2010
Euroland
1,7
1,8
1,4
1,6
2,4
1,7
10,1
9,8
9,5
328,6
Sw eden
5,4
4,2
1,5
1,2
2,6
1,8
8,4
7,5
7,3
9,4
and forecasts regarding current and future
Finland
3,6
3,0
1,7
1,2
3,3
2,0
8,4
7,7
7,2
5,3
market conditions that are for informational
Denmark
1,7
1,4
1,3
2,3
2,8
2,0
7,4
7,3
7,1
5,6
and prepared. However, it contains analyses
purposes only. The data is based on sources
that we consider reliable, though we cannot
f = forecast
Sources: EIU, EcoWin, Helaba Research
assume any responsibility for the sources
being accurate, complete, and up-to-date. All
statements in this publication are for
informational purposes. They must not be
taken as an offer or recommendation for
investment decisions.
The economic dynamics in the Norhern European countries will weaken noticeably in 2012.
Growth rates should then come in between 1 and 2 % over the previous year. After the strong prior
years, Sweden and Finland will see a noticeable decline in the vigor of their economies and thus
approximate the economic growth in Denmark, which remains weak.
Real Estate Report Northern Europe
GDP on divergent paths over the previous year …
… and in terms of a quarter-on-quarter comparison
% y/y
% q/q
10,0
Swe
7,5
5,0
10,0
3
7,5
2
Dnk
0,0
-2,5
-5,0
0,0
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-10,0
-10,0
Q1
Q3
09
Q1
Q3
10
0
-2,5
-7,5
Q3
08
1
0
-1
-7,5
Q1
2
2,5
-5,0
Fin
3
Swe
1
5,0
2,5
Fin
Dnk
-7
-7
Q1
11
Q1
Sources: EcoWin, Helaba Research
-1
Q3
08
Q1
Q3
09
Q1
Q3
10
Q1
11
Sources: EcoWin, Helaba Research
Unemployment rates, which had risen robustly in the wake of the financial and economic crisis,
have now declined again in all three countries. However, in Denmark unemployment reached its
peak only at the turn of 2010/11, while a declining trend was already evident in Sweden and
Finland at the end of 2009. However, it is still a long way to the low pre-crisis levels in the three
countries. In 2012, the decline in the unemployment rate should continue only at a reduced pace,
given the more difficult economic environment.
Decline in unemployment in Scandinavia
More pessimistic sentiment among consumers
%, harmonized according to Eurostat
Index consumer confidence, seasonally adjusted
10
Swe
9
Fin
8
10
30
9
25
8
Dnk
6
15
5
5
4
3
05
06
07
08
Sources: EcoWin, Helaba Research
09
10
25
15
Fin
10
6
30
20
20
7
7
Swe
10
Dnk
5
5
0
0
4
-5
-5
3
-10
-10
07
11
08
09
10
11
Sources: EcoWin, Helaba Research
Private consumer spending is likely to weaken in the coming year. This is indicated by the most
recent development of the indexes for consumer confidence: Over the course of 2010, some of
them rose above their previous high in 2007, but they have been in a clear downtrend in Sweden
and Finland since the fall of 2010 and in Denmark since the middle of 2011. However, compared
to the euro zone, consumers in Northern Europe continue to be much more optimistic.
Normalization in the investment market
Rise in investment
turnovers
The real estate investment market in Northern Europe was not able to escape the global trend during the financial crisis. Transaction volumes collapsed at the end of 2008 and recovered again at
the end of 2009. Thanks to the strong closing quarter, investment turnovers in 2010 were able to
double overall from the previous year. 1 Within the European investment market, the region, with
an increase of around 140 %, posted the strongest growth, ahead even of Eastern Europe. In
Europe as a whole, the rise was just below 50 %. The positive trend continued in the first six
1
See CB Richard Ellis, Market View Nordic Property, H2 2010.
Helaba Research · 19th September 2011· © Helaba
2
Real Estate Report Northern Europe
months of this year, although there was no acceleration in investment activity. Activities continue
to be dominated by domestic investors, while cross-border transactions are taking place largely
within the region. The Northern European countries will remain attractive for investors during the
next quarters. However, with continuing high uncertainty in the financial markets and weakening
economic growth, no meaningful increases in investment turnovers can be expected.
