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The Swedish inflation in focus
At the end of June, the Swedish Riksbank opted to maintain its interest rate but clearly indicated potential rate cuts in the second half of the year. The Riksbank’s own forecasts for inflation, together with all key economy indicating components, including economic growth, unemployment rate, combined with moderate wage increase across the whole country, suggest that the policy rate should have been lowered in this announcement. However, we speculate that this must be weighed against the fact that some major central banks around the world remain uncertain about their future policy rate settings, which have influenced the Riksbank’s decision.
The Riksbank projects that the policy rate will be decreased from the current 3.75% to 3.14% by the end of 2024, done by 2 or 3 rounds of reductions during the year, while market pricing indicates a rate of 3.08% with each round cut being 25 basis points. The inflation outcomes in June and July are likely to set the future course for policy rate, forecasting that the KPIF will drop from 2.3% in May to 1.8% in July, well below the 2.0% inflation target.
With the Riksbank’s expectation that KPIF will reach an average of 2.0% in 2024 and even lower to 1.8% in 2025, we at Carousel however agree with the Riksbank’s governor Erik Thedéen that any forecast beyond a year should only serve an academic purpose with forming the basis for near-term monetary policy. Regardless, uncertainty remains and we tend to see more conservative forecasts on inflation and slightly more downside than upside risk on the market for the rest of 2024.
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The global economy
Over the past few months, global stock markets have shown different trends. In the US and several other developing economies (excluding China), stock markets have demonstrated positive trends. Conversely, most European indexes have experienced fluctuations, ultimately landing with minimal net change. In Europe, market interest rates increased in anticipation of elections in the UK and France, whereas they declined in the US. A significant portion of the US decline occurred following the release of June’s employment data.
After the European Central Bank (ECB) reduced its policy rate following Sweden’s lead in early June, we observed that the impact on market movements was not as significant as many have anticipated, unlike earlier this year.
Our assessment attributes this phenomenon primarily to political turbulence in Europe, compounded by the growing importance of long-term market interest rates, which investors are more sensitive to. The unexpected call for a new election in France, following President Macron’s significant loss in the EU election, has introduced uncertainties in France that have spread to the rest of the European markets.
On the contrary, in the US, although employment rose slightly more than expected, May employment growth was simultaneously revised downwards. Additionally, wage growth continued to moderate. The US CPI data was released while composing this article, revealing a broad cooling of inflation in June, mainly due to a long-anticipated slowdown in housing costs. This development has bolstered the confidence of the Federal Reserve. Treasury yields across the curve declined, with Fed swaps indicating more easing. Equity futures have nearly erased all their gains, and the dollar has weakened against all major currencies.
In general, it is noteworthy that several negative economic signals have emerged recently from both the US and Europe. This is reflected in the Economic Surprise Index, a proprietary indicator developed by Citigroup that measures how macroeconomic figures compare to forecasts (with a value below zero indicating more negative surprises than positive). Currently, the signals are quite weak, making the anticipated global economic recovery in the second half of the year somewhat questionable.
The Swedish commercial real estate industry
The office real estate market
During Q2 the office market in Sweden continued to face challenges due to the prolonged effects of high interest rates, particularly impacting the low-yield segment. Prime yields experienced further decompression, even for top-tier assets in certain areas of Stockholm. However we have observed a trend towards yield stabilisation following the Riksbank’s policy rate reduction. The yield spread between prime and secondary location and submarkets continues to widen, creating opportunities for landlords to upgrade or refurbish properties in anticipation of better market conditions.
Leasing activities remained robust. Many tenants we interacted with are considering downsizing their current spaces, adopting hybrid work environments, and exploring different office configurations in terms of location and size. Proximity to commuting options and high levels of service near office locations remain priorities, allowing tenants to focus on their core business.
We observe that the rental growth in Stockholm CBD has reached its peak. The vacancy rate for prime assets remains low, as these properties continue to attract potential tenants. We also notice that some modern secondary office properties are getting more interesting, with green credentials located in well-connected hubs in the near suburbs.
Capital markets
The real estate investment market continued to struggle in the first half of 2024. However, we expect a slight increase in activity after the summer, as the Riksbank has implemented its first policy rate cut and is expected to execute 2-3 additional cuts by the end of the year. We foresee emerging business opportunities for investors prepared to make acquisitions, as transaction possibilities may arise from upcoming loan and bond maturities.
