High prices in the capital cities in the Nordics can lead investors to explore secondary markets, but caution is needed, delegates heard at Real Asset Media’s European Outlook H2, which was held in Stockholm in early June.
‘Where lack of supply and high prices cause problems, as in Copenhagen, then go for second-tier cities in Denmark where the fundamentals are strong and not tied to cyclical factors,’ said Nicole Bangstad, Research Analyst, Savills Investment Management. ‘In general the Nordics are a very strong region and the fundamentals make diversification attractive’.
Going into secondary markets only because the main markets have become too expensive is a risky strategy, said Adam Irányi, Head of Investment Europe II, Union Investment Real Estate: ‘Historically assets in secondary markets in Europe have underperformed when the markets adjusted. They appear to be less volatile but then in a downturn they suffer more’.
A good price can be a mirage that leads to disappointment, said Olle Håkanson Nobel, Partner, Transactions, Croisette Real Estate Partner: ‘It is easier to make a mistake going into a secondary city, where you think you are getting a good deal then you realise it wasn’t such a good price after all’.
The search for yield argument can also be hard to justify at times. ‘The yield spread that you are seeing in the secondary markets is actually not that big,’ Irányi said. However, Union is happy to pursue an AB strategy, buying continuously outperforming assets in secondary markets.
‘I agree the best strategy is going for the very best assets in every city, but it is also important to look at the long-term demand drivers,’ said Bangstad. ‘I think some of the more regional cities can have better prospects than some of the capitals. We try to assess this over the long term, looking at the next 10-15 years’.
The assessment spans the prospects for the economy, employment growth, demographics and population growth but the most important factor, she said, ‘is having the local market knowledge’.
Another important factor that needs to be assessed before investing is the exit, said Irányi, because often international investor demand in secondary markets is quite limited.
‘Sometimes you can benefit from a first mover advantage when you get into a new market, but you must always assess the liquidity of the market,’ he said. ‘Some secondary markes are dominated by a few local investors and you can only sell to them, so core investors are cautious’.
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