Transaction volume has normalized
Total returns in Northern Europe positive again
Investment turnover in Northern Europe, billion euro
Total return in local currency, %
20
12
12
10
10
8
8
6
6
4
4
5
2
2
0
0
0
08
Q2
Q3
Q4
09
Q2
Q3
Q4
Q2
10
Q3
Q4
15
10
in Sweden
10
Finland
5
Denmark
0
-5
-5
2005
Sources: CB Richard Ellis, Helaba/Research
Best performance
15
Sweden
Q2
11
20
2006
2007
2008
2009
2010
Sources: IPD, Helaba Research
Over the past few years, the performance of Northern European properties has followed the global
trend. Thus, Denmark, Finland, and Sweden witnessed high, at times double-digit total returns
(made up of capital growth of the properties and income return) in the boom years 2005-2007. A
pronounced slide occurred in the wake of the financial and economic crisis in 2008. Swedish properties showed the greatest volatility: They suffered the strongest decline in total returns during the
financial crisis, but they also posted an above-average performance in the subsequent recovery in
2010. The real estate index by Investment Property Databank (IPD) shows a total return of 10.4 %
for Sweden last year, which is substantially higher than in Finland (7.0 %) and Denmark (5.3 %).
While Finland’s retail properties did much better than office, the reverse was the case in Denmark.
In Sweden, the performance last year was about the same for both property types. We expect noticeably higher total returns for Finland and Denmark in 2011; in Sweden, returns should more or
less reach the level of the previous year.
Particularly high market transparency in Sweden
Transparency index 2010, scores from highly transparent (= 1) to opaque (= 5)
2,4
2,4
2,0
2,0
1,6
1,6
1,2
1,2
0,8
0,8
0,4
0,4
0,0
0,0
GB
S
IRL
F
NL
D
B
DK
FIN
E
A
N
I
PL
CZ
H
Sources: Jones Lang LaSalle, Helaba Research
Northern European real estate markets are considered to be highly developed and display a correspondingly high market transparency. According to the transparency index of Jones Lang LaSalle,
Sweden was in second place in 2010 among European countries, after the United Kingdom. What
contributes to this transparency is, for example, comprehensive market information, an investor-
Helaba Research · 19th September 2011· © Helaba
3
Real Estate Report Northern Europe
friendly legal structure, and a number of publicly traded real estate companies. Denmark and
Finland are also among the Top Ten in Europe in terms of market transparency.
Northern European office markets in an upswing
According to their population numbers, Northern European office markets are not among the larger ones in Europe. With 11 million m², Stockholm has the largest office space in the region, followed by Copenhagen (a solid 9 million m²) and Helsinki (about 8 million m²). In Sweden, Gothenburg and Malmö play an important role alongside the capital.
Medium size by European standards
Office employment rising again in all three locations
Office space in million m², 2010
Office employment, 1995 = 100
25
25
150
20
20
140
15
15
10
10
5
5
0
0
Copenhagen
130
150
140
130
120
Malmö
Gothenburg
Helsinki
Copenhagen
Stockholm
Frankfurt
Hamburg
Paris
London
Sources: Feri, DTZ, Helaba Research
Helsinki
Stockholm
120
110
110
100
100
90
90
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11e
Sources: Feri, Helaba Research
* London and Paris: only inner-city area
The financial and economic crisis had a negative effect on employment in all three economies.
While office employment in Helsinki and especially in Copenhagen declined noticeably, the level
could be largely maintained in Stockholm. By now the lows have been overcome and office employment is on the rise again. Especially Stockholm, thanks to the favourable development of the
overall economy, already posted robust job growth last year, which had a positive effect on the
office market. The demand for office space has improved accordingly. However, that demand is
focused on modern properties in prime locations, while less attractive and older office buildings
continue to draw little interest. This year, as well, demand in Stockholm has shown the most favourable trend. Leasing activity should also pick up in Helsinki, while it is likely to remain only
stable in Copenhagen.
Noticeable decline in
office completions 2011
In Helsinki, the above-average employment trend stimulated construction activity in the past. This
created excess capacities, which could not be unwound because of the weak demand as a result of
the crisis. The peak of the office development cycle in Finland’s capital was already reached in
2008, and the following year saw a drastic slump in completions. By contrast, completions remained high in Copenhagen and Stockholm in 2010. By now there has been a noticeable decline
also in these office centres, since the projects that were begun before the economic crisis have
been completed and few new speculative projects are being launched.
Among the three cities, Stockholm shows the greatest volatility in rents. In addition, the rent level
in this city is substantially higher than in Helsinki and Copenhagen. At its peak, office rents in the
Swedish capital had dropped by about one tenth in local currency, before stabilizing toward the
end of 2009. As a result of strong changes in the exchange rate, the decline was twice as high in
euro terms. But the robust economic upswing then led to a rising demand for modern space, and
this has allowed rents to rise again markedly since 2010.
