After years of economic independence, Norway is embracing cross‑border investment. Emily Wright travelled to Oslo to find out why the world’s wealthiest ice maiden is finally thawing
Originally published 8th October 2016
“Sixty years ago we were all just hunters and fisherman here. We are still not really used to the wealth.” Norwegian urbanist Erling Fossun looks out over Oslo from the pine forest surrounding the famous Ekeberg Sculpture Park. Rising up over the city, this is the place to come for the best views of the Norwegian capital. And not just for the fjords, flora and fauna. The elevated look-out point gives a clear snapshot of a city on the cusp of a major change. The sight of a waterfront packed with cranes, modern architecture and a wall of fresh development emblazoned with company logos – Deloitte, PwC, DNB ASA – speaks volumes. This is all part of a new look for Oslo – one that signals the city is open for big business and, by default, that one of the richest countries in Europe is finally ready to take its place on the world stage.
And this is not an insignificant step. Once considered the “wealthy weirdo” of Europe, the discovery of oil in the late 1960s gave Norway the riches it needed to make its own rules, set its own goals and keep the rest of the world at arm’s length. It has never been a member of the EU and, on the real estate side at least, has not always had an open-door policy in terms of overseas investment.
But that is changing fast. It might not strictly need external resource – this is the second-richest country in Europe by GDP per capita (at $67,619) and is home to the biggest sovereign wealth fund in the world – but with international relations now more important than ever before, Norway is ready to re-engage. Starting with property investment: “Ten years ago, Norwegian real estate was a local business,” says Stig Bech, partner at Oslo-based law firm BA-HR, which was responsible for advising on Nkr112bn ($13bn) of a total Nkr125bn of deals in Norway in 2015. “There was no room for anyone else. That has changed considerably over the past five years. Foreign investors in the Norwegian market have grown in amazing numbers, and more or less 50% of deals in 2015 were overseas funded. We understand now that we are part of an international world.”
Big plays by the likes of Blackstone and Starwood Capital in the past 18 months have helped nudge Norway further onto the world map. But the big questions remain: is the country still an attractive investment proposition against the backdrop of plummeting oil prices? How easy is it to do business in a country that, until recently, has favoured domestic investors? And what does a fellow non-EU member think of the UK’s Brexit decision?
Global community
The sea change in Norway that has seen the barriers finally lift on overseas investment has less to do with a shift in requirement – the country is still rich enough by quite some margin to support itself – and more to do with a recognition by Norwegians that being part of a wider global community is becoming increasingly important.
That is not to say the economic situation in Norway has been without hurdles in recent months. As oil prices have halved to $48 a barrel, the country’s economy stalled in the first quarter of the year as offshore oil, gas and shipping activity shrank by 1.4% and mainland GDP grew by just 0.4%.
The government was forced, for the first time, to tap the nation’s sovereign wealth fund to the tune of $819m, and Norway’s central bank has said the country might be forced to withdraw more than $9bn from the $888bn pension fund in 2016 to make up for the collapse in oil revenue.
Not ideal, but a manageable sum compared with the overall size of the fund. And twinned with the International Monetary Fund’s positive review of the Norwegian economy in September this year – that mainland GDP is on a slow but steady growth trajectory and unemployment and inflation remain low – the country’s finances are stable.
So why the incentive now to attract overseas investment? Peter Jacobsen, owner and founder of Oslo-based Accendo Investment Management, says that it comes down to a desire to “enter the next division” as Norway has been “greatly overlooked” compared with neighbouring Sweden and Finland over the years (see comment, p25).
BA-HR’s Bech puts the shift down to a concerted effort on the Norwegian side of the transactions: “We had to grow an international market,” he says. “It is good for us to have international interest as it makes the market more liquid and more robust. From the point of the view of the property owners, it is in their interest to make sure there are lots of different players involved. That could be a German firm, a UK family office, a Norwegian bank. We see now that diversity and being part of the wider world is important.
“We now print brochures in English, which is a big step, and we even slow deals down to give foreign investors a chance. Things happen very quickly here and often a deal would have been done domestically before international players had even landed at the airport. Local companies have been more willing to wait a little longer to give international buyers a chance to keep up.”
Reliable growth
And what about the incentive for anyone eyeing Norway as a possible investment play? On the plus side, this is a solid, stable market. Growth is reliable – particularly in Oslo, where a major regeneration plan is under way to account for an expected growth of 200,000 people over the next two decades off a low population base of 650,000 today. Prime central rents in the city are around $378 per sq m pa, according to Cushman & Wakefield, and Bech expects them to dip in the short term (“this autumn”) but then grow over the next five years. Yields for commercial property are between 4% and 7% for prime central Oslo and the market is still maturing as major schemes such as the 20,000 sq m waterfront Barcode project (see above) have opened the floodgates to a new style of high end office and mixed use development.
