Article
An International Investor's Guide to the Swedish Residential Market
By: Maria Wiklund
November 13, 2023 10 Minute Read Time
Sweden, as many other European countries, suffers from structural undersupply of housing, a factor that is more pronounced in the larger cities like the capital Stockholm. With home ownership increasingly challenging, Sweden’s for-rent residential market is an attractive investment opportunity—but its highly regulated nature presents complexities for international investors.
This paper will cover the fundamentals of the Swedish residential market, examining for-rent residential, the owner-occupied market, and the dynamics between the two. We will investigate the reasons for the undersupply of housing and whether this is likely to change in the foreseeable future, and how that will impact the performance outlook for the sector. In addition, we will cover the for-rent market’s system of regulation.
With House Prices High, Fewer People Can Afford To Live in Owner-Occupied Stock
Home ownership has been on a downward path for many years. In 2022, 62% of people lived in owner-occupied housing (Figure 1), and 30% of the population in rented accommodation (the remaining 8% consists of a mix of special housing/other/unknown). In comparison with the rest of Europe, Sweden has a similar percentage of home ownership as, for example, the U.K. and France, and like the U.K. has seen that proportion fall from approximately 70% over the last two decades.
Figure 1: Home Ownership Rates, 2004-2022* (%)
Source: National statistics databases, CBRE Investment Management as of Q3 2023. For illustrative purposes only.
The decline in home ownership can be attributed to the steep increase in house prices in Sweden, which has grown at a level significantly higher than the Eurozone average (Figure 2). Sweden’s interest rates were negative for many years after the global financial crisis and loans to households and companies were inexpensive to obtain. During this time, many people got favorable mortgage terms and bought more expensive properties. Despite this being the case for most of the Eurozone as well, Sweden benefitted from a more supportive macro environment—it took half the time for Swedish GDP to return to pre-GFC growth levels than the Eurozone average (three years vs. six years). Additionally, population growth and a tendency to smaller household sizes fueled the house price surge further.
Figure 2: House Price Index, Including Forecasts
House Prices Are Cooling as a Result of Higher Interest Rates and Increased Operating Costs
The last couple of years have seen downward pressure on residential values due to a combination of factors the principal one being higher interest rates. The Swedish central bank raised interest rates to 4% in May 2023, the last in a string of increases from a trough of 0% in May 2022. A high proportion of households have short-term variable rate mortgages and now face refinancing at significantly higher rates than historically. Meanwhile, those looking to buy cannot afford to borrow to the extent that was the case just a short time ago.
Research by construction company, Veidekke, shows that many households living in housing association residential properties (a form of owner-occupied stock) have been hit hard by rising costs. For example, in Stockholm, housing costs have increased by 64% since 2016 (Figure 3). This is mainly due to significantly higher interest rates on mortgages for both the individual households and for the housing association, but also higher operating (energy) costs for the housing association.1
Figure 3: Housing Costs by Region (SEK/sqm/year)
As a result, house prices are cooling, with Oxford Economics recording a current fall from peak of 12.3% in Sweden (Figure 4), significantly more than in other European markets. While there are some signs of price stabilization in the market, transaction volumes have collapsed, which seems likely to persist until interest rates stabilize or start to decline. The latest statistics from Maklarstatistik shows over the last three months through October, 22,900 apartments and 13,100 houses were sold, approximately 5% less apartments, but 1% more houses compared to the same period last year.
Figure 4: Recorded House Price Shift, Peak to Trough (%)
Even though prices have corrected over the last 12-18 months as a result of the housing market’s sensitivity to changes in interest rates, a recovery is expected from 2024 (as shown in Figure 2 above) that would limit any further improvement in affordability.
Moving Over to Rental Accommodation Is Tricky—Half of Swedish Municipalities Report an Undersupply of Affordable Housing
At the end of 2022, the average waiting time to obtain a rental unit in Greater Stockholm was 9.4 years (12.4 years in the city center).
The number of people with registered interest/need for a rental unit amounted to 775,000 (out of a population of 2.4 million). Even though the waiting time in Greater Stockholm has come down since 2018, when the time to obtain a rental unit was at 10.3 years, it has gone up for the city center (11.6 years in 2018). Overall, the waiting time remains extremely long and indicates general undersupply.
Every year, Boverket (the Swedish National Board of Housing, Building and Planning) conducts a study with a questionnaire sent to all Swedish municipalities, investigating the health of the municipal residential market. In the latest study from 2023, 62% of the municipalities estimate a general undersupply of residential stock, while 49% report that the undersupply is primarily caused by a lack of affordable stock (Figure 5).
Figure 5: Undersupply Is the Major Residential Housing Market Issue Identified by Municipalities (Total Sample=290 Municipalities)
The largest obstacle for new residential construction seems to be related to high construction costs (Figure 6). This reason was given by 80% of the municipalities, followed by private mortgage hurdles (51%). A lack of land supply zoned for residential use was a key obstacle noted by 38% of municipalities, while conflicts of interest with the Swedish Environmental Code was another important limitation. Only 10 municipalities reported no limitations to new construction.
