FBGBY Fabege AB (PK)

By Peter Grant 

Late last year, when Swedish home prices were plummeting, some short sellers targeted Fabege AB, a large Stockholm office landlord, on the belief that the weakness in residential would spread to commercial property.

It was a bad bet. Lately Fabege's shares have been trading above 120 Swedish krona a share ($13.19), up from under 90 Swedish Krona late last year.

"Everyone who has been cautious on the Swedish commercial real-estate names has been wrong," said Peter Papadakos, an analyst with Green Street Advisors. "Everyone who has been seeing the low [office] vacancy and assumed that rental growth will continue has continued to be right."

The Swedish real-estate industry is demonstrating that residential and commercial property markets march to different drummers. While home prices have fallen and investor sentiment in that market has done an about-face after years of growth, office-building owners are being buoyed by expanding tenant demand in a high-growth economy.

Investors buying office property in Stockholm's central business district are paying top prices. In the second half of this year, buyers were getting yields in the low 3.5% range, according to JLL, a commercial-property-services firm.

That is down from 5% in 2011 and over 4% in 2014, the firm said. Yields fall in commercial property as values rise.

Recent deals include Fabege's sale earlier this year of Uarda 6, an 18,000- square-meter building the company completed in 2017, to an open-ended real-estate fund managed by Frankfurt-based Union Investment. The deal valued the property at 1.2 billion krona, Fabege said.

Also, Skanska AB last year sold its Sthlm Seaside project to Vasakronan, a Swedish property company, for about 900 million krona. That 12,500-square-meter building's tenants include gaming companies Arrowhead Game Studios and Yggdrasil Gaming.

Still, amid these positive signs, the Swiss office market faces challenges. "Even though we witness a continued rental growth, we also get signals from tenants that the willingness to pay has reached the limit," said Cecilia Gunnarsson, JLL's head of research in Sweden.

Also, the availability of sites for new development is limited by Stockholm's water-inundated geography and strict government restrictions on height and mass in historical areas. Developers have been increasingly focusing on suburban and industrial sites, like the Arenastaden development, which includes Fabege's office buildings, the Mall of Scandinavia and a new soccer stadium.

In August, Fabege announced plans to try to repeat its success at Arenastaden by developing a sprawling new business district in the Flemingsberg area south of Stockholm over the next 10 to 15 years. When finished, it will have enough office space for 50,000 workers, 50,000 residents and 50,000 daily visitors, according to Christian Hermelin, Fabege's chief executive.

The project also will help address the traffic jams in the area when workers who live in the southern part of the city travel to the business districts of the north. "Today the average employee in Stockholm is spending more time getting to work than they have holidays," said Mr. Hermelin. "And in Stockholm, we have many more holidays than you do in the U.S."

The Stockholm office market held up better than that of many other European cities after the 2008 global financial crisis. It also has experienced impressive growth in occupancy and rents since the debt crisis in Southern Europe ended, according to Peter Wiman, head of Sweden research for Savills. "As soon as [the debt crisis' was settled, the market really started moving upwards," he said.

Office vacancy in Stockholm overall is 6.6% and only 2% in the central business district, JLL said. The technology sector is particularly strong. For example, co-working giant WeWork is planning to open its first Stockholm operation in early 2019.

Prime office rent in Stockholm's central business district was over 7,000 krona a square meter per year at the end of the first half, compared with less than 5,000 in 2015, JLL said.

On the supply side, the residential boom, which ended last year, has helped the office market. While it lasted, developers converted numerous older office buildings to apartments.

Historically, developers in Stockholm have added new office stock at an annual rate of about 1% to 1.5% of total supply. But in the last five years that number has been "close to zero or even negative" because of conversions, Green Street's Mr. Papadakos said.

"Whenever possible [in Sweden] when you have an obsolete office building, it would make much more economic sense to convert it to residential," he said. Similar conversion booms in other cities, such as Sydney, Australia, have helped those office markets also stay strong.

Market bulls worry about new space being added. Over 160,000 square meters of space currently is in the development pipeline, up from 100,000 square meters last year, JLL said.

But many expect tenants to absorb this space steadily. "We're more likely to see a slowdown to other European levels in terms of rent growth as opposed to an absolute correction in rents, let alone a big fall," Mr. Papadakos said.

Write to Peter Grant at peter.grant@wsj.com

(END) Dow Jones Newswires

September 04, 2018 08:53 ET (12:53 GMT)

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