Helaba Research · 19th September 2011· © Helaba
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Real Estate Report Northern Europe
Office completions in decline
Office rents rising again
In 1.000 m²
Average office rent in top location, in local currency, 1995 = 100
300
200
300
200
190
250
250
Helsinki
200
Copenhagen
150
100
100
50
50
Stockholm
180
170
200
150
97
98
99
00
01
02
03
04
05
06
07
08
09
Helsinki
140
130
150
140
130
120
Copenhagen
110
120
110
100
90
10 11e
180
160
150
0
190
170
160
100
0
96
Stockholm
90
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11e
Sources: Feri, Helaba Research
Sources: Feri, Helaba Research
In Helsinki, the excess supply of office space exerted pressure on rents into the second half of
2010, although the decline as a whole was much less than in the two other metropolises. A moderate increase in rents can be expected this year. In Copenhagen, too, office rents are by now off
their lows, which means that a slight increase is likely by the end of 2011. All in all, office rents
could thus rise again in all three capitals this year – though that applies only to prime space. Stockholm, as the most volatile market and thanks to the best economic trend, will witness the strongest
increase in office rents.
Vacancies declining from high level
Office vacancy rate, %
14
Stockholm
12
14
12
10
10
Helsinki
8
8
Copenhagen
6
6
4
4
2
2
0
0
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11e
Sources: Feri, Helaba Research
No strong reduction in
vacancy rate in sight
In 2008/2009weak demand and new office space led to a substantial rise in vacancies. In Copenhagen and Helsinki the vacancy rate increased more than in Stockholm, where it had settled at a
much higher level already from 2003 on. With a rising office demand, but mostly in view of the
drastic decline in completions, the vacancy rate in the three Scandinavian conurbations was able to
come down in 2010 from its high level. Stockholm continues to show the highest ratio of empty
office space. Here the vacancy rate should move in the direction of 11 % by the end of the year,
while in Copenhagen it should drop below 9 %. The rate in Helsinki will remain in between, and
only a slight decline to a solid 10 % is likely. With this vacancy rates in the three conurbations
remain on a fairly high level. However, vacancy rates in the central business district of Stockholm
and Helsinki are much lower at 4-5 %, which reflects the preference of office users for top locations and prime office space.
Helaba Research · 19th September 2011· © Helaba
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Real Estate Report Northern Europe
Shopping centres dominate retail trade
Stable trend compared
to office market
Compared to the office market, retail properties have been more stable during the economic crisis.
Only Denmark saw a noticeable and sustained decline in retail sales. The result was that in the
region retail rents in top inner-city locations as well as in attractive shopping centres did not dip or
only slightly so. However, secondary locations experienced marked declines. At the moment,
Swedish retail properties are in the best shape, thanks to the robust economic recovery. By contrast, the sector is recovering only slowly in Denmark. Completions have been in decline in Helsinki for years, though with a comparable market size, the growth in space here was notably higher
than in Copenhagen in the middle of the decade. This could have led to the later onset of recovery
in retail rents compared to Stockholm. The Swedish capital, which offers by far the largest retail
space in Northern Europe, had witnessed a robust growth in space already before the turn of the
millennium, but that growth is no longer weighing on the market. However, that should be the
primary reason for the lower rental level compared to the other two capitals.
Retail sales highly divergent
Retail rents barely budged
Real, 2005 = 100
Average rents in top locations in local currency , 2000 = 100
125
120
N
125
135
120
130
115
FIN
115
125
110
S
135
Copenhagen
130
125
Helsinki
110
120
105
105
115
100
100
110
110
95
105
105
90
90
100
100
85
85
95
95
DK
05
06
07
08
Sources: Datastream, Helaba Research
09
10
11
120
Stockholm
115
95
00
01
02
03
04
05
06
07
08
09
10
11e
Sources: Feri, Helaba Research
Vacancy rates in central locations of the Northern European capitals are likely to be around 2 % at
the moment, in some other large cities they are higher. Shops opening up in the sought-after top
locations could be rented to other retailers without any problems. Especially the demand from
foreign retailers has picked up again. Retail rents should rise moderately in all three countries in
2011. However, the split development between prime retail space and less attractive ones should
continue. In view of the most recent decline in consumer confidence in Sweden and Finland –
Denmark has not seen a sustained recovery so far – the potential for rental growth should be limited in the coming year.
No excess supply of
shopping centres
By European standards, shopping centre space per capita is high in the three countries. Sweden
holds the top ratio, and especially the conurbation of Stockholm. However, we are not looking at
an excessive supply of shopping centres. The Scandinavian countries have high purchasing power,
and we are dealing with mature retail markets, where this retail type plays a leading role for a long
time. Especially in Sweden there is a multitude of smaller shopping centres for local supply not
competing with other shopping centres. Even though the country has a high density of shopping
centres, overall retail space per capita is by no means outstanding by European standards.
The development pipeline 2011/12 is manageable in the three countries, even if some of the expansion projects put on hold during the financial crisis have been picked up again. In view of the
comparatively old stock in Sweden and Denmark, where more than half of the shopping centres
are more than twenty years old, emphasis in the future should be put more strongly on the modernization of existing properties than on new developments. 
Helaba Research · 19th September 2011· © Helaba
6