Economic Overview:
The Swedish economy continued to face headwinds during the last quarter of 2023, implying a current state of recession. The GDP for Q4 contracted with -1.4% YoY, with the expectations of a turn of events leading to a reaccelerating growth in 2024. The National Institute of Economic Research estimate a 1.0% expansion of Swedish GDP in 2024, and additional growth in 2025 driven by the predictions of increasing wages and lowered interest rates, yielding possibilities for elevated consumption and investments. Although, the current lack of demand is apparent in the unemployment rate which have been increasing to 7.7%, with assumptions of a peak at 8.5% during 2024.
The inflation has deaccelerated to 3.6% in November and remain in a downtrend during 2024, heading towards the Riksbank’s inflation target levels. With the inflation declining, the Riksbank decided to keep the interest rate at 4%. Although, the Riksbank is determined there will be no rate cuts until second half of 2024, a scenario the market consider being too strict. Increased freight rates due to the situation in the Suez Canal area expose the risk for inflation to flare up yet again, as well as maintaining high construction costs. At last, the Swedish krona is expected to help regain control of inflation due to catching momentum since late October, strengthening towards both the Euro and US Dollar.
Investment Overview:
Swedish investment market experienced a seasonal uptick in investment activity in Q4 compared to the previous quarter but concluded in a significant decline YoY. The first half of the year witnessed a sharp decline in activity, with transaction volume falling below the 10Y average, to just over SEK 40 billion. The subdued investor activity summarised a Q4 transaction volume of SEK 23.9 billion, plunging 56.5% YoY and still well below the 10Y average. Full year transaction volume for 2023 amounts to SEK 92 billion, dropping 54% compared to 2022. Domestic capital constitutes a vast majority of total investment volume, covering 78% of investments made throughout 2023. The industrial sector has seen an excessive increased share of total volume compared to Q3 (45%), followed by retail and residential, both at 11%. Private property funds remain strong buyers in a market with challenging financing terms, covering 38% of completed acquisition volume.
Increased costs related to financing and transactions keep putting pressure on investors, not being able to be as competitive as at former market terms. Consequently, yields have faced a continued decompression throughout the segments, with prime asset yields extending to 4.00% and 4.50% in the office and retail (shopping centres) segments respectively. Notable is the logistics prime yields reaching 5.00%.
