Rune Kock, CEO, NREP
How would you describe the 2023 real estate year?
The market was undoubtedly challenging last year and in several geographies the transaction market had virtually frozen. The year was an opportunity to direct more effort into our portfolio and asset business plans. However, as a local and collaborative investor the market also presented us with investment opportunities.
Fundraising has clearly become tougher, and trust was central to investor decision-making, as was the demand for firms that adopt longer-term and considered thinking around demographically driven trends and structurally supported sectors. This approach is less impacted by economic cycles and enables strategies to be proven over time.
Moreover, in 2023 investors wanted clear ESG leadership as they took increasing note of the supply and demand issues for well-constructed buildings with strong green credentials. In countries with a higher density of existing buildings, the opportunity is in retrofitting assets, so investors were, and still are, prioritising companies with a big focus on brown-to-green real estate transition strategies.
For NREP, we were able to make significant investments in an attractive market with the capital we’ve been entrusted to manage. In Sweden specifically, by acquiring the well-positioned residential player Klövern, two centrally-located hotels and a large care-home portfolio. And we extended our footprint in Poland through the acquisition of the logistics developer 7R.
For the platform that we are part of, Urban Partners, the majority of our fundraising has been by NREP’s NSFV (Nordic Strategies Fund). This attracted unprecedented investor demand, raising a record-breaking €3.65 billion in total, making it the largest European-focused value-add real estate fund to date.
What are the main challenges facing the sector and your company in 2024?
Our business is based on the trust that investors have in us to invest their money, many of which think that now is a really good time to invest in real estate. Distress has, in some cases, generated attractive opportunities for buyers but, in general, there is still a gap between buyers and sellers settling on price levels.
As uncertainty generally seems to be lower now and visibility keeps increasing, I would expect more transactions across geographies in 2024. However, the global environment has become less stable, not least with severe conflicts in several continents, and we need to be mindful that this can continue to destabilise markets.
“In 2023 investors wanted clear ESG leadership as they took increasing note of the supply and demand issues for well-constructed buildings with strong green credentials.”
Rune Kock, NREP
The related challenge is getting sufficiently strong returns in a period where more security is sought.
To do so, we are being more selective about the opportunities that we capitalise on to take on less risk, focusing on asset types where we have an operating edge or where macro-fundamentals remain strong. We are working on scaling known levers and strategies more than we are focusing on developing new ones.
Lastly, and most important, we must not forget that the whole industry is continuously and increasingly challenged on its emissions, and we work in one of the industries that generates the most emissions. We focus on drawing on lessons from our more explorative cases and scaling the solutions that have the most significant impact on real emissions.
What are likely to be the chief positive influences on strategy in 2024?
In 2024, we anticipate that the focus on sustainable real estate will continue – among investors, tenants, banks and the construction value chain.
It will influence our strategy at NREP, particularly in the Nordics, which is well positioned to deploy the strategy profitably. It also helps that the region’s capitals are projected to grow faster than the EU average of 3.6% by 2035.
Key demographic trends, such as capital city expansion and the rising number of single inhabitants, will continue to support urban rental residential strategies. An ageing population ensures a continual demand for care homes.
The logistics sector has repriced and remains an attractive development strategy in most markets. However, we should be on the lookout for how changes in private consumption affects tenants. Despite the aforementioned global instability, hope persists for decreased inflation and lowering of interest rates across the Nordics.
What changes in direction (perhaps in terms of emphasis on sectors or geography, or the scope of your activities) have you made or do you envisage making in response to the fresh challenges, regulations, opportunities or technologies that have emerged in the last year or so?
I am looking forward to us seriously taking up the challenge in the German market. The opportunities within two of our largest and longstanding strategies – residential and logistics – are obvious given the demographically driven demand and structural undersupply with old stock presenting a need for more modern and sustainable buildings.
We have been preparing for a few years, establishing a team and making the first investments. We are well-positioned to embark on a larger volume in the German portfolio, particularly in the residential sector. It will be our most important task and it is also the one I am most looking forward to.
We were also very active in Sweden in 2023. In 2024, we expect the activity to move to Denmark, among other places. Here, it has taken a long time to adapt to the new interest rate environment and lack of capital. There will be a pent-up need to act, and I also expect that we at NREP will be very active.
We will also complete a number of significant projects, including UN17 Village in Ørestad, which we started working on in 2018 and which has functioned as an open laboratory for creating and disseminating new solutions in construction. As residents move in, we will continue to try things in health, communities, water recycling, biodiversity and local energy production and consumption. This is a good example of a project which we draw learning from, on solutions we are now looking to increasingly scale across the portfolio.
Looking back at 2023, what has given you the greatest inspiration for the year ahead?
In 2023, there was a significant increase in businesses committing to formalised sustainability metrics as a successful way of reducing emissions. It reflects a genuine accountability taken by businesses in the sector and recognition of the importance of ESG, and it has inspired me for the year ahead.
Having a positive impact on our urban ecosystem and driving returns for investors are not mutually exclusive, so there is significant opportunity for those prepared to capitalise on the move towards a more sustainable sector.