Hans Petter Skogstad
Head of Research Norway / COO
Everyone in Norway is waiting for the vaccines to reopen society. Infection rates are rising, and the media is full of negative news. But, after all, the Norwegian infection rates are comparatively low at 200 infected per 100,000 inhabitants.
Five percent of the population has received 2 vaccine doses and another 8% has received their first. Vaccination has been slower than an impatient population would like, but the Norwegian health authorities maintain that the entire adult population should have been offered the vaccine by July or perhaps even sooner.
As a result of the situation, strict measures have been introduced in and around Oslo. Travel activity is at a minimum and there are few people out on the streets in central Oslo. All shopping malls and shops are closed. Groceries and pharmacies are the only ones allowed to stay open. Home office is mandatory for everyone. All bars and restaurants are closed as only take-away is allowed. All other indoor facilities and outdoor activities are also closed. All schools with students from the age of 11 (level 5) and higher are closed and have online learning. Kindergartens and schools with the youngest pupils may be open under particularly strict conditions. The measures will last beyond the Easter holidays.
Norway has among the lowest infection rates and the lowest proportion of deaths from COVID-19 in Europe. Nevertheless, last Saturday (23 January) Oslo introduced the strictest measures so far during the pandemic, because several cases of the mutated ‘British virus’ were discovered last week.
All shops are closed. Groceries and pharmacies are the only ones allowed to stay open. Working from home is mandatory for everyone. All restaurants are closed, only take-away is allowed. All other indoor facilities are also closed. Schools and kindergartens may be kept open under special infection control conditions. All sports activities will be closed. These measures will last until the end of January.
Vaccines are now being rolled out and 1.5% of the population has been vaccinated. The plan is to vaccinate all adults before the summer holiday.
In contrast, the statistics based on signed leases, show that office rents increased sharply in Q4 supported by high volume. Office rents are now 3% higher than a year ago. The transaction market was also recorded as strong in Q4 and continues with many processes running into the New Year. Vaccine optimism is also reported in the retail market.
Norway has gone through its second wave, but it’s a mere swell compared to the storm many European countries have experienced. Norway has only suffered 353 deaths due to the virus. The second wave hit mostly the cities of Oslo and Bergen, but the infection rates are declining going into the Christmas season.
In Oslo, stores are open, but some restaurants and hotels are closed due to the lack of guests. To limit gatherings and reduce general mobility, indoor gatherings are forbidden. This includes cinemas, theatres, gyms etc. Masks are mandatory in crowded public places and also on occasions where it is not possible to keep a 1metre distance between people. The Government encourages working from home, and most are following this.
The economic recovery was strong towards the summer. In September, GDP was only 2.7% behind February levels. New restrictions will limit the recovery. Vacancy declined from 10.7% in April to 3.4% in October. As of 1 December, the vacancy rate is at 4%.
The transaction market is booming after many large transactions this fall. The volume is closing in on 100 bNOK and will probably pass 2019 levels. Prime yield has dropped from 3.4% to 3.25% after several transactions at this level. Office rents have decreased with 3-5% from the top in January. We are approaching Christmas with better prospects than for a long time.
The number of COVID-19 cases are once again rising globally, but here in Norway there are still low rates despite increased activity and people enjoying the lovely weather. We are also worried about the global uncertainty which can lead to a fall in Norwegian exports and weak GDP development during the autumn.
In Norway, unemployment fell further to 5.1% last week, and for the second consecutive month the Consumer Confidence Index rose. The index rose to the highest level since July 2019 (-0.8 points). The index of retail sales for May was released last week. The index showed ‘all time high’ with 2.8% sales growth in April and 7% higher than in February. The e-trade sub-index is now 27% higher than in February. The hotel industry is still struggling. High occupancy rate is reported in tourist areas in Northern Norway (Lofoten) and in Western Norway, while the occupancy rate is about 20% in the larger cities.
Several commercial real estate transactions are again made towards the Norwegian summer holidays. Nevertheless, the volume is currently at about 70% of the volume at the same time last year. Recent transactions show that the yield on modern and centrally located properties with solid tenants is at the same level as before COVID-19. This week is the last active week in the Norwegian market before commercial real estate takes a summer vacation. We all wish you a good summer - we are back in August.
