A harsh financing market, but signs that liquidity in the property market is stabilising

The transaction market in the first half of 2023 was weak, and the total volume was 62 per cent lower than in the year-earlier period. Price levels have gradually fallen, and market sentiment has been characterised by higher interest rates, cost increases, a harsh financing market and an increased need for equity in investments. In general, all property types have been impacted, but the segments that have fared best are higher yielding segments that were also supported by rent indexation due to inflation.

“Given that financing costs have increased more than yield requirements, the focus on annual cash-on-cash – meaning returns without regard to unrealised changes in value – limits transaction opportunities for many investors. But with the peak of the interest-rate cycle not far off, and with rent growth and increases in real value, the total yield for long-term investors is beginning to look promising,” says Niclas Höglund, Head of Research at JLL.

Warehousing and Light Industry remains a strong segment. In residential units, we are seeing an increased interest in newly produced units compared with older stock. Office properties in prime locations have displayed resilience, even though international investors are seeing risks based on the fact that working from home is reducing the need for offices – a trend that is even more obvious in the UK and US. 

Banks in the Nordic countries are continuing to focus on existing clients and commitments, which puts a limit on new borrowings. To a greater extent, therefore, investors need to seek financing from international banks and alternative creditors. 

Comparisons with previous financial crises show that full recovery could take many years, but appreciable recovery normally occurs within two years. In Sweden during the financial crisis of 2008–2009, the transaction market returned to 80 per cent of its pre-crisis volume within a two-year period. A normalisation of the market will only occur when we have seen the peak of the interest-rate cycle and improved conditions for financing. What we are now seeing is that several funds have raised new capital and have started to invest.

“From a transaction perspective, it has historically taken the Swedish property market four or five quarters to reach bottom and turn back upwards after a financial crisis. Assuming stabilisation and improvement in the interest-rate situation in 2024, there is much to indicate that we ought to see a turnaround in the second half of 2023 and a gradual improvement in the transaction market in 2024. Transaction volumes will be driven by the fact that many property companies will have to continue adjusting their balance sheets through new share issues and sales,” says Thomas Persson, Head of Capital Markets Nordics.

The most recent edition of the JLL Nordic Outlook indicates, for example, that:

·       The market for office rentals in prime locations in Stockholm, Gothenburg, Malmö, Oslo and Copenhagen will remain stable to strong. However, the yield requirement for all sub-markets and segments will continue to increase in connection with the higher financing levels.

·       The upturn in market interest rates and limited access to borrowed capital continues to force property companies to adjust their balance sheets to these new conditions through new share issues, sales and structural transactions.

·       From a transaction perspective, it has historically taken the Swedish property market four or five quarters to reach bottom and turn back upwards after a financial crisis. Accordingly, there is much to indicate that we ought to see a turnaround in the second half of 2023 and a gradual improvement in the transaction market in 2024.

To download the report free of charge, click on the link below

https://www.jllsweden.se/en/trends-and-insights/research/jll-nordic-outlook-autumn-2023

About JLL Nordic Outlook

JLL Nordic Outlook, which is published twice per year, analyses the Nordic property market from various perspectives. The analysis includes the office markets in Stockholm, Gothenburg and Malmö, and the other Nordic capitals, as well as retail, logistics and residential property markets in the Nordic region. An analysis is also conducted of the transactions market in Sweden and Finland and a special article analyses the financial market.