02

Macroeconomics

Escalating trade wars and diminishing global growth rates have led to turbulent markets recently. Following several years of key indicators pointing towards a normalization of the major global economies, the outlook is about to change once again. Increased trade barriers and uncertainty will reduce global growth and thus push long-term interest rates further down. However, it is unlikely that it will lead to a recession, as relatively sound household economies along with monetary and financial stimulus will prevent this from becoming the scenario in the largest economies.

Hovedbildet

As for Norway, 2019 has not been especially turbulent - yet. The economic growth and capacity utilisation rate is higher than normal, and unemployment is low. This is primarily attributable to the oil sector, as a high level of growth in investment activity on the Norwegian continental shelf generates positive impulses for major portions of Norwegian industry.

However, we face a challenge in that many of the large exploration projects are nearing completion. At the same time, there is a shortage of new projects of similar size. This means that the growth trend we have experienced in oil investments will begin to slow down next year, and then fall in 2021 and 2022. Before that, weak levels of growth among our most important trading partners, combined with the possibility of a hard Brexit, will negatively impact the industrial sector, as well as Norwegian exports.

The Central Bank of Norway is unlikely to increase interest rates in the autumn, while at the same time an interest rate cut seems  also seems unlikely. That is because economic growth and inflation figures are at sound levels. The key policy rate remains at a low level and this will continue to help stimulate the economy. However, given the current situation globally, interest rates are perceived high and, in a normal situation, should have made the Norwegian krone more attractive (i.e. stronger currency). Weak global forecasts and the severe volatility in the financial markets, however, result in higher interest-rate differences having little significance on the NOK exchange rate. Therefore, we do not believe that the interest level and current macroeconomic trends will offer particular support to the Norwegian krone in the immediate future.

A continued weak Norwegian currency will support inflation and improve competitiveness for exporters; however, the same will bode poorly for importers. The financial policy will also provide incentives. The price of oil and the exchange rate for the Norwegian krone have once more come together and have been relatively good recently, where both have been encumbered by the trends seen in the risk image internationally. Prospects for weaker global growth will also weaken oil demand, and will contribute to a modest rise in oil prices going forward. Therefore, an increase in the price of oil will not necessarily result in a stronger Norwegian krone in the future.

The growth in the Norwegian economy will not completely escape a global downturn, thus we expect the growth to slow down in the coming years. How significant the downturn will be is difficult to ascertain and it is contingent upon a number of negative effects occurring. If these do not occur, the economic growth and interest rates may be higher. This may come about, for example, in the event that the trade war between the United States and China stagnates, that the United States decides to refrain from imposing tariffs on automobile imports from Europe, and how hard Brexit will be. The measures now being taken on the part of the Norwegian Central Bank therefore seem to be as proactive as they necessarily mark the start of a prolonged downward trend.

How does the macroeconomy affect the property market?

The macroeconomy forms the backdrop and sets the stage for the developments in the real estate market.

Interest rates

The current economic situation, including falling long-term interest rates, indicate that there will be no interest rate hikes any time soon. Seen in isolation, there will be no interest rate effect on the yield. The question then becomes: How much worse it will be for Norwegian economy, and how do investors view this? For the time being, we believe that the interest rates will have the strongest effect. Newsec therefore believes that the yield will remain stable in the years to come, and that it may possibly begin to rise again once interest rates rise.

CPI

The Central Bank of Norway tracks core inflation when it speaks of an inflation target of 2%. For property owners, total CPI is the important figure as this tracks the adjustment of rental contracts. With a lease contract with long tenure and 100% CPI adjustment, this can have a great impact on the value as the adjustment is directly reflected in the cash flow (income). In 2017, the  relevant CPI came in at 1.1%, as compared to a CPI of 3.6% in 2016. In November 2018, CPI was 3.5%. Thus, the effect was more than three times as high last year compared to 2017. It is difficult to predict what inflation will be by 2019. With "normal" growth throughout the year, our forecasts indicate that 12-month growth in November will be 1.9%. The reason why it is falling again is that it trails heavily from 2018.

Norwegian krone

A weak krone can be one of the reasons why non-domestic investors have done a great deal of acquisitions in Norway last few years, as the risk to the exchange rate for the krone has clearly been on the upside. However, this has only been an incentive for those international buyers who are not required to hedge the currency. However, currency is not part of the business and hence taking a “bet” on currency is not an option – hedging is required. Thus, the cost of hedging the Norwegian krone becomes important; and it has been volatile lately, while simultaneously not following fundamental factors due to negative risk sentiment.  On average we have found evidence indicating that a “typical” international investor  pays approx. 70-80bps in hedging costs, which has increased over the past year. With a prime yield of 3.75%, Norwegian property is beginning to get expensive.

Oil price

The concern for the commercial real estate sector has been whether this downturn would impact on the demand for commercial space. What we saw was that Western Norway, with Rogaland in particular, and “Vestaksen”Asker and Bærum, in particular, were affected somewhat, while Oslo was largely spared. However, the situation has now turned sharply both in Western Norway, and Vestaksen in line with rising oil prices, are there are reports of high demand for vacant space. This is also reflected in the transaction market, where we find an increase in demand for assets in Stavanger. The oil industry has made considerable cost savings and has reduced the break-even level to approx. USD 35 per barrel, so we do not see a possible fall in the price of oil to USD 50-60 per barrel as any great threat. We believe demand for commercial real estate for this industry will persist in the coming years, especially in the near future where large investments on the Norwegian continental shelf continue.

Unemployment

Employment growth is increasing and unemployment rate is falling. This creates positive effects for commercial property industry, especially the demand for office premises. Here we have seen that the number of office premises in the largest Norwegian cities has fallen in recent years and this has pushed rental prices upward. The forecasts show a continued increase in employment in 2019, and partly in 2020, which will generate a further upward pressure on rental prices in the office segment. Furthermore, the proportion of the population between 25-54 that is not working is very high from a historical perspective. If this state of affairs were reversed, demand could increase further.

GDP

In summary, the Norwegian economy looks bright right now. Growth will pick up further, unemployment will stabilise at low levels, interest rates will level off, wage increases will pick up and the Norwegian krone will be stronger next year. This all bodes very well for the commercial propertindustry.