Introduction and summary:
Swedish real estate stocks have outperformed the OMX-30 over any time frame over the last two decades. For example, during the last five years, real estate stocks have doubled in value, while the OMX-30 has risen only 25%. Additionally, real estate should offer diversification to a portfolio. The OMX-30 is an index that contains the biggest and most liquid stocks listed on the Stockholm Stock Exchange. Even compared to international real estate indices, the Swedish stocks have performed really well:
The blue line is the OMX real estate index, and the pink line is OMX-30 (2205 -November 2020). Dividends are not included, which means the performance of the real estate stocks is underrated.
There is of course no guarantee that real estate stocks continue to outperform in the future. After all, real estate has been driven forward by a nice tailwind both from lower interest rates and increased immigration (and subsequent bigger population). However, the structural trend of fewer people per apartment is likely to continue.
In this article, we briefly discuss what we consider the 7 best Swedish real estate stocks. Sweden has 27 listed real estate stocks, by far the highest number in the Nordics.
We believe the Nordic countries are an excellent place to invest, for many reasons. We recommend you start by reading our 7 reasons why the Nordics have generated higher returns than the US market since 1965:
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What are real estate stocks?
Real estate has one advantage over many other stocks: It’s a business model more or less everyone understands. The business model is very simple: Use your capital (or borrowed money) and either buy or develop a physical structure and then sell it or rent it out (or manage the day to day activities). Everyone either rents or owns a house and can easily relate to the business model.
That said, many have gone bankrupt in real estate, mainly via excessive leverage, so real estate is no free lunch. The market is competitive, and it’s not easy to gain a competitive advantage. The best advantage is mostly in the form of scale, size or geographical knowledge.
A real estate stock is thus a company that either owns, manages or develops a building, either for private or commercial use. There are many types of real estate stocks: The most common are residential apartments, offices, shops, hotels, and logistic centers. Many companies are specialists in their sector or segment, for example owning a portfolio of logistic centers like Catena, but some own a mix consisting of different types of properties, like for example Castellum.
Why own real estate stocks?
The famous study by Hendrik Bessembinder in 2017 called Do Stocks Outperform Treasury Bills? concluded that the median (not average) stock produced negative lifetime returns. Just a very few stocks contributed to the overall outperformance of the stock market over other asset classes.
We believe real estate stocks offer better odds at generating positive lifetime returns, given you avoid excessive leverage. Investing is very much a game in survival, thus you should focus on survival and not short-term returns.
If you own a diversified portfolio of stocks you indirectly own real estate through the companies’ buildings and offices. However, compared to 1-3 decades ago, this ratio is currently much lower. Facebook, Amazon, Google, etc don’t own much real estate, they basically own only goodwill and intangibles. Thus, to make sure you own some real estate in your portfolio you might want to add real estate stocks.
We believe less can go wrong in real estate stocks:
- It serves as an inflation hedge. Rent can be passed on to tenants.
- Stocks have a short life, but real estate usually lasts for decades and centuries (as long as it’s properly maintained). Even badly maintained, they last for a very long time.
- Publicly listed stocks offer great diversification both in terms of industry and geography.
- They produce “income” via dividends.
- Reasonably predictable income streams.
- A business model that is less likely to “suddenly” disappear. We all need a place to live and work.
- Apartments and offices “always” serve a need and demand.
- A long history of producing wealth.
- Available land is given and often in short supply in cities.
- No need for you to invest directly in real estate (it’s a hassle to manage).
- Many real estate stocks are trading below their break-up values, thus potentially less risk.
- Rent is basically “always” higher than the Treasury bills.
One famous Norwegian real estate investor (Ivar Koteng) said ten years back that even lobotomized people can make money in real estate, and you must be pretty dumb NOT to make money. We tend to agree, but of course without excessive leverage.
One important aspect of most Swedish real estate stocks is that of a controlling shareholder. We consider this a positive thing as it aligns the interests with the outside shareholders.
A few words about leverage:
Real estate stocks use leverage (borrowed money) to finance their businesses. Leverage is fantastic when real estate prices are rising, but comes back to hit you like a boomerang when prices fall. Furthermore, the interest rates are a crucial part of the costs. The rates have been falling since the early 1980s, and this has provided a nice tailwind. If rates increase the tailwind turns to a headwind.
During the financial crisis in 2008/09 the Swedish real estate stock index fell 47% from the top in March 2008 to the bottom one year later, compared to 35% for the OMX-30. This is the price you pay for leverage. For comparison, Hofvudstaden, the most conservatively financed real estate stock, only fell 28% in the same period.
We advise you to be very cautious with leverage and not be greedy. Leverage has the potential of wiping out the equity of any company. Think long-term, and avoid excessive leverage.
Should you own real estate directly or indirectly?
Each country has its own investment culture. For example, in Germany and Switzerland, it’s more common to rent than to own your own residence. This is in contrast to the Nordics, where it’s normal to own your own living space. Among the Nordics, Norway has the highest rate of ownership. Furthermore, Norway has a peculiar culture of investing in a second home, purely as an investment.