High house prices (averaging $7,500 per sq m) are fuelling a city plan that Oslo city councillor Victoria Marie Evenson says could create 147,000 new homes. These have been allocated around 37 locations along subway or railway lines and Evenson insists it is possible to deliver on such a huge scale within the current city boundaries if the urban fabric “becomes denser.” She adds that collaboration with contractors, architects and investors would be key to ensuring the delivery of the schemes.
And Bech adds that investment opportunities spill into the retail and leisure market – particularly on the luxury side, where there is a huge gap in the Norwegian market.
“There is about 90 metres of luxury retail in the whole of Oslo,” he says. “And seven years ago there was nothing – no luxury branded stores at all. Now we have Hermes, Gucci, Louis Vuitton and this is just the start. We know those luxury brands are looking for more branches. We need to wake up to that here. The mentality is changing in Norway and people are going to London or Paris for the luxury stores, so the demand is here. It is the same with luxury hotels. There are a few classics here but over the next five years we will see more luxury, designer and boutique hotels coming into the city.”
Then there is the ease of doing business: “investing here is very structured and very easy,” says Bech. “And we are attracting a new wave of very good tenants who are looking for long leases of 10-15 years. The contracts are the most standardised in Europe, which just adds to the ease.”
The big downside is obviously the price. It is not cheap, as the aforementioned commercial and residential property prices attest.
But with such impressive returns, an influx of new, international tenants and growth across most sectors, the country remains a solid play for those with the cash to splash.
UK vote
Less encouraging is the distinct lack of any upbeat advice on operating successfully outside the EU. While the response to Brexit from the upper echelons of the Norwegian oil fund remain reassuringly unfazed (see p26), other reactions to the UK’s vote to leave are more negative: “It is one thing being the weirdos on the outside but it is another to be the weirdos who leave,” says Evenson. “The UK economy is tied up with Europe,” she adds. “It’s quite different. We wish you the best of luck.”
“I love the EU,” adds Bech. “I would really like Norway to join so I think it is incredibly strange that Britain is not staying. I think it is really sad, especially when I look into some of the reasons.”
But in terms of British investment into Norway, his message is more positive: “Typically UK companies have not invested in Norway yet but I think we will see great interest in the future. We know the UK. We invest in the UK and we have good, strong relationships.”
Let’s just hope that as Norway starts to move towards a closer, more cohesive relationship with the rest of the world the UK doesn’t take its place as the “(slightly less) wealthy weirdo” of Europe.
Brexit – could UK adopt Norway’s model?
Charles Brasted and Scott MacPherson, Hogan Lovells
What is the “Norway model”?
Norway is not a member of the EU, having voted against joining on two occasions. Its relationship with the EU has been vaunted as a possible model for a semi-detached UK; but what is that relationship? It is founded on Norway’s participation in the European Economic Area (EEA) agreement with the EU, its various member states, Iceland and Liechtenstein. The UK could not adopt the Norway model unilaterally. It would have to accede to the EEA agreement, which would require the unanimous approval of the other EEA members.
A single market – but not as you know it
The eea agreement allows Norway to participate in most aspects of the eu single market, while retaining control of its agriculture, fisheries, customs and VAT policies. As a result, there are additional border requirements, which can add cost and time to transactions with the EU.
The single market also requires free movement of people. Traditionally, free movement in the eea is narrower in scope than the eu’s citizenship provisions – for example, in relation to derived rights of family members – although there has been a trend toward convergence with the EU rules. The eea agreement also provides for an “emergency brake” on migration in circumstances of serious economic, social or environmental difficulties. In the event of this being used, other eea members could be entitled to implement a suspension of preferential trade.
The price of access
Access to the single market does not come without cost. Norway pays roughly £623m per year for its membership of the single market and other EU programmes. As a proportion of its GDP, this amounts to 80-90% of the amount that the UK currently contributes to the EU budget, as a proportion of its own GDP.
Sovereignty preserved?
Norway must follow the EU laws that relate to the operation of the single market. As Norway is not an EU member, it does not have a direct say in how these laws are made. However, under the EEA agreement, at the pre-legislative stage the commission must seek advice from experts of the EEA states for legislation that involves the EEA, giving Norway some input.
Despite the “democratic deficit” in relation to decision making, the model remains almost unanimously popular in Norway. It is unclear how much of this model could be successfully applied to the UK, which is used to playing a very active role in EU policy making, and has a larger economy that is substantially more focused on services and enjoys fewer natural resources than Norway.
Project watch – Nydalen: A new neighbourhood
Developer: Avantor
Architect: Mad/COBE
A new, sprawling urban masterplan in northern Oslo, Nydalen has been transformed from a traditional, outdated industrial area to a city district and home of the Norwegian Business School. The scheme includes a new school, subway station and will even introduce a surfing wave next year. The project marks the emergence of a fresh perspective on city living in the capital.
