With regards to what was said during Business Arena in London (May 22-23) it was obvious that the appetite for real estate investments in the Nordic region among foreign investors in recent years have risen to record levels. This fact can be explained by different things and in this blog post we will clarify at least some of the most important of them.
In general, the Swedish real estate market has somewhat of a safe haven status among foreign investors. Key factors for this are the high level of transparency, accessibility and reliability regarding legal framework and public records, as well as a stable Swedish political environment in combination with a very cheap Swedish currency in relative terms.
For outside investors the Nordic real estate markets also offer great opportunities for diversification of investment portfolios regarding both asset class, economic region as well as currency denomination. The currency aspect is an important consideration when evaluating investments denominated in foreign currency. The present exchange rate determines how much real and/or financial assets a certain amount of other currency can buy and the coming exchange rate development has a direct effect on the return of foreign investments. In the graph below the exchange rate development for GBP/SEK (pound sterling/Swedish krona) during the recent years is presented.
It is common knowledge that the British Pound has been heavily under pressure due to all uncertainty associated with the ongoing Brexit process, ever since the referendum in June 2015 when the British people voted to leave the European union. But as shown I the graph above the Swedish krona have struggled even against pound sterling during the last couple of years. The extraordinary weak development of the Swedish krona lately can be explained by the fact that Sweden has had the one of the lowest key reference interest rates in the world, as low as negative 0.5%. The Swedish central bank (Riksbanken) operates and sets its monetary policy according to a single mandate, namely price stability, with an inflationary target of around 2% annually for the Swedish economy.
By keeping interest rates on minus levels in combination with an otherwise very loose monetary policy for half a decade, the earlier deflationary pressure in the Swedish economy is no longer present. During the same period of time the very loose monetary policy has resulted in substantial devaluation of the Swedish krona. However, in December 2018 a new interest rate policy cycle started when the Swedish central bank decided to raise the key reference rate for the first time in seven years.According to present monetary policy forecasts a slow but gradual normalisationof the interest rate level can be expected in Sweden over the next few years.
Lately the Swedish economy has experienced a strong underlying macro-economic development, especially compared with the vast majority of the economies in continental Europe. Learning from experience, both financial assets and obviously currencies can stay fundamentally undervalued, but in mid to long term fundamentals tend to win. Therefore, it is pretty hard to imagine the Swedish krona depreciating much more during a scope of the nearest 12-24 months, at least compared to the pound sterling regarding all uncertainty still associated with the Brexit process. Likely this helps building some of the huge foreign demand for investments in the Swedish real estate market, since investors tend to want to invest the most when assets still are relatively cheap.
