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Preparing for a soft landing

Robert Nystad, Head of research UNION Gruppen

Drivers in the property market have been very powerful in the recent times, which has given several years of high returns. Interest rates fell substantially from 2011, reflecting rate developments internationally initially and then the impact of the oil price slump on the Norwegian economy.

The most recent decline in interest rates was a consequence of an economic downturn, which primarily affected southern and western Norway. Oslo enjoyed two simultaneous strokes of luck – both low interest rates and a strong rental market. A slight decline in market rents was admittedly experienced in 2015, but low supply-side growth contributed to a relatively speedy recovery. Rent levels in Oslo have risen a great deal since mid-2016.

Interest rate developments have now gone into reverse. The gap between the yield for “normal” property in Oslo and the overall lending rate on bank loans has narrowed substantially in recent years, and is at the 2007 level. That means the equity yield – first-year cash flow to equity after interest charges – is under pressure.

Investors have accepted this development since a strong rental market has contributed to greater expectations for future returns. The signs are that 2019 will be another strong year in the rental market, and we have raised our forecast for rent growth because office vacancy has declined more than expected.

However, the newbuild volume is set to rise sharply in 2020, and half the space under construction has yet to be let. At the same time, we expect conversion of offices to other applications will decline gradually in the years to come. After several years with scant addition of new office space, we expect a net rise of roughly 130 000 m2 in 2020. There is nothing dramatic in that, but the addition of new space will probably be large enough to curb today’s brisk rent growth.

Next year, interest rates are likely to be higher and expectations of future rent growth lower than they are today. We therefore expect prime yield to rise in 2019 for the first time in seven years.

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