SWEDEN: An Introduction to Real Estate

Real Estate Market Overview – Chambers  

Current Economic Conditions 

The Swedish real estate market met its all-time high during 2021, with a transaction volume amounting to approximately SEK 290 billion (EUR 27.3 billion), and almost SEK 400 billion (EUR 37.6 billion) including the activity on the stock market. Compared to 2020, this meant an increase of almost 50 percent. Yields are at record low levels in most segments. Analyst firms have predicted that the Swedish real estate market will grow even stronger in 2022; however, that prediction was made before the events that took place in Ukraine in February 2022. At the time of writing, it is uncertain what effect the recent events in Ukraine will have on the market and therefore, the article does not take it into consideration.

The Swedish central bank (Sveriges Riksbank, Riksbanken) has not reached its goal of 2 percent inflation rate – in January 2022 the inflation rate was 3.7, going down from 3.9 in December 2021. The forecast of Riksbanken is that inflation will continue to increase until mid-2022, and thereafter decrease marginally. Inflation is assumed to cause increased interest rates, which – starting from a zero-interest rate – may have a rather high impact on the non-commercial, owner-occupied housing and commercial properties. According to Riksbanken, however, the interest rate will not increase until mid-2024.

Overall Market Trends 

During 2021, the highest activity was found in sectors with tenants within the stable cashflow segments such as residentials and social buildings (i.e., properties with tenants that in all material aspects are financed through taxes and specifically for society service purposes). The market saw several large residential real estate transactions – the largest being Heimstaden’s acquisition of 859,000 sq m of residential area from Akelius with a purchase price of SEK 36.7 billion (EUR 3.3 billion). The office market as well as the retail market faced an uncertainty during the pandemic.

The office market stabilised somewhat during 2021 and yield compressions are continuing, now slightly below 3 percent in Stockholm Prime CBD. Going into 2022, landlords are facing new demands from tenants. The pandemic seems to have increased the demand for flexible lease options such as co-working spaces, short-term leases, and workforce mobility. This may create a challenge with regard to financing, since traditional banks prefer long-term leases. Furthermore, the office market will be facing the challenge to adapt to new work life demands. According to a survey performed by JLL, hybrid working will continue to be a trend and the possibility to work remotely will stay a key factor – although the same survey found that productivity at home is falling. Nonetheless, employees are demanding more from their workspace and according to JLL: “…a holistic, employee-centric approach will be attractive in the future, where focus is on digital connectivity and green values”.

During 2020 and 2021, the market has also seen an increased demand for logistic properties – likely connected to increased e-commerce as a result of lockdowns and social distancing recommendations during the pandemic. This, in combination with long-term lease contracts, seems to create an attractive market for logistics.

Other trends are more structural. The listed company Castellum purchased another listed property company named Kungsleden, and the property company Corem took over Klövern. The listed company SBB with its business within properties for public use made several large transactions such as the purchase of the listed company Amasten and Offentliga Hus.

New Rules for Private Schools 

Since Sweden implemented the so-called Private School Reform in 1992, the number of independent schools has increased rapidly and today Sweden has 822 independent primary schools as well as 449 independent secondary schools. The Private School Reform allowed privately run schools that offer primary or secondary education to receive public funding for each student, at a similar level to what public schools receive. The reform has been highly debated in Sweden, especially regarding for-profit schools.

In February 2022, the Social Democrats, currently in government, proposed a new bill to reduce the public funding for private schools in relation to public schools. The municipalities in Sweden have an obligation to offer education for all pupils residing in the municipality, and public schools in Sweden are covered by this obligation which may result in additional costs. Private schools, however, are not covered by the obligation. The bill argues that public funding should be reduced for private schools since they are not covered by the obligation, and thus not subject to those additional costs. There is also a debate in Sweden about prohibiting owners of schools to take profit in tax-financed companies.

Critics of the proposal fear that reduced public funding will put a heavy financial pressure on many schools, which might ultimately result in many private schools having to close their business. It is difficult to say what consequences the proposal would have on the real estate market, but it is reasonable to believe that several landlords, together with banks and other lenders, would need to re-analyse the security of their long-term lease agreements and LTVs.

Energy Efficiency Directive 

Under the directive 2012/27/EU, amended in 2018, the EU set an energy efficiency target for reducing energy consumption in 2030 by at least 32.5 percent compared to 2007 consumption projections for 2030. The directive is particularly challenging for energy consuming sectors such as buildings (responsible for 40 percent of the energy use). In July 2021, EU proposed to further stimulate the member states efforts to promote energy efficiency by introducing a higher target for reducing energy consumption by 2030.

In Sweden, a large amount of the buildings constructed during 1960-1975 need renovations. According to the public research institute RISE, about 400,000 of the apartments built during the relevant period have not been registered as renovated and at least 140,000 apartments are in urgent need of renovation. The need for renovation, in combination with the targets for reducing energy under the directive, risk becoming costly as the energy efficiency target for example requires usage of materials that might be more expensive. According to the National Board of Housing, the estimated cost for renovating the buildings included in the so-called Million Programme (the common name for a public housing programme implemented during 1965 and 1974), amounts to SEK 300-500 billion (EUR 28-47 billion).

In addition to the increased costs trigged by the directive for all real estate owners, the high latent renovation debt in Sweden has led to a need for municipalities to divest properties to release capital. Uppsala municipality divested a portfolio of properties in 2020 and recently Kalmar municipality divested a property portfolio for an amount of SEK 2.5 billion (EUR 235 million). To meet increased costs, we may see additional divestments during 2022 and onward.

Going into 2022, Sweden's property transaction market is looking transparent with a high liquidity, making it an attractive market for real estate transactions. It is worth noting that the recent events in Ukraine will most likely affect the market, but at the time of writing, we cannot foresee how, or to what extent.