Owning real estate directly can be both risky and troublesome. It can be risky because leverage is usually >65% to LTV. It’s also a lot of headaches with maintenance and tenants not paying. The tenants in the Nordics enjoy strong consumer rights/protection.
If you want to avoid the hassle of managing this yourself, you can invest in a publicly-traded real estate stock:
Swedish listed stocks
Sweden is the biggest stock exchange in the Nordics, by far, both in terms of the number of listings and market capitalization. This is also true for real estate stocks.
Currently, we find these stocks in the OMX real estate index:
- Fast Partner
- Victoria Park B
- Platzer Fastigheter Holding B
- Wihlborgs Fastigheter
- Sagax B
- ALM Equity
- HEBA B
- Atrium Ljungberg B
- Fast. Balder B
- Diös Fastigheter
- Covivio SA – French
- Icade SA – French
- Gecina SA – French
- Altarea SCA – French
- Cofinimmo SA – Belgium
- Hufvudstaden A
- Aedifica SA – Belgium
- Klövern B
- Klepierre SA – French
- Eurocommercial Properties NV – Dutch
- Nexity SA – French
- Covivio Hotels SCA – French
- Wereldhave NV – Dutch
The most popular Swedish real estate stocks
Because of the strong performance of the real estate market, real estate stocks have become a popular investment vehicle.
The Swedish online broker Avanza publishes how many of its customers are invested in each stock. Below is their most popular real estate stocks ranked in the number of owners prior to the Covid-19 crisis:
|Samhällsbyggnadsbolag i Norden B||29 439|
|Fast. Balder B||17 130|
|Klövern B||14 147|
|Hufvudstaden A||12 491|
|Diös Fastigheter||8 238|
The right column is the number of owners at Avanza. Castellum has a pretty spectacular number of shareholders considering Sweden has only 10 million inhabitants.
The best Swedish Real estate stocks
The heading of the article contains the word “best”. That is a definition that is hard to establish. Why? Because “best” depends on the time frame, personal aims and goals, and leverage.
What is your aim? To create a “safe” and conservative portfolio? Or to take more risk and hopefully higher returns? Only then can you find out what is “best”.
However, what we consider the 7 best Swedish real estate stocks are these, based on diversification, safety and leverage:
Castellum is a Swedish real estate company that saw the day of light in the 1990s. The main purpose of Castellum was to invest in properties that would both appreciate and at the same time be immune to recessions. Castellum is probably the one most diversified, both in terms of geography and industries. They have all the major real estate industries in their portfolio in addition to a huge presence of “safe” public sector tenants. Operations are mainly in the biggest Swedish cities, but additionally in Copenhagen and Helsinki.
Leverage is moderate with an LTV of 43% at year’s end 2019.
We believe Castellum could be a good choice for many investors due to its diversification.
Their property value by category is as follows:
- Office 47%
- Public sector 23%
- Warehouse/logistics 16%
- Retail 8%
- Developments and undeveloped land 4%
- Light industry 2%
Property value by region:
- Stockholm 30%
- Central 24%
- West 24%
- Öresund-region 19% (includes Copenhagen)
- North 2%
- Finland 1%
Wallenstam (WALL B)
Wallenstam is one of the older real estate companies: established during WW2 in 1944. Their main focus is residential and commercial real estate: 56% is residential properties, 39% is commercial properties and 5% public use properties (of rental income). The geographical area is more narrow compared to most other similar stocks: Stockholm and Gothenburg and their surrounding areas.
Wallenstam has one segment that differs from the other real estate companies: It owns 66 wind turbines, in an effort to be self-sufficient in renewable energy.
The management has substantial skin in the game: The Wallenstam family is still the main shareholder: they have 25% of the shares and control 62% of the votes. The stewardship has been very good. The share price has risen tenfold since the year 2000, substantially better than the main index OMX-30 and among the best in the OMX real estate index.
If you invest in Wallenstam you know that the main shareholder and CEO is in the same boat as you.
Hufvudstaden (HUFV A)
Hufvudstaden has an even longer history than Wallenstam: It has been a public company since 1938 and thus has a very strong brand. They have more in common with Wallenstam than you just a long track-record: Their main geographical area is Gothenburg (18%) and Stockholm (82%).
Financially, Hufvudstaden is financed extremely conservatively: the equity ratio stands at a very high 62% by the end of 2019, and the loan to value (LTV) at a very modest 23%. With such a conservative debt level, it’s easy to understand they have survived (and prospered) for such a long time. But because of the low leverage, among other things, Hufvudstaden has underperformed the Swedish real estate index but managed to outperform the OMX-30.
Just like Castellum they have increased their dividend every year since the year 2000.
The biggest shareholder is Lundbergforetagen (45% of the equity, 88% of the votes), a publicly listed investment company. The Lundberg family is very powerful and has proven themselves as shrewd investors.
Samhällsbyggnadsbolag i Norden – (SBB B,D)
This company aims for long-term residential properties and tenants from the public sector all over the Nordic region. As such, Samhällsbyggnadsbolag should be a rather defensive stock. The stock was listed in 2017 and thus has a relatively short history, which is negative. LTV is at 40%, but the equity and debt structure are somewhat complex.
