The real estate sector is heavily influenced by interest rate cuts, as interest costs are the largest expense for property companies. However, not all companies benefit equally from these changes.
Henrietta Theorell, who manages the Swedbank Robur Småbolagsfond Sverige, highlights two holdings in the fund that stand out positively in this environment: Nyfosa and Fastpartner. These companies have short interest rate durations, which provide tailwinds when short-term rates fall.
In addition to these holdings, Theorell has added Catena and NP3 to the fund’s portfolio this year. She praises Catena for its exposure to warehouse and logistics properties, boasting a historically high occupancy rate of nearly 97% and potential for further growth through its land bank. Similarly, NP3 is commended for its ability to create shareholder value through projects and acquisitions, particularly in northern Sweden.
Meanwhile, Philip Hallberg and Tobias Kaj, who oversee Lannebo’s real estate funds, have identified their top picks: Sagax, Balder, NP3, SLP, and Wihlborgs. These companies share a common trait of strong cash flow generation and healthy balance sheets. The duo anticipates a shift towards growth strategies through acquisitions and project investments in the coming years.
However, the Lannebo managers caution against companies with significant exposure to office properties in Stockholm. Rising vacancies and the need for continued investment in these properties could lead to subpar returns on invested capital. They believe that the challenges in the office market, particularly in Stockholm, are not yet resolved due to weak net leasing activity reflecting a sluggish Swedish economy.
In terms of residential properties, both fund managers maintain their primary exposure through Balder. While there is pent-up demand for housing, they remain cautious about the sector’s prospects, citing uncertainties around population growth. Nonetheless, Lannebo Fonder expresses a more positive outlook for Swedish rental housing, expecting higher rental growth compared to commercial properties in the near future.
A recent analysis by Afv revealed a significant improvement in the capital structure of real estate companies over the past year. The capital gap in the residential segment has narrowed substantially, with Heimstaden, K-fastigheter, and K2A standing out as the remaining areas of concern.
Despite a challenging month for Lannebo’s real estate funds, the managers remain optimistic about selected companies with strong growth potential. They foresee a 7% increase in management results by 2025, with a focus on properties within the warehouse, light industrial, and logistics segments as key winners.
In conclusion, the real estate sector continues to evolve, presenting both challenges and opportunities for investors. By carefully selecting companies with robust fundamentals and growth prospects, fund managers aim to navigate the changing landscape and deliver sustainable returns to their investors.