Sweden's real estate market returned to double-digit annual total returns in 2010, at 10.4%, as measured by the IPD Sweden Annual Property Index, driven by the return to capital appreciation after a -11.4% two-year fall in values.
The headline annual return is comprised of 5.0% capital growth and 5.2% income return and reflects positive capital and rental value growth in all sectors and market segments, except industrials, and is the eighth double-digit annual total return in the index's 14-year history, comfortably outperforming the 1.3% returned in 2009.
The drivers of the return to capital appreciation were a combination of a positive valuation impact at 2.8% and a year-on-year 200 basis points improvement in rental value growth from 0.1% in 2009 to 2.1% last year.
The combination of positive valuation impact and rental growth in 2010 was the first time the two main drivers of capital growth both contributed to capital appreciation for three years. It is also worth noting that through the worst of the re-pricing cycle, rental value growth at the all property level remained positive, underscoring the income stability of the investment market in Sweden.
There were however significant differences between sectors. Offices have seen significant capital growth in 2010 but capital values continued to decline for the third consecutive year in the industrial sector. In terms of performance, offices delivered the strongest total return, at 10.6%, while industrials were weakest, at 4.6%. Retails returned 10.4%.
Christina Gustafsson, Managing Director of IPD Norden, said: "Capital values declined significantly in Stockholm CBD offices during the financial crisis but bounced back strongly in 2010. The total return was 13.8% which can be attributed to a 30 basis points yield compression and 5% market rental value growth."
Compared to other Swedish assets, direct property investments trailed equities and property equities but was ahead of bonds during 2010. Property equities had an especially strong year with a total return of 50%, while equities returned 25. Longer term direct property is between equities and bonds.
The IPD Sweden Annual Property Index measures 1,105 properties worth SEK 226.7 billion, and is comprised of 69.2% offices, 16.5% retail, 8% residential and 1.9% industrial with the balance in miscellaneous assets.