Market Report Summer 2020

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Market Report Summer 2020 Market report Summer 2020 www.malling.no The grey rhino suddenly appeared About six months have passed since our previous report where we recognised the obvious trade war, Brexit and geopolitical tension as a risk for global growth. In the meantime, the world has been taken by surprise by the invisible enemy well known as Covid-19. The virus is already categorised as a grey rhino, defined in the book carrying the same name by Michelle Wucker, as a highly probable, high impact, yet neglected threat. This is something we all should have been better prepared for and put into our risk models. Alas, we (and the rest of the market) did not! Anders Berggren CEO, Eiendomshuset Malling & Co The complete effects on the Norwegian CRE market are in production working from home. The Central Oslo office still not fully visible, but we already know that 2020 will market remains solid compared to previous periods of rental be a different year. A sharp decline in the price of high decrease. New supply pipeline is limited in Central Oslo, and quality CRE companies on the stock exchange has seen the weak economic outlook may scare off new developments them trading with a significant discount. Many investors under planning. We believe the rental downturn will be have thus been expecting similar discounts on direct asset relatively short and mild this time for office in Oslo. transactions. The increased risk premium from investors has been followed by more expensive credit and risk premiums For retail, and high street retail in particular, Covid-19 being demanded by banks. Despite sharp interest rate cuts increases the wind from 9 to 11 on the Beaufort scale. from Norway’s central bank, it was not enough to brake the Several key retail chains, such as H&M, report on weak transaction market to an almost complete halt in March and sales, and the prospects of an increase later this year April. The market is now gradually picking up speed, as risk seem unlikely as purchasing power will decrease in line seems more lucid and society is reopening more, however with the sudden increased unemployment. The savings mostly in the off-market arena. rate is expected to increase, the main wage settlement normally held in May has been postponed until the autumn Our transaction survey sent out to institutional investors, and prices have started to increase sharply due to the closing Friday before Easter, indicated that Prime yield dramatic depreciation of the NOK. We are all significantly estimates for offices in Oslo increased marginally by less wealthy than last year. On top of that, the virus has around 5 bps from Q4 2019 to Q1 2020 (end of quarter). accelerated online shopping to new highs, and many believe Office projects with a riskier real estate profile increased this will accelerate the shift towards online retailing. by 15-25 bps on estimated yields, reflecting the increased risk premium demanded by the market at that time. Since We hope you enjoy our latest market report, which has then, interest rates have fallen, credit premiums have been undergone a design brush-up as we enter a new decade. reduced, and the stock exchange has partly recovered. If we We have also expanded its contents by adding two new gradually get back to normal without new bursts of virus segments, namely Hospitality and Residential, as well spread, further yield compression for prime assets cannot as including one new city, namely Bergen. The latter is be excluded as a likely scenario. supplied by our regional contact WPS Næringsmegling. Remember that Malling & Co is here to support you in all Rents and cash flows will also be affected by Covid-19, your commercial real estate needs, including transaction and the immediate effects will be increased vacancy and support, tenant representation, development, energy and lower rents. The office sector seems to have very few environment services, research services, leasing services, symptoms of Covid-19, and most businesses have remained valuations, and property and asset management. Macro — Global page 4 Macro — Nordics page 8 Macro — Norway page 10 The office market page 16 Stavanger page 34 Drammen page 40 Bergen page 44 Retail page 50 Hospitality page 56 Industrial & Logistics page 64 Residential page 70 The investment market page 74 About Malling & Co page 80 Editing completed: 19 May 2020 Design & layout: Julian Alberti Macro — Global U, V or W? The COVID-19 pandemic has inflicted high and rising social and economic costs worldwide through widespread closures to slow the spread of the virus. The severe impact on economic activity will as a result lead to the global economy contracting sharply by a projected -3.0 % GDP growth in 2020, according to the IMF World Economic Outlook April 2020 (IMF). That is much worse than during the 2008 financial crisis. In the IMF’s baseline scenario, which assumes that the pandemic fades in the second half of 2020, the global economy is projected to grow by 5.8 % in 2021 as economic activity normalises, helped by policy support. There is however according to the IMF extreme uncertainty around the global growth forecast. The economic fallout depends on factors that interact in ways that are hard to predict. Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices. GDP growth projections GDP growth projections, % change Emerging markets & Risks of a worse outcome predominate, and effective policies Global Advanced developing are essential to forestall worse outcomes because the economic economy economies economies fallout reflects particularly acute shocks in specific sectors. The fiscal response in affected countries has been swift and sizable 6.6 in many advanced economies as well as many emerging market 5.8 4.5 and developing economies, where they have begun providing 3.7 2.9 substantial targeted fiscal, monetary, and financial market 1.7 measures to support affected households and businesses. -3.0 -6.1 -1.0 The significant actions of large central banks include monetary stimulus and liquidity facilities to reduce systemic stress. These actions have supported confidence and contribute to limiting the amplification of the shock, thus ensuring that the economy is better placed to recover. The synchronised actions can magnify their impact on individual economies and will also help generate 2019 2020 2021 2019 2020 2021 2019 2020 2021 the space for emerging market and developing economies to use monetary policy to respond to domestic cyclical conditions. Source: IMF World Economic Outlook (April 2020) GDP growth projections, % change Latin America Middle East & Emerging & Sub-Saharan The US & the Caribbean Euro Zone Central Asia Developing Asia Africa 8.5 4.7 5.5 4.7 4.0 4.1 2.3 3.4 3.1 1.2 1.2 -5.9 0.1 -5.2 -7.5 -2.8 1.0 -1.6 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 Source: IMF World Economic Outlook (April 2020) 4 MACRO — GLOBAL MACRO Fiscal policy The rapidly worsening risk sentiment has prompted a series of central bank rate cuts, liquidity support actions, and, in a number of cases, large asset purchase programmes, including from the US Federal Reserve, European Central Bank, Bank of England, Bank of Japan, Bank of Canada, and Reserve Bank of Australia, as well as from emerging market central banks in Brazil, China, India, Malaysia, Mexico, the Philippines, Saudi Arabia, South Africa, Thailand, and Turkey—which will help partially offset the tightening in financial conditions. Moreover, several central banks have activated bilateral swap lines to improve access to international liquidity across jurisdictions. Nonetheless, the significant tightening of financial conditions will further dampen economic activity in the near term, adding to the direct macroeconomic repercussions of the pandemic. Key policy rates — Actual and expected policy rates (percent) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 2014 2015 2016 2017 2018 2019 2020 2021 2022 The US Canada The UK Japan Euro Zone Switzerland Source: IMF World Economic Outlook (April 2020) Ten-Year Government Bond Yields (percent) 6 5 4 "The significant tightening 3 of financial conditions will 2 further dampen economic activity in the near term.” 1 0 -1 Jan. Apr. Jul. Oct. Jan. Apr. 2019 2019 2019 2019 2020 2020 Japan The US Source: IMF World Economic The UK Germany Italy Outlook (April 2020) 5 MACRO — GLOBAL MACRO Financial conditions Financial conditions in advanced as well as emerging market economies are significantly tighter than our last report in November 2019. Equity markets have seen dramatic falls; high-yield corporate spreads have widened significantly. Signs of dollar funding shortages have emerged amid the general rebalancing "Financial conditions of portfolios toward cash and safe assets. Currency movements have generally reflected these shifts in advanced as well in risk sentiment. The currencies of commodity as emerging market exporters with flexible exchange rates among emerging market and advanced economies have economies are depreciated sharply since the beginning of the year, while the US dollar has appreciated by some 8.5 % significantly tighter." in real effective terms as of April 3, the yen by about 5 %, and the Euro by some 3 %. Real effective exchange rate changes – Advanced economies 10 5 0 -5 -10 -15 USA EA JPN GBR SWE CHE KOR TWN SGP CAN NOR AUS NZL Latest vs. 31 December 2019 31 December 2019 vs. September 2019 Source: IMF World Economic Outlook (April 2020) Real effective exchange rate changes – Emerging Market economies 20 15 10 5 0 -5 -10 -15 -20 -25 ZAF CHN IND IDN MYS PHL THA HUN POL RUS TUR ARG BRA CHL COL MEX PER PAK Latest vs.
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