Figure 6: Limitations to New Residential Construction Based on Percentage (%) of Municipality Responses
Undersupply Will Worsen in the Near-Term Given the Limited Supply Pipeline
The outlook for new residential construction looks relatively bleak in the near term. High inflation combined with rising construction and financing costs are eating into developer profits. On top of that, lower purchasing power and the decline in house prices have seen housing sentiment diminish. The abolishment of government investment support to new for-rent residential construction will also negatively affect new supply coming to market. Hence, the construction pipeline for residential units has eroded, and new stock coming to market will be at historically low levels for the next few years. This is clearly illustrated by data on residential building permits and completions from the Swedish Statistical Agency (SCB), which showed that the numbers of new building permits for residential properties significantly declined in the first quarter of 2023 (Figure 7). Only a total of 871 permits were issued, the lowest number since 2008 and well below the post 2000 average of around 2,000 permits. The largest impact has been for building permits in the wider Stockholm area.
Figure 7: Residential Permits and Completions (Sweden), Q4 Rolling Average (000s)
Institutional Transaction Levels Remain Low, but Widening Yields Offer a Potentially Attractive Entry Point
The Swedish residential market has been liquid for many years, and while still dominated by domestic investors, has seen increased interest from international capital in the last five to ten years. Both private and institutional investors are active in the sector (Rikshem, Willhem, Alecta, NREP, Stena) as well as a number of listed companies with residential focus (JM, Wallenstam, Balder). Record transaction volumes of SEK116.2 billion were recorded in 2021 for the Swedish residential market. The residential sector’s share of total investment volumes was also high overall at 38%.
However, the recent slowdown is evident in the recorded transaction volume data. Transaction data from RCA points to a stand-still market, with fewer transactions taking place at the start of 2023 (-77% Q1-Q3 compared to the same period in 2022). Institutional investors remain net buyers in the residential sector (year to date Q3), however, where residential assets sold, it was typically to international institutions and private investors that picked up that stock, rather than other domestic institutional investors. Many Swedish property companies are facing refinancing issues having a high proportion of short-term debt. Some are under pressure to sell to meet bullet refinancings and to reduce leverage rather than default or refinance on unfavorable terms. While painful for the domestic property companies in the short term, this could result in some attractive investment opportunities for nimble, equity-backed investors with a longer-term outlook.
The yield for utility stock in Stockholm has historically been low, at below 2%. Newly built stock shows a slightly higher yield somewhere between 3%-4% historically (Figure 8). Utility stock has lower yields because of the government regulated discounted rent in these properties. These apartments are fully let, with waiting lists of 10+ years for tenants and a very low churn rate, making it comparable to bond-like income for an investor.
Figure 8: Residential Real Estate Investment Volumes and Yields
Current Market Conditions Provide Attractive Investment Opportunities, Especially for International Players
In the upcoming years, there will be a historically small pipeline of new for-rent residential units coming to market. Added to that, more and more people will be pushed into the rental sector in the near term, given elevated mortgage costs. This should result in higher demand for affordable for-rent accommodation, underpinning a robust rental growth outlook for the sector. This is illustrated by our latest Q3 2023 forecast (Figure 9), where residential is one of our preferred strategies globally. The Swedish residential markets that we cover offers strong rental growth over the five-year forecast period: Gothenburg (3.5% per annum (p.a.)), Stockholm (3.5% p.a.) and Malmo (3.3% p.a.) are all expected to outperform the European average (2.8% p.a.) in terms of rental growth.
Figure 9: Residential Rental Growth, Forecast % P.A., Q4 2023–Q3 2028
This report has shown that the current macro-economic environment is causing issues for the interest rate sensitive Swedish property market. This was first felt by owner-occupied residential, but has seen ripple effects into the for-rent residential market as well. We believe that the current environment, however, can provide attractive investment opportunities for investors. International investors, especially those who have no need for financing and who are comfortable with the unique regulatory complexities of the Swedish market, can take advantage of the headwinds facing distracted domestic players, who historically have dominated in terms of market share, to acquire scarce assets with strong fundamentals.
1 In addition, on March 1, 2018, the Swedish Financial Agency put in a stricter requirement for amortization on current mortgages, depending on annual income. The change meant that people with high leverage relative to their annual income needed to amortize more on their mortgage than previously. This also resulted in many new issued mortgages with a 3% amortization requirement annually (compared to either 1% or 2% previously). This new requirement came into effect given the sharp increase in house prices between 2014-2017 (40%) and because salaries had not kept the same pace of increase, hence forcing people to take bigger mortgages relative to their income in order to buy property.
Appendix
Utility SystemIntroduced in 1968 as a way to keep rents low for tenants, with caps on rental increases allowed by landlords. However, that meant as construction costs went up over time, and the rents were capped, profits for landlords eroded and it was not sustainable building new stock from an investment perspective.
Presumption System
As a way to incentives investors to build more new residential stock, the presumption system was introduced in 2006. This allowed landlords to increase rents more than under the utility system, however these were still capped, although at higher levels in order to increase profitability for investors.
Investment Subsidy
In 2017, an investment subsidy initiative was put in place, this given that the residential market still experienced an undersupply of stock, even though the “new” presumption rent system had been introduced a decade earlier. This subsidy was put in place under the presumption rent system. This was later phased out in January 2022, with the reason “lack of intended effect”.
