During Q4 2017, no Swedish investors said they were looking to buy property investments over the 12 months to December 2018, while 31% said they would hold their existing investments, and 19% said they did not use the asset class at all.
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This compares with the broader pan-European view where the aggregate opinion on property was neutral, with 34% intending to hold onto the asset class, 14% to increase holdings, 13% to decrease, while 40% did not invest in the asset class.
Depressed market
Sweden is currently facing what reports have called its worst housing slump since the Global Financial Crisis. Its minister for finance Magdalena Andersson said in December 2017 that the price dampening had been partially due to an increase in supply.
She said it would be difficult to predict how extensive the decline would be but that the country’s economy was strong, and that unemployment was expected to fall.
Real estate investment tech firm, BrickVest’s chief investment officer Thomas Schneider said the Swedish property market in general was very small and not very liquid and that investors needed to look outside of Sweden if interested in property.
Schneider said there was a strong tendency for Swedish investors to look at property in countries like Germany, Benelux, and Denmark. He noted that the UK market, especially in London, was a bit problematic thanks to Brexit and that there was some interest in Liverpool and other areas outside of the capital.
Germany shines
He said Germany’s property market was very liquid and that the economy was doing well and was benefiting from Brexit.
“Germany is perceived as a very stable and safe country. It doesn’t have any crazy price bumps and while the pricing is like everywhere else in Europe – high – it does not have unreasonable price increases, or not as strong – like Spain where when a recession hits it hits very hard,” Schneider said.
“Germany that doesn’t grow as quickly but doesn’t fall as bad either. Just the macro economic data is very supportive of this.”
He said the reason why investors did not look to France was because it was quite a closed market.
“Bennelux is kind of between Germany and France and is quite easy to enter the market and quite liquid. For Swedish people, Denmark by nature is a closed market. Copenhagen especially has tremendous growth rates over the last years and it’s developing very well – it’s a good market,” Schneider said.
Positive Dutch
On the opposite side of the fund selector sentiment spectrum, Dutch fund selectors were by far the most positive across Europe on property, with 38% intending on buying property investments over the 12 months to December 2018. It was also the asset class they were most positive towards in general. No selectors intended to sell their property investments and 31% wanted to hold.
According to Schneider, the Dutch historically had been very keen on property investments in general.
“The Netherlands is a small country but has a liquid market because it has a very fortunate situation as it is between France and Germany which are very prosperous and running very well,” he said.
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Strong flows
According to Morningstar data, net flows into active European property funds grew in 2017 to €6.2bn from €3.7bn. This increase was a turnaround from 2016 where it dropped to €3.7bn from €8.9bn. Net assets under management (AUM) grew €1.1bn in 2017 to €126.9bn.
BrickVest’s Schneider said the challenges surrounding the asset class were the low yields and the rising interest rates. He said most investors thought 2018 would remain positive, bullish, and stable but people were a bit nervous and knew they were buying into high property prices.
He noted that investment managers and developers now wanted to have shorter time spans and wanted to turn around assets quicker – between two to three years as rallies would not last forever.
“We’re looking for are investments that we can hold for a longer time than expected and not to run into debt service coverage ratios (DSCR) – that was the problem during the Lehman bust. Properties were performing well on the books so they were paying interest with debt but the valuation went down 30% and the bank called the owners and said ‘give me two more million please to get that level balanced again’ and they could not do that,” he said.
“So that’s my lesson learnt and I think a lot of people are thinking about that and so they try to be careful.”
Schneider said that people had recently become more aggressive with leverage but needed to be careful.
“It’s a good market but you have to be careful. It can turn tricky and if it turns don’t want to be on the losing side,” he said.
Top property funds
Top 5 European property funds three years to 31 January 2018
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Source: FE Analytics
Looking at data from FE Analytics, all the property sectors have not performed well over the three years to 31 January 2018. Asian property was the top sector with an average return of 6.15% over the same period. This was followed by Europe at 1.22%, international at -1.26%, and North America at -6.48%.
The top fund, Janus Henderson’s Horizon Pan-European Property Equities, returned 21.77% for the three years to 31 January 2018. The fund’s largest weighting, 9.72%, is towards German residential property firm Deutsche Wohnen, followed by Paris-based commercial property firm, Unibail-Rodamco at 5.92%, and commercial property company British Land Co at 5.16%.
