Investment insights with Coeli

Propstreet investment insights

In-depth Interview with Coeli

Hendrik Versteegh, Investment Manager at Coeli-Fastigheter Coeli Investment

Kristin Gejrot, Head Analyst Unlisted Companies at Coeli Investment

Earlier in February, Propstreet did a survey on the current investor sentiment amongst its community members and published an in-depth report on the findings (accessible here). A lot has happened in the world since then, and as a follow up on this segment we have gone out into the field to get some “hot takes” on the current investing climate.

We had a chat with Hendrik Versteegh and Kristin Gejrot, Investment Manager and Head Analyst for Unlisted Companies, respectively, at Coeli Investment, whose main investment focus is unlisted properties and private equity within the Nordics. We discuss their take on the current market conditions and the implications for areas such as deal flow and cross-border investment, what it takes to be successful in the CRE industry, Coeli’s own investment strategy and how to invest amidst the uncertainty.

Could you perhaps start by breaking down your favorite segments within the CRE market, the ones Coeli is most active in?

Hendrik: We have two different structures for property investing. First there are our two funds (Coeli Fastighet I & Coeli Fastighet II), both with the same strategy: buying development properties where we can drive value by altering the local plan—predominantly to housing where we can extract the most value. Then we have the latest company we’ve started, Entita, which invests in the same type of assets in warehousing, logistics and light industry, but without the underlying conversion potential to residential properties. These are investment properties meant for our long-term portfolio.

What does it take to be successful in the property investing game?

Hendrik: A lot of hard work. It’s a small industry, really. You have to have a strong network, and if you don’t, you’ll be working much harder than everyone else. Today we are quite connected, but in the segments, we operate—purchasing these development properties—the objects rarely make it out on the open market as they often sell before.

We’ve recently seen a significant upsurge in inflation, and interest rate hikes are looming on the horizon. What are your predictions for these rates going forward?

Kristin: One can look at the US—which tends to be leading in these situations—where the FED has already announced several interest rate hikes for the year. Sweden and the rest of Europe will likely follow suit. What is key is how growth will develop, which will likely taper off before inflation does. Inflation, we believe, will peak by summer. Consensus in turn seems to be that Riksbanken (the Swedish Central Bank) will raise rates four times during the year, and probably again in 2023. So that is quite substantial relative to the extremely low rates we’ve had.

What are the implications for the CRE market?

Hendrik: We are coming from back-to-back record years in terms of transaction volume, and it’s likely we see the market cool off and adopt a “wait-and-see” approach as everything unfolds. Development properties in prime locations—where we partially operate—are still very attractive—the buying pressure is immense—and we believe that there still are a lot of deals to be made this year.

Looking at other segments, like newly produced residential properties or community properties—where yield has been falling drastically the last few years—there you are a bit more dependent on balancing the financial equations with regards to how much you can borrow for, the yield you can purchase at, etc. You could expect that as interest rate increase that these lower yield property deals will be harder to make happen.

Then on the other hand there is currently so much capital on the market, capital which needs to be allocated, so we still expect to see a lot of transactions during the year.

Is it possible, then, that we see a similar ketchup-effect of investors rushing back into the market when the uncertainty around inflation, interest rates and perhaps even geopolitical events, has lifted—as we did after the initial fear of the pandemic had settled in?

Kristin: We think so. Even though inflation won’t disappear overnight—and we’ll probably have to go through a period of rising rates and some lower economic activity before things turn around—investors will likely become more active once they have more tangible numbers to work with in their calculations. Having said that, we find that these situations can allow some mispriced opportunities to be found, which can create a lot of value for the long-term investor.

What are the main risks as you perceive them in the current CRE market, to bear in mind and perhaps try to protect oneself against?

Hendrik: We are not in the capital market right now, but many larger firms are, and maybe even have their primary source of financing there. If something unforeseen were to happen and firms were to struggle to refinance their debt, of course that would have spillover effects in the rest of the economy, but we see no reason to start speculating “doomsday” scenarios.

Kristin: And that perhaps stresses why we like properties as an asset type, interest is after all the last thing you stop paying, so there’s still that cash flow intensive initial position when you invest.

Hendrik: If you look at cashflows they are very predictable. If you do your due diligence and you know your tenants well and feel confident that they are well-capitalized and can pay rent, you can calculate everything—what interest rates you can tolerate and what your return will be. I think it is unwise for any business model to be solely based on the historically low interest rate levels we’ve enjoyed these last years.

What property types do you believe will be the winners in the near future?

Hendrik: I think we’ll see continued low yields for both residential and new, large, great logistic properties, where there is huge demand. Those who buy more high-return properties and widen their horizons past Stockholm, to Malmö, Gothenburg, etc. will reap large rewards. Large, diversified portfolios with warehousing, industrial and logistic properties will fare well.

And here we have another interesting trend, that started also with the pandemic: many companies want to secure production domestically here in Sweden, relocating production that previously has been overseas. Now as additional geopolitical risks are revealing themselves, and transport costs and commodity prices are soaring, it makes more sense to keep a reasonable amount of production on home turf, if not for sustainability reasons alone.

Do you think cross-border investments will be more attractive, in for example Sweden?

Kristin: There is probably a sizeable number of international investors already interested in Sweden for its high transaction flow of quality properties.

Hendrik: Yes, one can attribute the fact that we have so much foreign capital in Sweden to local properties. Sweden really stands out compared to the rest of the European property market in regard to how many foreign investors are drawn to its markets, due primarily to its old and stable system, with a property register and rent regulations—many investors like that the market for housing is regulated in Sweden because it means predictable cash flows. Perhaps the increased global uncertainty will only attract more capital to our markets.

Kristin: Especially with the Swedish Krona having depreciated a bit.

Lastly, any concluding thoughts on investing in these turbulent times?

Hendrik: When inflation rises it’s often a good idea to invest in real assets—’properties are a great hedge for inflation with indexed rents for example.

Kristin: But be careful of entering something with an excessive premium when interest rates are rising. And focus on quality acquisitions above all else.

Hendrik: There will be many great opportunities ahead. While many sit on the sidelines in a hesitant market, this leaves more on the table for bold investors to secure quality properties.