The founder is Ilija Batljan, an immigrant from Montenegro and a former social democratic politician. The strategy is to have a more social profile and to own properties both in cities and more rural areas. We at RationalThinking are a little cautious about former politicians entering business.
Property value by type of property:
- Residential 15%
- Public sector 47%
- Indirect public sector 20%
- Others 12%
- Sweden 76% (65% in metropolitan areas)
- Norway 15%
- Finland: 8%
- Denmark: 1%
Fast Balder B (BALD B)
Balder is one of Sweden’s biggest real estate companies in terms of market cap. They own, develop, and manage offices, hotels and residential apartments.
The property portfolio was like this at the end of 2019:
- Helsinki 21%
- Gothenburg 21%
- Stockholm 19%
- East 10%
- Copenhagen 11%
- South 7%
- North 4%
- Residential 59%
- Office 18%
- Other 15%
- Retail 8%
Balder is a relatively new company, founded in 2005, and has grown from a local company in the Swedish regions to become a major player all over the Nordic region.
- Net debt to total assets was 48,2%
- Net debt to total assets 38,6%
Erik Selin owns 36.4% of Balder and controls 49.9% of the voting rights. He’s the main force behind the company and thus aligning the interest between management and the outside shareholders.
Klövern (KLOV B)
The famous Swedish real estate developer Rutger Arnhult is the main shareholder and CEO of Klövern, thus aligning interest with outside investors.
Property value by type of property:
- Offices 82%
- Retail 10%
- Warehouses/logistics 8%
Contract value by customer category:
- Private companies 56%
- Listed companies 29%
- Public sector 15%
Property value by region:
- Stockholm 56%
- East 16%
- West 16%
- International 12%
The international segment consists of Copenhagen and New York (!).
Sagax (SAGA A,B,D)
Sagax’s strategy is to invest primarily in warehouses and industrial properties in regions and areas with population growth. They don’t limit themselves to the Nordic region and have considerable exposure in Holland and France. Warehouses offer, most of the time, a higher rental yield and stable occupation rates. The downside is a longer time to get new tenants if they get vacant.
Since the listing in 2009 Sagax has, like other real estate stocks, outperformed the OMX-30 by a wide margin.
The biggest owners are CEO David Mindus and chairman Staffan Salèn:
|Owner||% of shares||% of voting rights|
The market value of properties by region:
- Stockholm 30%
- Helsinki 21%
- Finland, university cities 10%
- Paris 9%
- Netherlands 9%
- Rest of Sweden 6%
- Rest of Finland 8%
- Rest of Europe 8%
Tenants by industry:
- Manufacturing 18%
- Food and drink 13%
- Automotive 12%
- Medicine, healthcare 8%
- Service for properties 7%
- IT, development, education 7%
- Building products 5%
- Media 5%
- Logistics 5%
- Production properties 4%
- State, municipality 3%
- Other 13%
The debt ratio is about 43%
Other real estate stocks
We end this article by very briefly mentioning the business and segments of the other publicly traded real estate stocks:
- Diös (DIOS): A small regional company with a focus on the northern parts of Sweden, both residential and commercial properties.
- Magnolia (MAG): Residential apartments and hotels in the biggest metropolitan regions of Sweden.
- Kungsleden (KLED): Commercial properties are 75% and warehouses/industrial properties are 15%. Geographical areas are Stockholm, Västerås, Gothenburg and Malmö.
- Platzer Fastigheter Holding B (PLAZ B): This company is only operating in Gothenburg, an area they know really well. Business segments are commercial and logistics.
- Catena (CATE): Their niche is only logistical properties, mainly in Sweden, but the business area is the whole of the Nordics.
- Fabege (FABG): The main focus is Stockholm, and the business segments are offices, retail and residential.
- Wihlborgs Fastigheter (WIHL): The company was spun-off from the parent company (Fabege) in 2005. The main geographical area is Öresundregionen (Malmö and Copenhagen). They have only commercial properties.
- Pandox (PNSX B): The company is only focusing on hotels, all over Europe.
- K-Fast Holding (KFAST B): They offer residential properties in the Öresund area, Småland and Western parts of Sweden. LTV is at 42%
- Fast Partner: The focus is on commercial properties in the Stockholm area, where 80% of the rental income is generated. Office is 49% on income, logistics 16%, retail 12%, care and schools 10%.
- Victoria Park B: The strategy is residential apartments in the three biggest regions: Stockholm, Gothenburg and Malmö. LTV is 52%, and their own limit is a max of 65%. Residential real estate is regarded as “low risk”, and thus higher leverage can be sustained. The management owns only 2% of the company. The biggest shareholder is the German real estate company Vonovia with over 50% ownership of both equity and voting rights.
- Atrium Ljungberg: Operations are mainly in Sweden’s three largest cities; Stockholm (68%), Malmö (10%) and Gothenburg (7%). They have retail hubs in Stockholm, Uppsala and Malmö. Commercial properties are 97% of the rent, with offices at 54% and retail at 20%. Residentials are only 3%. The Ljungberg family owns 23.2% and controls 30.6% of the voting rights. Another family, Holmström, owns 19.8% and controls 12.4%.
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.