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Contrarian and Positive View on Commercial Real Estate

Report: Systematic Strategies

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Stockholm (HedgeNordic) – Following one of Europe’s most significant property market booms in recent years, Sweden’s property market has found itself in the eye of a storm triggered by soaring interest rates. Despite the challenges many real estate companies face in managing the debt mountains accumulated during a decade of virtually free money, the country’s commercial real estate prices have displayed unexpected resilience in stark contrast to the gloomy residential property landscape. While some believe prices have potentially a long way to fall, Gustav Sällberg of PriorNilsson Fonder takes a contrarian view.

Gustav Sällberg, who is responsible for managing a real estate-focused long-biased long/short equity fund at PriorNilsson Fonder, is currently eyeing attractive opportunities within the Swedish listed real estate market and he is not alone in this endeavor. “There is an opportunity to buy real estate exposure at attractive prices and there is a lot of interest and very significant money on the sidelines, which will be deployed gradually and support the sector as the clouds clear,” says Sällberg, who manages PriorNilsson Fastighet.

“There is an opportunity to buy real estate exposure at attractive prices and there is a lot of interest and very significant money on the sidelines, which will be deployed gradually and support the sector as the clouds clear.”

Commercial real estate in Sweden has witnessed a decline in asset values of about ten percent. This drop, though substantial, is considered by many as relatively minor when contrasted with the challenges stemming from higher interest rates. Sällberg provides an insightful perspective on this situation: “The Nordics have seen nominal value adjustments of circa 10 percent, which combined with 20 percent CPI-linked rent growth (including October indexation), represent a valuation drop of 30 percent in real terms.”

“My contrarian view is thus that the large valuation adjustment is behind us and that we will see more modest valuation drops going forward,” emphasizes Sällberg. As interest rates are not expected to remain high indefinitely, the sector will experience tailwinds with improved returns as inflation moderates and interest rates are reduced. Sällberg is optimistic about the prospects, saying, “I see many names with the potential to double from these levels within 2-3 years, as much of the negatives are well discounted in the valuation.”

“My contrarian view is thus that the large valuation adjustment is behind us and that we will see more modest valuation drops going forward.”

PriorNilsson Fastighet, which has just passed its first anniversary since launching in October of 2022, has enjoyed a cumulative return of 11.8 percent to exceed both the negative return of 1.1 percent for its benchmark and the return of 2.3 percent for the Carnegie Real Estate Return. Despite this strong absolute and relative performance in its inaugural year, Sällberg emphasizes that “asset management is a marathon, not a sprint,” highlighting the importance of long-term performance.

According to Sällberg, “Massive office vacancies in the US and UK are much less prevalent in the Nordics, where the Swedish market has a cumbersome planning process with long lead times and little speculation and with low activity since the Covid pandemic.” Addressing concerns about office vacancy in the Swedish commercial real estate sector, he believes that “Even though we have little exposure, the fear of office vacancy is somewhat exaggerated, particularly since remote work has been a common practice over the last decade.”

Sällberg opportunistically weighs the valuation and market fundamentals to create an attractive global exposure to real estate, where different property subsectors are carefully matched with geographical presence. “The fund has rotated into more Nordic names as the recent share price pressures have increased the risk-reward and potential upside,” says Sällberg.

“There are very interesting higher yielding property subsectors with strong cashflows, such as industrial, warehouse and hotels, which have a strong rental growth potential whilst also more resilient to higher interest rates,” he explains. The list of appealing long ideas includes Argan, Sagax, Np3, Nyfosa, WDP, CTP, Pandox, among others. On the short side, Sällberg identifies low-yielding office companies with weak cash flows and uncertain project development pipelines, such as Atrium, Fabege, and Hufvudstaden.

“We will look back at 2023 and 2024 as a time with volatility, but also as an amazing opportunity to gradually increase real estate equity exposure…”

Gustav Sällberg, a portfolio manager specializing in real estate at PriorNilsson Fonder, is especially positive on European equities, where he expects good risk-adjusted returns going forward. “We will look back at 2023 and 2024 as a time with volatility, but also as an amazing opportunity to gradually increase real estate equity exposure as the recent years headwinds will turn into strong tailwinds.”

Risk Disclosure

Past performance is not indicative of future performance. Fund units may increase or decrease in value and there is no certainty that investors will recover the entire invested capital.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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