Sweden needs REIT structure
During the last couple of years, a large amount of capital has flowed into the Swedish real estate market. Foreign investors have purchased a large number of properties. Foreign investors accounted for more than 70% of SEK50m+ (e5.6m+) real estate transactions during 2003. It is principally German and UK/US funds which have made the acquisitions.
Following the real estate crisis of the early 1990s, banks built a large number of real-estate companies from distressed loans. On the Stock Exchange, companies like Norrporten, Castellum, Diligentia, Näckebro, Balder, Mandamus and Drott were listed. Even the state established real-estate companies, some with stock already owned and others on newly built stock. The largestof these are Vasakronan and AP-Fastigheter.
What has happened to these companies? To a large extent, they have all disappeared from the stock market due to acquisitions and restructuring. After the current acquisition of Tornet and Fabege, only two companies will remain, Castellum and Kungsleden, which are not locked in by their ownership. To that can be added the two state-owned companies, Vaskronan and AP Fastigheter, but these are also locked in by ownership and not exposed to financial pressures.
What are we faced with now? We have seen German funds with low earnings requirements and with clear, low risk profiles purchase newly built properties in good locations, primarily in Stockholm, with good tenants and long-term leases. At the same time, we have seen UK/US funds purchase properties with appreciably larger risks in order to restructure ownership behind these properties. We are also beginning to see the first signs of foreign investors purchasing older properties.
The influx experienced in the last years is influenced not just by the situation in Sweden, but also by the economic situation in the rest of Europe. Sweden is well positioned in the economic cycle and, above all, the opportunistic funds can expect an earlier recovery. Furthermore, we have had help from the development and increasing professionalism of the real estate market that has emerged in the last ten years. Swedish real estate owners for the most part have not participated in the restructuring process in recent years. This is mainly due to the ineffective ways real estate capital in Sweden is organised. Most of the foreign investors are organised as real estate funds according to relevant legislation and with a clear specialisation in different types of funds, risks and expected returns. This provides foreign investors with a more effective way to allocate capital and lower cost of capital. With their fund construction, they also have access to a much broader base of investors, from institutions to private investors.
What drives these developments forward is the increasingly effective use of capital. Previously, one type of real estate was concentrated on. Today, one looks for different types of capital with different returns and different types of office. German pension funds are satisfied with a return of approximately 6%. They buy newly developed office properties with the most stable tenants while UK/US risk capital acquires high-risk properties and earns money by restructuring their assets.
What does this mean for the Swedish private investor in general and for pension investors in particular? It means that the Swedish investor receives limited access to this type of real estate investment. It also means that private individuals, with the exception of the wealthiest, have no alternatives for real estate investments.
Currently, there are several attempts being made to get around this problem using fund-like structures within the Swedish legislative framework. The risk is high that these efforts will be ineffective and expensive, poorly analyzed and, moreover, inaccessible to pension savers in Swedish Premium Pension System and unit links funds or private individuals.
The solution to the problem described above is legislation for a Swedish Real Estate Investment Trust. In the rest of Europe such legislation already exists. One of the last countries in the process of introducing such legislation is Finland. Real estate funds should have a structure similar to equity funds, such as an independent legal entity that only functions as an instrument for the ownership. Taxation of ownership should be made through the owner of the fund and not the fund itself. REITs and their managers should be overseen by the Swedish Financial Supervisory Authority.
Claes Kjellander is a director at Jones Lang LaSalle in Sweden