A non-issue for housing brought down the government
There has been a political storm recently, a storm that started in a teacup. Introducing market rents for new builds should not lead to a major political pushback. But it did. The proposal for market rents failed, and so did the government.
Ironically, we have actually had a system in Sweden for a little over ten years that allows what are referred to as “presumption rents” for new rental apartments. In practice, this means market rents for new builds. So for the market and the real estate companies, this issue was almost entirely irrelevant. The system of presumption rents is the regime that has permitted the construction of rental apartments to increase markedly over the past decade compared with the situation before, when rent levels for new builds were more or less entirely regulated.
Sentiment for real estate stocks fell sharply in mid-June. If this in some way relates to the loss of market rents, I must say that an excellent buying opportunity has arisen for listed real estate companies. These companies are not impacted by the loss of market rents for new builds. Some companies have even been pleased that the proposal failed to go through.
It should still be pointed out that we are quite unique in Sweden when it comes to the rental market, and that this creates problems. In no other democratic country is the entire stock of rental housing subject to complete regulation like we have had in Sweden. In other countries, parts of the housing stock are controlled, or market mechanisms are built into the way rents are set, even if they are controlled. We should have realised a long time ago that the Swedish model does not work. Stockholm is the only capital in the western world where you have to stand in line for twenty years to get a lease. In most other capitals there is no queue at all. Why does Sweden stand out? Because for several decades it has been unprofitable to build new rentals due to the general rent controls. Thanks to the presumption rents this problem has been partly resolved. The low interest rates and lower yield requirements have also helped.
Controlled rents and the consequent limited construction of rental apartments over a long period has also channelled all increase in demand in the housing market towards condominiums and houses, resulting in very strong price growth, but that’s another story…
For the existing stock of rental apartments not covered by presumption rents, the rent is therefore still fully regulated. Because the real estate companies bought these apartments under existing terms, the prices have been adjusted to the controlled rents. In a strong economic upswing with rising interest rates, this may not be optimal exposure, but with a pandemic and very low interest rates, there has actually been a rush to invest in Swedish rental apartments. This demand is likely to last for a long time.
As for changes to the portfolio, we made some adjustments this month. We have continued to increase our stakes in JM and Brinova, while we have decreased the holdings slightly in Castellum, Entra, Nyfosa and Fastpartner. We have also sold almost our entire holding in Sagax D. During the period, Corem’s bid for Klövern was completed and our entire holding and Klövern have thus been converted into a single holding in Corem. As we have mentioned in previous monthly newsletters, we see great benefits from the merger, which will be good for the share.