Nordic Real Estate Conference Takeaways
Last week, I spent a day at the Nordic Real Estate Conference, which brings together each year the leaders of major European real estate investment firms that are active in Northern Europe.
As such, it was particularly relevant to our following investments:
Cibus Nordic: grocery stores in the Nordics
Tallinna Sadam: Ports and land in Estonia
Vonovia: Major residential portfolio in Germany, but also in Sweden
Xior: Student housing primarily in Northern Europe
I will soon have separate updates on all of these companies, but before that, I wanted to share some key takeaways from this conference. These takeaways also apply to our other holdings, so you may still find this interesting even if you do not invest in these Northern European real estate companies.
Takeaway #1: Everyone is Baffled by the Huge Discounts to NAV
Historically, listed real estate companies operating in Northern Europe have generally traded at premiums to their net asset values.
The region is known for being economically strong and one of the most stable in the entire world. As a result, there is generally a lot of demand for the stock of listed real estate companies operating in this region, and yet, their supply is strictly limited, with only a small number of listed companies.
But today is the exception with Swedish real estate firms trading at a near 40% discount on average, and similar discounts exist elsewhere in Northern Europe:
The CEO of Swedbank, which is one of the leading banks in the Nordics, explains that either the stock market is wrong, or the bond market, transaction market, and banks are all wrong.
He clearly thinks that the stock market has it wrong and expects the gap to close over time.
The publicly listed real estate market is far smaller in scale than the private market, and banks and bond investors, who are known for being more conservative and sophisticated, feel very comfortable with these private market values.
Takeaway #2: Retail is the Most Heavily Mispriced Property Sector
Many of the institutional investors that I talked to appeared to think that retail is the most attractive property sector to invest in right now.
The “death of retail” narrative was so strong leading up to and following the pandemic that negative views still linger today, with many people continuing to avoid retail due to e-commerce fears.
But the reality is that the property sector is today severely undersupplied, resulting in historically high occupancy rates and strong rent growth.
This is true in Europe, but also in the US, where most retail REITs have guided for 3-5% same-property NOI growth for years to come as a result of this undersupply.
This has also attracted the attention of major private equity firms like Blackstone (BX), which has already acquired two retail REITs in recent years (ROIC; ALEX) and is now rumored to be going after a third one in Whitestone REIT (WSR).
Despite the solid fundamentals and steady growth, these properties are today still selling at attractive cap rates, typically in the 6.5-7.5% range.
In comparison, residential properties commonly sell at materially lower cap rates, at closer to 5%, despite enjoying slower growth and being more management-intensive.
The gap in cap rates between retail and industrial is also unusually large, when accounting for the strength in retail.
Because of this, many investors appeared to think that some cap rate compression is likely over the coming years as this growth becomes a reality and perceptions change.
The growth in NOI, coupled with just 50 basis points lower cap rates, could materially boost the NAVs of publicly listed players when accounting for their leverage.
