Why look to Norway?
Norway has been a macroeconomic adventure since the black gold was discovered in 1969, but still foreign investment into Norwegian real estate has been limited. Estate Media asked two partners in Deloitte Norway, Kjetil Stensland and Thorvald Nyquist, to comment on how foreign investors view the Norwegian real estate market in 2014. They have offered insight through Deloitte’s global network.
It’s the economy, stupid
An important initial consideration for any foreign investment is, of course, the macroeconomics of the target country. When asking our Deloitte network and clients, this is also the most frequent response about the positive features of Norway, says Kjetil. The strong underlying fundamentals in Norwegian economy are relatively well known. The World Economic Forum summarized it in the Global Competitiveness Index 2013-14 as follows:
“Norway’s macroeconomic environment is ranked an impressive 2nd out of all countries (up from 3rd last year, and continuing an upward trend over the last several years), driven by windfall oil revenues combined with prudent fiscal management.”
GDP growth since 2007. To go a bit further, the GDP growth rate for Norway has continuously outperformed the EU-28 in recent years, and most predictions for the future are relatively optimistic. According to the January 2014 statistics from Eurostat, the GDP rose by 0.3 % in EU-28 during 2013, while Norway had a rise of almost 2 %. Due to steady growth of the disposable income in Norway and thereby also in consumption, the consumer purchasing power is expected to remain strong in Norway.
Population growth. Norway has further been through a solid population growth in recent years, especially in the major cities. The increase in population was according to the Central Bureau of Statistics (SSB) as high as 1.2 % from 2012 to 2013. SSB expects an increase of around 20 % in the next 20 years, predominantly from immigration.
Demographic trends. Taking into account that people and business are moving to the major cities, this will potentially have great impact in some areas, and especially greater Oslo, Bergen, Stavanger and Trondheim. The local growth in population in these and other cities is expected to be enormous. For example the expected population growth in greater Oslo is an increase of 40 % until 2040 (SSB). This impact will potentially drive demand and prices by itself.
Low unemployment. At the same time the unemployment rate in Norway is currently at only 3.5 % (SSB). This is low compared to most other countries, e.g. countries like the UK with 7.1 %, the US with 6.7% and Spain with as high as 26.7 %.
The increasing population, low unemployment rate and high purchasing power are all important factors. All of these elements support foreign investment into Norwegian real estate. Still, investment on a broader scale has not yet occurred. Why?
Nordic view. The Nordic countries count for as much as 15-25 % of the total European real estate market, and this has been the case for some time. However, the Nordic countries represent a highly diversified market, and there are considerable differences between the countries. From our Deloitte network we get the clear general message that even though clients have shown great interest in real estate in Northern Europe lately, very little of the interest is related to Norway, but instead to Sweden, Finland and Denmark. Why is that?
One explanation we get is that the Norwegian market has been viewed as less transparent. Another reason is the transaction processes with a limited time frame for international investors. Also, there is the additional currency issue and associated costs/risks for international buyers.
Oil addicted. Prime commercial real estate projects in Norway are today priced at yield levels as low as 5 to 5.5 %. On this level comparable markets in quality and price are commercial properties in cities like London and Paris. However, Norway is both a relatively small market and by some viewed as a peripheral region in Europe. And of course, Norway is highly dependent on oil.
The Norwegian economy’s link to the oil price is an important element in the outlook of the Norwegian economy. Although the macroeconomic picture is good, a fall in the price of oil would potentially have great impact on the general outlook. Many international investors may therefor find the risk reward too low compared to the larger European real estate markets.
Real estate specifics. Norway has not been highly affected by the financial turmoil since 2007, and the commercial real estate market is still considered solid. The vacancy rate is still low and decreasing, with current levels at around 6-7%. A recent example of foreign investment into Norwegian real estate is Madison International Realty’s entry into high street retailing.
