Preference for prime and lack of debt widens yield gap in Swedish investment market (SE)

According to Savills' latest research on the Sweden investment market the gap between yields for prime and secondary properties is set to continue to widen as a result of strong investor demand for prime and the challenges to obtain debt for secondary properties.

The international real estate advisor states that the most notable gap can currently be seen in the retail warehouse and logistics segments where yield spreads have increased to 100 basis points between prime and secondary yields.

Ulf Nilsson, CEO of Savills Sweden, comments: "The Swedish investment market continues to be dominated by a risk-averse attitude among low-geared or equity rich investors leading to a strong focus on prime properties in all sectors with secure income flows.

"We believe that prime yields will therefore remain stable however, a lack of available debt for secondary stock is expected to lead to further softening on these yields."

Savills report notes that domestic investors, particularly institutions and the Swedish pension funds who are becoming more risk averse, have maintained a strong appetite for prime assets. These investors are also generally all-equity buyers and therefore experience less competition from investors that are dependent on debt leverage.

Peter Wiman, Head of Research in Savills Sweden, says: "Since the demand for prime properties is still strong, the question moving forward will be whether geared investors will accept a lower return spread or if we will see a yield relaxation as a compensation for lower net return to investors."

Looking forward, Savills reports that debt availability will be fundamental to determining the development of the property market in Sweden for the remainder of 2012. The firm highlights that there are currently a few indications of a pick-up in lending due to the uncertainty of the European sovereign debt situation and the possible effects on the banking system.

The overall transaction volume in Sweden for Q1 2012 is confirmed by Savills as SEK 25 billion, which is an increase of 18% compared to Q1 2011. However, there has been a significant decrease of 40% in the number of deals transacted during the respective quarters reflecting the amount of larger transactions that have taken place this year. These deals include the sales of residential portfolios from public housing companies and also a substantial take-over made by property company, Klõvern accounting for approximately SEK 5.7 billion.

Savills expects that, in spite of being net sellers during 2011 and 2010, interest from international investors will remain firm during 2012. The report also states that Sweden maintains an optimistic outlook in the context of the wider European market due to its stable public finances, which can allow for an expansionary monetary policy. However, it does indicate that the wider macroeconomic environment and caution in the market will continue to impact the Swedish market during 2012.

Source: Savills

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