Capital depreciation in Nordic real estate markets led to an annual capital growth of -5.4% in 2008, according to the IPD Nordic Annual Property Index. Based on local currencies, the capital return over last year was lowest annual figure in the index's nine-year history, preceded by 8.0% in 2007. Annual income return last year climbed 20 basis points to 5.5%. This produced a -0.1% total return in 2008.
The four-country constituent index is composed and weighted as follows: Sweden, 45.1%; Finland, 21.0%; Denmark, 17.1% and Norway, 16.8%. All four individual countries contributed negative capital value movements to the Nordic Index.
However, the scale of the negative movements reveals that the index is composed of two countries so far mildly affected, and two countries more profoundly affected, by the impact of rising yields and the credit crunch.
At one extreme, Norway was most significantly affected by sector-wide yield rises, producing a capital return of -9.9%, followed by Sweden's -7.9%. By contrast, Finland produced the shallowest negative capital return, at -1.2%, while Denmark's annual capital growth was -2.0%.
At the sector level, the steepest movements in capital values came in Offices, at -6.4% according to the IPD Nordic Index, pulled by the relative underperformance of both Norway and Sweden, which returned -12.5% and -8.2%, respectively. Some way behind was Industrial, which ended 2008 at -4.2%, followed by Retail, at -3.8% − both sectors pulled, principally, by the underperformance of the same two countries. By contrast, Denmark and Finland both recorded shallow negative returns in Offices and Industrial with the only divergence in this trend in the Retail sector, where Denmark produced the only positive annual sector capital return, at 1.6%, while Finland's was -3.3%.
The income story over 2008 in the Nordic region is more consistent: all four countries contributed resilient income across each of the three main sectors. Annualized total returns over three, five and nine years were 9.3%, 9.4% and 8.7%.
Due to the strong euro over 2008, movements in capital values are more pronounced when local currencies are converted into euro, on which basis the IPD Nordic Index ended last year at -14.0%, while in US dollars this would be -18.3%.
In euro denomination, Nordic real estate significantly outperformed both equities and property equities, which returned -51.4% and -42.3%, as measured by the SHB NORDIX Equities Index and the SHB NORDIX real estate Index, respectively.
Christina Gustafsson, Managing Director IPD Norden, said: "Depreciation in capital values across the Nordic region has so far primarily been yield-driven. Undoubtedly, since the end of 2008 valuations the macro-economic of the Nordic region has deteriorated significantly which has placed downward pressure on rental values. This will likely lead to further capital depreciation over 2009."