Private estate bubble. As a counterweight to all the positive economics, the International Monetary Fund has raised some concern as to a potential Norwegian private estate bubble. IMF increased its estimate of how much Norwegian house prices are overvalued from 20 to 40 % in its latest report from September 2013. We have seen some adjustments during the last months in the housing market, with a fall of up to 10 % in some regions. The market seems less concerned.
Currency cost. One obvious negative element for investing in Norwegian real estate is the Norwegian currency, Kroner. Although the risks involved may be dealt with through currency hedging, the currency element is adding some complexity and cost to an investment into Norway compared to projects within the Euro zone.
Cheap and easy. The World Bank Group has in the 2014 version of the “Ease of Doing Business Report” rated Norway as number 9 of 190 countries in terms of the ease of doing business. This also involves the establishment of holding structures, transfer of titles and issues like the level of taxes and the enforcement of contracts.
An example of the relevant elements in the ease of business relative to real estate investments is the time and cost for completion. The average time incurred for the transfer of tittle within OECD-countries is 24 days, with an average transfer cost of 4.4 % of the property value. In Norway this takes only 3 days and with a cost of 2.5 % (stamp duty). Most commercial properties in Norway are today held by SPVs (special purpose vehicles). This provides for a fortunate tax-situation for investors as the “Norwegian exemption method” applies and assures that sale of shares in an SPV is tax exempt. This structure also eliminates the stamp duty.
Furthermore, there are no legal limitations that prevent foreign investors from investing in Norwegian commercial property, and the legal and tax environment should therefore be positive.
Too short and sweet. Another message from the Deloitte network is that transactions in Norway seem to be concluded extremely swiftly. In several cases we have experienced that the ease of doing business has actually implied that potential foreign investors have been effectively excluded from participating. A number of transactions are completed within such short timeframes that no time is left available to consider and evaluate the potential investment. If the foreign investor is dependent on approval of investment committees and thorough due diligence investigations, it could, in some cases, be difficult to compete with the domestic players. On the other hand, such foreign investors seem partly unaware which protections are granted through applicable legislations and standard contracts, rendering complex due diligence processes unnecessary in many instances.
Although foreign investment in Norwegian real estate is limited when looking at the total number of transactions and foreign buyers, we know through our network that there are several foreigners that currently are looking at Norwegian real estate projects. Many of the small and medium deals are maybe not that interesting to a foreign investor, but there are often foreign investors participating in the big deals in Norwegian terms. As an example of foreign involvement one may look at the shareholding of Norwegian Property ASA, a listed public company, where a significant number of the shareholders are foreign. Another major transaction, where several foreigners took part in the process, was the architectural design and build of Statoil’s new office in Oslo, where Madison International Realty ended up investing.
Small market – limited knowledge. Feedback from our Deloitte network is also that main stream Norwegian investment opportunities could be better marketed to foreign investors. Another input from our network is that several of the investment funds and REITs (real estate investment trusts) have experienced major losses in projects in continental Europe. Many such investors are therefore currently very careful. Additionally, although Norway is outside the EU and has strong macroeconomic indicators, Europe – and Norway included – is just not on the agenda.
We experience that the knowledge of the Norwegian market and offerings often are limited outside of Norway. This includes knowledge of local market trends and, the major players as well as knowledge of the actual investment opportunities. Almost all foreign investments are furthermore related to properties in Oslo, Bergen or Stavanger. During recent years an increased attention has been given to the real estate market in the oil capital Stavanger, and in some cases with more foreign attention than domestic.
What to expect? The likely coming privatization of Entra – a major player within the Norwegian real estate segment – will most probably draw the attention of foreign investors. This transaction may serve as an eye-opener to many foreigners, and increase knowledge and interest of the Norwegian market. A transaction of this size could open the market and raise interest in other projects. As the general trend seems to be that real estate deals in Norway are less time sensitive, we expect that the environment will be more open to foreign investors. Hopefully in cooperation with a competent Norwegian advisor on their side.
Publisert Estate Magasin nr. 1 2014