This summer most Norwegians will travel within Norway, not sunny Spain or Greece as we are used to. Fortunately for us, the heat came to us last week with several days above 30 degrees Celsius. We cannot say that the economy is as hot as pre-corona, but the unemployment rates continue to decline. The unemployment rate was last week at 5.4% and we expect this to decline below 5% by the end of June. An increasing amount of optimism and adjusted forecasts is followed by signaling from the Central Bank of Norway that they may increase the Norwegian policy rate by the end of 2022. The rate is for now kept at 0%.
The activity within commercial real estate is increasing. June is normally a month with a lot of signings. In 2020, the volume will likely be lower within both transactions and letting. Veidekke, a large Norwegian construction firm has separated its portfolio of real estate for construction and sold it for a sum of €0.8 billion. Cushman & Wakefield Realkapital has also completed some minor transactions of buildings with rental housing. The demand for housing is high and it is expected that housing prices will increase in June. This is one of the reasons why the Central Bank of Norway has signaled the possibility for an increase in the policy rate.
The Norwegian COVID-19 infection numbers are still low (less than 10 confirmed cases a day), resulting in a low amount of deaths. Norway is among those countries with the least deaths per capita in Europe (4.5 for every 100,000 residents). The economic activity is rising, and unemployment continues to decline. The unemployment rate was last week measured at 5.7% which is close to half of that measured at the peak at the end of March.
The growing activity also affects commercial real estate. We are experiencing increased activity on the transaction side, but there are still a low number of transactions being completed. Nonetheless, several processes have been restarted, and we expect high transaction volumes when Norwegians return from their summer break in August.
Last week there were reports of increasing infection numbers in the Unites States with subsequent turmoil and fall in stock prices worldwide. The Norwegian infection numbers have not increased despite the significant rise in activity and mobility within the population.
With less to worry about at home, our focus is elsewhere. The development in global trade, the trade war between the United States and China, the financing of Corona-losses, Brexit etc. will have increasing effect throughout the Autumn. As for now we are enjoying the much-awaited summer.
The number of new COVID-19 cases in Norway is low, at around 10 cases a day. Over the last weeks we have even had days without new admissions to hospitals. There is only 238 confirmed deaths due to COVID-19 in Norway, and the positiveness from the latest development has changed people’s behavior. An increasing number of people are traveling to the office, the streets of Oslo are experiencing increased traffic and the turnover in stores is increasing. Even though this is the case, everything is not back to normal. There is a decrease in the use of public transport, an increase in the use of cars, there are no tourists in the streets, and we do not shake hands. At our own offices we run a 50/50 strategy, where half of the workforce is allowed at the office while the other half works from home. We are having customer meetings at the office but we experience that some customers prefer digital meetings.
The Norwegian economy is steadily improving, and the perception of a crisis is low. Newly published statistics show that the Norwegian housing market has bounced back from the decrease in March and April. The prices are now 2.5% higher than May last year. A large driver for this is the decrease in mortgage rates, decreasing from 3% in February to the 1¾% we have today. Unemployment rates are also falling drastically.
The positive development is also experienced in our own line of work with increased activity both for our Capital Markets department and our rental department. In 4 weeks, the Norwegian summer vacation sets in and we expect that a low number of contracts will be signed before then, but we are looking forward to a hectic opening when we are back in August.
The Norwegian unemployment rate is continuing its decline and measured 6.4% by the end of May. The unemployment rate peaked at 10.7% at the end of March from a low of 2.3% before the COVID-19 measures were implemented. We expect unemployment to continue its decline in the weeks to come as the economic activity continues to normalise.
Retail sales came in at an all-time high in April when large parts of the service sector were closed. The seasonally adjusted volume index of retail sales increased by 4.8% from March to April 2020. This follows a decrease of 0.9% from February to March. The largest contribution to the growth in the overall retail index was stores selling building materials, followed by stores selling sporting equipment and boats. Other sectors who experienced growth were clothing stores, flower shops, e-commerce and furniture shops. E-commerce increased its sales by 16.8% in the period.
The bank margin has increased drastically and is currently on its highest since 2014 according to a new bank survey (source: Union). For new 5-year loans at 65% loan-to-value the average margin was 248 basis points in the second quarter of 2020. At the same time the uncertainty makes banks increasingly selective on loans and solid tenants are necessary to achieve good conditions. The 5-year swap rate is down 150 basis points this year, which makes large and secure borrowers achieve a total loan cost of record low 2.9%.
