Office and industrial yields edged lower in Q4 as the recovery in Scandinavian investment took hold. However, the pandemic continued to weigh on occupiers, with retail rents declining further in most markets and office rents taking a hit in Oslo and Stockholm. Looking ahead, there are downside risks to the economic recovery given the slower-than-expected pace of the vaccine rollout. But the Scandinavian and Swiss economies are still likely to return to pre-virus levels of activity more quickly than most other parts of Western Europe. This should support occupier demand, although continued growth in online spending and firms adjusting their office space will weigh on retail and office performance.
- Office and industrial yields edged lower in Q4 as the recovery in Scandinavian investment took hold. (See Chart 1.) However, the pandemic continued to weigh on occupiers, with retail rents declining further in most markets and office rents taking a hit in Oslo and Stockholm. Looking ahead, there are downside risks to the economic recovery given the slower-than-expected pace of the vaccine rollout. But the Scandinavian and Swiss economies are still likely to return to pre-virus levels of activity more quickly than most other parts of Western Europe. This should support occupier demand, although continued growth in online spending and firms adjusting their office space will weigh on retail and office performance.
- Economic indicators suggest that the comparative economic resilience of the region should continue. Meanwhile, inflation will spike in the coming months, but only temporarily. This will allow central banks to keep policy accommodative. The exception is Norway, where we expect rates to rise by year-end.
- Commercial property investment market indicators show that activity picked up strongly in Q4 and could recover more quickly than other parts of Western Europe this year.
- Commercial property occupier market indicators highlighted that office markets in Oslo and Stockholm were under the most downward pressure last year. Meanwhile, only Geneva escaped retail rental falls.
Chart 1: Scandinavian Investment (12-Month Rolling Total, Feb 2020 = 100)
Source: Pangea Property Partners
- Q4 GDP data confirm that the Scandinavian economies fared comparatively well last year (2). And we expect a similar result in Switzerland (3). Economic activity in the region is likely to take a step back in Q1 because of lockdowns and some softening in export demand. However, the region is well placed to recover thereafter (4). That said, progress on the vaccine rollout has been slower than expected, which poses a downside risk to our assumption that restrictions will start to be lifted from mid-April (5).
- Higher oil prices are expected to boost energy inflation in most countries over the coming months. And in Sweden and Norway, it will also be boosted by a spike in electricity costs, with futures prices around double their levels of a year ago (6). But we expect inflation to fall back as these temporary factors drop out of the annual calculation next year.
- Therefore, we expect that most central banks will keep monetary policy highly accommodative. The exception is Norway, where we now think that interest rates will be raised twice in H2 this year, instead of rates staying on hold until 2023. (See our Nordic & Swiss Economics Update.) As such, although bond yields will remain near their current lows in most of the region over the next year, we think they will edge up in Norway (7).
Chart 2: Q4 2020 GDP (% y/y)
Chart 3: Swiss KOF Economic Barometer & GDP
Chart 4: Real GDP (Q4 2019 = 100)
Chart 5: Vaccinations Administered
(Per 100 of Population, As of 19th Feb)
Chart 6: Energy Price Futures (% y/y)
Chart 7: 10-Year Government Bond Yields (%)
Sources: Refinitiv, Health Data, Capital Economics
- Scandinavian investment activity rose 10% y/y in Q4, bringing the 2020 total to €35bn, just 11% lower than in 2019 (8). This was led by activity in Denmark. But the improvement was more broad-based in January (9). In contrast, investor sentiment in Switzerland weakened further at the end of last year (10).
- Looking ahead, we expect investment in the region to recover gradually. But there are reasons why the recovery could be faster than in other Western European markets. For one, the Scandinavian and Swiss economies are expected to return to pre-virus levels of economic activity more quickly. Further, unlike the euro-zone, standards for commercial property lending do not appear to have tightened dramatically (11).
- Scandinavian prime industrial yields fell further in Q4, meaning that yields ended the year 30bps to 40bps below their 2019 levels (12 & 13). Prime office yields also ended the year lower, except for in Stockholm where the Q4 decline was not enough to offset yield rises earlier in the year. Meanwhile, retail yields were under upward pressure in Q4 in Stockholm and Copenhagen, following the path of Oslo, where retail yields rose by more than 15bps in 2020.
Chart 8: Scandinavian Investment (€Bn)
Chart 9: Investment by Country (% y/y)
Chart 10: RICS Switzerland Investment Sentiment Indicator (Net Balance, %)
Chart 11: Change in Credit Standards for Norwegian Commercial Property Lending
Chart 12: Quarterly Changes in Prime Yields
(2020 Q4, Bps)
Chart 13: Annual Changes in Prime Yields
(2020 Q4, Bps)
Sources: Pangea Property Partners, RICS, Norges Bank, Capital Economics
- Office vacancy rose by the most in Stockholm and Oslo in Q4, continuing the trend seen in previous quarters (14). However, data from Savills show that there have been differences in the drivers of the increase, with a rise in tenant sublet space accounting for some of the upward shift in Stockholm, but not in Oslo. In contrast, the rise in vacancy in the Swiss markets has been relatively muted given the sharp fall in occupier demand (15).
- This was consistent with the increase in Swiss office rental growth in 2020 (16). Meanwhile, retail rents fell sharply in Stockholm in Q4, leaving it as the worst rental performer in 2020, alongside Copenhagen (17). Oslo retail rents held up comparatively better. In part, this reflects that rents have already fallen substantially in recent years. But online penetration in Norway also did not increase as much as most other markets (18).
- For industrial property, the resilience of rents, combined with sharper falls in yields, meant that Scandinavian capital growth firmly outpaced the other sectors in Q4 (19). Meanwhile, capital value growth slowed to 3.6% y/y for offices, while retail values fell further. We expect these trends to continue in 2021.
Chart 14: Change in Office Vacancy (2020 Q4, Bps)
Chart 15: RICS Swiss Occupier Demand (Net Bal., %)
Chart 16: Changes in Prime Rental Values
(2020 Q4, % y/y)
Chart 17: Changes in Prime Rental Values
(2020 Q4, % q/q)
Chart 18: Retail E-commerce Turnover (% Total)
Chart 19: Scandinavian Capital Value Growth (% y/y)
Sources: RICS, Colliers, Capital Economics
Latest Data & Main Forecasts
Table 1: Latest Market Data
1 month ago
1 week ago
1 month ago
1 week ago
US Fed funds
Swedish OMXS 30
UK Bank rate
Danish OMXC 20
Germany 10 yr
Sweden 10 yr
Norway 10 yr
Denmark 10 yr
Switzerland 10 yr
Sources: Refinitiv, Capital Economics *Latest at 9.00 GMT on 22nd February 2021
Table 2: Forecasts of Economic Activity
Real Consumer Spending
Sources: Refinitiv, Capital Economics
Table 3: Forecasts of Interest Rates, Bond Yields & Currencies
Official Interest Rates %
10-yr Government Bond Yields %
Local Currency per euro
Sources: Refinitiv, Capital Economics
Andrew Burrell, Chief Property Economist, email@example.com
Amy Wood, Property Economist, firstname.lastname@example.org