The Swedish economy is set to continue performing at a lower pace throughout 2023 and 2024. The National Institute of Economic Research expects Swedish GDP to contract by around 0.6% this year, with a slight uptick in 2024 (growth of about 1% expected), and a stronger recovery in 2025. Inflation has continued to decelerate and reached 4.7% in August. It is expected to continue declining throughout the year, returning to lower levels in 2024. The increase in construction costs has continued to outpace inflation, posing additional challenges for property developers. Additionally, the Swedish krona has depreciated sharply against the US Dollar in the past few months, losing nearly 5% of its value since the beginning of the year. In response to the worsening economic situation, the Riksbank decided to raise the interest rate by a further 25 basis points in September, bringing it to 4%. One more increase is expected this year, with the interest rate projected to reach 4.25% by the end of 2023. The Riksbank expects the interest rate to stabilize at around 2% in 2024. Finally, unemployment is expected to remain stable throughout 2023 and increase slightly in 2024.
Swedish investment market continues to underperform in the latter half of 2023. The first half of the year witnessed a sharp decline in activity, with transaction volume falling below the 10Y average, to just over SEK 40 billion. The subdued investor activity continued throughout Q3, with investment volume falling short of SEK 20 billion, remaining firmly below the 10Y average and down 40% year-on-year. Domestic investors continue to dominate the Swedish investor market, capturing over 90% of the total volume for the period. Residential sector remains the most popular investment destination, capturing nearly 40% of the total volume, followed by office (23%) and industrial (22%). Notably, the trend of quoted real estate companies as net sellers continues, as private equity funds and institutions stand as strong buyers in this challenging market landscape.
As investors face increased financing and transaction cost the yields continued to decompress across the office and retail (shopping centres) segments, with yields for the best prime assets reaching 3.85% and 4.25% respectively. At the same time the logistics segment has seen the prime yields begin to stabilise at 4.75%.
