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Investor hunger for return on capital amid the current low interest rate environment is spurring the creation and listing of new commercial real estate companies in Sweden.

Independent financial adviser Catella has worked on bringing the latest two vehicles to market. Northern Swedish property owner NP3 Fastigheter listed on Nasdaq Stockholm in early December, and Catella also created and sold shares in specialist single-asset vehicle, Torslanda Property Investment.

Torslanda - which owns Volvo's research and development centre in Gothenburg - is taking a listing on the smaller Nasdaq First North exchange.

More property vehicles will arrive on the scene during 2015, according to Catella. The process is being driven by investors’ interest in dividends or return on capital. Ericsson: 'If you have €25,000 in your bank account you will get nothing in return today. But for the same amount you could as an alternative invest in Torslanda,' Johan Ericsson, head of Catella's Swedish corporate finance operations, said. 'The stable cash flow, due to a long-term rental contract with Volvo Cars, will generate a solid and much higher return on your investment.'

The availability of relatively cheap financing is also aiding property investment. The combination of these market conditions generated huge demand for both NP3 and Torslanda. After a heavily over-subscribed offer NP3 went from having approximately 60 to 6,000 shareholders. This includes institutional investors but the main part consists of Swedish or Scandinavian individuals.

'We really underestimated the market’s interest in NP3. The total equity raised was not more than SEK 230 mln (€24 mln) but the demand was something like SEK 800 mln. Basically, we had to choose between not supplying everyone or giving everyone something. We decided to go for a broader allocation. So, we cut down the allocation to one-fifth to supply the large demand,' Ericsson recalled.

NP3
NP3 is a property investor in northern Sweden. The company’s €320 mln portfolio includes office properties, big box shopping centres and light-industrial properties in B locations. NP3 draws on strong local ties and there is a board member present in each city where the company invests.

Catella worked with NP3 for about a year, starting with strategic advice, which was followed by a capital raising and some additional acquisitions. The process was finalised in December with the listing on Nasdaq Stockholm.

Ericsson said that NP3 could double in size within its current geographical focus and that new companies with the same business model could be launched in other parts of Sweden. 'There are lots of cities with a population ranging from 25-35,000 to 100,000. If you know what you are doing you will receive substantially better yields. You could get up to 8%, while in big cities you might get 5%.'

SINGLE-ASSET VEHICLE
Torslanda is a completely different set-up. Rather than an existing company like NP3 which was seeking to grow, Torslanda was created by Catella to acquire and own Volvo's R+D centre.

Located at Sörred 8:4 in Torslanda, Gothenburg, the property was sold by Doughty Hanson & Co Real Estate for an undislosed price. Volvo is the property's principal tenant under a long-term rental lease. It consists of four office buildings with a lettable area of approximately 50,000 m2 and two car park buildings with 2,900 spaces.

'Torslanda is a project we arranged: we created the company, raised the capital, bought the property and we will list the company on the smaller Nasdaq First North exchange by the beginning of 2015,' Ericsson said. 'In this case, the owner was a fund at the end of its life term. Looking at the Swedish market in general the broader public is an option that we would consider if for any reason institutions couldn't fit an asset into their portfolios.'

The investor demand for Torslanda was so large that Catella had to close the book before schedule. Torslanda's appeal is that of a 'cash machine,' Ericsson said.

The Volvo property was bought at an 8.1% yield in June 2014, with 60% debt obtained at low cost. 'The annual cash flow on equity amounts to approximately 16% and that allows the company to pay annual dividends of 8%. The payout is 2% every quarter and the remaining 8% is used for amortisation of the loan. As a result the loan-to-value ratio will be extremely low at the end of the rental period.'

INVESTMENT BANKING ROOTS
'However, as an issuer you have to consider what kind of risk you are selling to the buyers - many of whom are not professional investors. So, it must therefore be a balanced product,' Ericsson said.

Catella, he said, is well suited for this role as its roots go back to investment banking rather than property advisory. Catella was launched in the 1990s in the aftermath of Sweden's banking and real estate crash. For its first five years Catella's operation was focused on the equity and debt side of the balance sheet. As the organisation grew Catella also decided to turn to the asset side and thus developed its property transaction services.

'At Catella we believe that our extensive experience allows us not only to follow the market, but also to create new opportunities such as Torslanda, for investors,' Ericsson added.

Cormac Mac Ruairi
Nordics editor

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