The Norwegian unemployment rate is continuing to decline and measured 7.1% by the end of last week. The unemployment rate peaked at 10.7% at the end of March. We expect unemployment to continue its decline in the weeks to come as economic activity continues to normalise.
The transaction market took a hit when authorities announced the lockdown in March. However, most large transactions are still ongoing, but will not be closed in Q2. Estimated numbers show that the volume of H1 will be approximately half of 2019 (NOK 20 billion vs NOK 40 billion). Our latest investor survey shows that investors believe that transaction volumes will be back at 2019 levels in 2021.
We have recently completed a tenant survey among our customers. The survey shows that 54% expect to be back in normal operating activity before the 4th quarter of 2020. A majority (63%), expect smaller changes in the way offices are used. The most significant change is the increase in and normalisation of digital meetings. Furthermore, the flexibility of contracts and office solutions will be increasingly important. The big question is if COVID-19 will affect the required square footage. Our survey shows that 60% expect no change in their needs and 26% expect that their need for offices will decline.
In Norway, we celebrated our National Day on Sunday, 17 May. In Oslo's main street there is normally a parade of children with flags to greet the Royal family in front of the Royal Palace. This year the street was empty, and the King and his family drove around Oslo in an open car. Restaurants were open, but few tables were booked. The value of footfall was fully demonstrated. Daily figures for payment card usage shows that sales from F&B fell by approximately 80% (compared to the same days in 2019) when the COVID-19 restrictions started on 12 March. Between 1 and 15 May, the fall was reduced from 60% to 35%. On the other hand, DIY sales have been on average 30-40% higher than last year.
Registered unemployment continues to decline. While it was at 2.3% in February, it rose steeply to 10.7% by the end of March. Now the rate is 7.8%.
Inflation was measured at 0.8% in April, aided by record low electricity prices. The record low price of electricity will not continue. On top of that the exchange rate of EUR/NOK has fallen by 10-15% since February. A rate at this level will lead to increased import prices. We may see inflation at 3% by the end of the year. In Norway we have inflation-adjusted leases - another good reason to invest in CRE.
Norway is continuing to reopen, as the Norwegian economy is recovering from its low point in April. This week the Government announced that all secondary and high schools will open before 15 May and on 1 June amusements parks can reopen. Several cinemas have stated they will reopen this week, complying with the maximum crowd rule of 50, increasing to 200 by 15 June. From 15 June fitness centres will reopen, as well as professional football leagues.
It was expected that housing prices would take a hit in April, but the prices were unchanged for the month. The decline in mortgage rates and comprehensive public support for the ones hit by COVID-19 measures have helped with keeping the housing prices up. For foreign readers we can confirm that 82% own their own residences and are therefore free to sell.
The Norwegian Central Bank set its policy rate to 0% (0.25%) for the first time on 7 May. Furthermore, the Central Bank stated that they believe the interest rates will remain at this level until the end of 2023. The rate on 10-year government bonds fell from 0.9% on 13 March to 0.4% on the 7 May. The decline in long government bonds as well as a functioning credit market makes us less prone to an increase in prime yield. On the contrary, it has opened opportunities for a decline in prime yield.
In Oslo, the activity slowly begins to return to normal. Two major changes have been made by the authorities this week.
- Recommended distancing was reduced from 2 metres to 1 metre. This will make it easier to return to the office.
- Events with up to 50 people participating will now be allowed. This is positive for cultural institutions and Food & Beverages. Some cinemas will open this week.
Registered unemployment dropped from 10.7% by the end of March to 9.4% by the end of April. We expect a further decline in May as activity increases.
Office search-volume in the first four months was 84,000 sq m in Oslo. The number was significantly lower (49,000 sq m) in the same period last year. There have been several major office searches since the COVID-19 restrictions were introduced.
Last week we got the results from our extraordinary (COVID-19 edition) investor survey. The results will be published this week. The survey shows that 60% of the investors plan to increase their portfolio in Norway in the next 6 months. Furthermore, half of the investors are ready to consider specific investment opportunities at this moment. This means that the transaction volume can pick up quickly when buyers and sellers have the same expectations.
According to the Government the COVID-19 outbreak is under control. The number of hospitalised in Norway continues to fall and has not been lower since 20 March.