Growing volumes put pressure on yields but more opportunities emerge
David Hutchings, head of EMEA investment strategy, Cushman & Wakefield
Norway’s real estate market is firmly on the radar for domestic and international investors, with volumes rising 131% last year to a record €11.5bn. Oslo attracts the lion’s share of investment, of course, with the city’s reputation as an environmentally friendly, secure but still dynamic location coming to the fore, with innovation in everything from architecture to nightlife.
With investment supply tight, volumes have eased back somewhat in 2016 but it has still maintained high demand overall and was in fact the 10th-busiest property investment market in Europe over the first six months of the year. Such demand has brought yields down to record low levels, with compression ahead of the European average in all sectors over recent quarters. What’s more, rental growth is also outperforming the regional average, driven in particular by strong growth for Oslo high street property but with offices also now seeing a return of growth.
Sectors of the market reliant on the oil industry do still show a high level of caution, and, indeed, consolidation. However, other areas are more upbeat, seeing rising demand and interest from cross-border retailers, for example.
Looking forward, low oil prices will continue to affect sentiment but economic momentum is expected to increase as oil prices recover. Government efforts to diversify the economy beyond oil should also start to pay dividends, while, in the short term, consumer spending is forecast to increase as interest rates stay low and employment picks up.
For real estate, growth will remain focused on prime but demand patterns are spreading, given the shortage of space now evident, with streets and properties in close proximity to the core picking up and opportunities emerging to reposition older space in all sectors, including industrial. As such, the country offers a broadening range of opportunities for investors across core, core-plus or more opportunistic strategies.
Norway closed for business? It’s a myth
Peter Jacobsen, Accendo Investment Management
I have recently been asked why Norway is open for foreign investors. We obviously do not need the capital. In truth there is enough domestic capital for the size of the market, yet there is an interest in attracting foreign investment. The textbook reasons as to why this might be are all there: increased transparency, more correct pricing, increased total capital freeing up domestic capital for other investments.
On further reflection, I believe that one of the major reasons is the desire to enter the next division. Finland and Sweden, being EU members, attracted a greater degree of the European investments in the early 2000s, while Norway, not being included in the EU statistics, had been greatly overlooked. While Sweden on average had around 20% foreign capital investing in real estate, Norway had about 2% – despite the fact that the macro picture for Norway has been better over time.
The lack of statistical information, and presence in EU real estate analytics, had given a false impression of Norway being closed for business with foreigners. The abundance of a wealthy domestic market also strengthened the impression of a private club. In truth, looking back, Norway was working on its game, the market was professionalising and the domestic wealth was improving the real estate stock. Then around 2008, while the rest of Europe was in the depths of the financial crisis, Norway was back on track and getting ready to do business. Although It may be only the opinion of a non-national, I believe Norway woke up, being aware that its game (economy) was better than they themselves thought. Since 2008 there has been an increase in domestic awareness in the robustness of the economy and in the fact that these strengths are greatly in the shadows of our neighbours without just cause. Since then, Norwegians have been conscientiously working towards entering the next division.
The Norwegian rebound, after the crisis of 2007, was also a wake-up call for global investors looking for a safe haven. The flight to quality and the hunt for a safe haven combined with the strong economy brought Norway into the spotlight – a position it was quite happy to have after living in the shadows. And recently Norway has proved that the economy is not as reliant on oil as many analysts have thought.
The entrance of the global players into the market has had the textbook effects, and it has sharpened the game. There is an increasing professionalism in the way deals are structured and carried out. Recognition is being given to the strength of the economy and the quality of the stock and the particular quality of the architecture. The domestic players’ area is also benefiting from the international experience being exercised by the global investors that have purchased here.
The new challenge is the availability of stock. There is enough demand, both domestic and international. However, the lack of alternative investments that can provide equivalent returns has reduced the deal flow. Although good prices can be achieved, if you can’t reinvest what is the point in selling?
There are, however, good opportunities to be had for the investors who think out of the box. Most international investors want 100% control over the investments. Yet there are many Norwegian investors who would like access to the international division, and to the expertise and network that the global players can offer. Norwegian players are interested in partnering and co-investing and to use the capital to reinvest and expand. I believe this is an untapped opportunity waiting to be explored.
There is also an opportunity for debt investors looking for secure real estate debt. Solvency requirements have resulted in Norwegian banks building capital and being quite selective in their lending. The domestic bond market has taken up some of the slack, yet there is room for more.
Norway is defiantly open for business. We have a strong and dynamic market that has lived in the shadows too long. Our strength is not driven by any dependency on the EU. And perhaps being on the outside has allowed us to develop our own identity that is now being recognised. There are solid investments to be had in the normal deal flow, and opportunities for those looking for local partners or debt. Welcome to Norway, now playing in a new division.