Last week Norway began to reopen kindergartens. According to school leaders the opening went well. This week primary schools will be allowed to reopen across Norway for children between the ages of 6 and 11. Personal services like hairdressers, physiotherapists etc. will also open this week.
All major festivals and concerts this summer will be cancelled. The Government announced that no events of 500 people or more will be allowed until 1 September. In Oslo, the ban on serving alcohol in pubs will be lifted at the beginning of May meaning the pubs will be able to serve during our National Day on 17 May.
Preliminary figures by Statistics Norway shows that GDP fell by 6.4% in March. Accommodation and food services experienced the largest decline (-30%).
Brent spot was under USD 20 last week. Low oil prices mean lower oil investment and activity. However, the oil activity is not as important for the Norwegian economy as in earlier downturns. Less than 5% of all employed in Norway work directly or indirectly in the oil business. Recent forecasts predict that the fall in oil investment will not reduce GDP by more than 0.3 percentage points this year and next.
The COVID-19 outbreak still seems to be under control according to the authorities. There has been a fall in the number of infected people in the last 3 weeks. However, by gradually easing the restrictions there will be setbacks of daily increases. Hopefully we will find the balance between increased activity and controlling the spread. To keep a 2 metre distance from others will affect the openings of offices, retail, F&B and hotels.
This week the health authorities launched an app to help limit the transmission of coronavirus. Anonymised data about movement patterns in society from the app are used to develop effective infection control measures. It will then be possible to monitor even more closely whether the measures are working, and whether infected people are in close contact with more people as society eases the measures and restrictions.
About 60% of all office workers were still working from home in the first week after Easter. In Oslo, the share is as much as 75%. Surveys says that 80% find it more difficult to work from home. The opening of kindergartens this week will make it easier for some of them.
The hotel industry is now focusing on domestic customers in the next months. Hopefully the borders to Sweden, Denmark and Finland will open towards the summer. The sharp fall in the price of NOK means that Norway now appears very favorable as a holiday country.
Shopping centres revenues fell by 19.5% from February to March. The fall was expected as the measures against the spread of COVID-19 started at the end of the second week in March.
Office rents were on average unchanged from Q4 2019 to Q1 2020. The figures may indicate that the prime premises peaked in Q4. IMF forecast a fall in Norway's GDP of 6.3% this year after a growth of 1.2% last year.
This Easter was different from usual in Norway. Normally most of us are heading to our holiday properties, but this year we all had to stay at home.
On 8 April, the Government presented a plan of gradually lifting the lockdown. Children’s day care centres, primary school classes for pupils in years 1-4 and out-of-school care programmes will re-open, and towards the end of April, the Government will lift the ban on people staying at their holiday properties. Hairdressers and other businesses where there are one-to-one contact, will be allowed to resume operations if they follow the requirements for infection control measures. The changes will be brought in gradually, starting from 20 April.
As the Government eases the restrictions gradually, we will also start the process of re-opening our office in Oslo. Infection control guidelines will be strictly followed.
Several retailers which have been closed over the last weeks have announced that they will re-open. Norwegians will probably have to stay within the country this summer. Hotels and leisure are experiencing a major increase in number of bookings for the summer holiday. Registered unemployment is highest in tourism and transport, with 26.9% of the workforce registered as fully unemployed. Secondly, managers and retail, respectively, 16.8% and 16.7%.
We are now entering the fourth week of COVID-19 measures. The measures seem to be working. The number of new confirmed cases is declining and so are the number of people being hospitalised. This week is the national Easter holiday, and usually many of us usually spend time at our cabins, but this year, we are not allowed. Yesterday, the Government released an update about the situation and presented a plan to gradually lift the lockdown later this month.
Registered unemployment has increased from 2.2% in February to 10.7% in April. The sum of people registered as fully and partly unemployed has reached 412,000 people, or about 15% of the labour force.
Sectors such as travel and transport have been hit particularly hard, but we note that the service sector in general has been deeply affected by the coronavirus crisis.
House prices fell by 1.4% from February to March, and the number of dwellings traded was 14% lower than in March 2019. The decline was expected, and we believe rate cuts and lower volumes made the fall less dramatic.
A compensation scheme will provide compensation, for a period, for some of the unavoidable fixed costs of companies severely affected by infection control measures. The companies must document a fall in turnover of at least 30% in March. The feedback is mainly positive.