The European property market is showing signs of cautious recovery and a slight increase of transaction market activity due to improved credit terms and lower interest rates. Macroeconomic conditions are also improving with inflation now under control and lower interest rates. During the quarter, Investment Management generated balanced in and out-flows, along with new asset management mandates, which is encouraging in a relatively subdued transaction market. Our stable liquidity and capital position, coupled with strategic organisational adaptations, enhance our preparedness as the market rebounds.
The outlook on the transaction market improved slightly in the third quarter, although completed transactions did not increase notably on the European markets. The underlying sentiment is positive and there are indications that the gap between buyers and sellers’ expectations is closing, supporting increased transaction volumes going forward.
The main reason behind a brighter outlook is improved financing conditions and lower capital costs. Although transactions still take a long time to complete, market sentiment suggests that we can expect more and larger transactions looking ahead, as the market slowly but surely prices in lower capital costs.
At macro level, the outlook is also brightening with inflation under control in Europe and the US, and with key central banks in the midst of interest rate cuts. However, the outlook is not as bright in all markets, where some economies, such as Germany, continue to face challenges. In addition, the continued political uncertainty and ongoing conflicts that, besides human suffering, could lead to new inflationary pressure, increased oil prices and disruptions in logistics.
The European property market is showing signs of recovery, with some segments experiencing stabilization or even decreases in yields. This indicates that the negative trend observed over the past two years and the decline in property values may be near a turning point. Given the positive impact of increased transaction market activity across all Catella’s business areas, we are encouraged by indications from current dialogues we have across our European markets that a recovery is underway, with sellers’ and buyers’ price expectations increasingly aligning.
I recently had the opportunity to attend the property fair Expo Real in Munich with other colleagues. In comparison to just six months ago, the sentiment within the sector is markedly more positive, with a notable increase in discussing transactions based on well-founded and genuine interest.
Operating profit for the quarter amounted to SEK 19 M (32), the decrease attributable to non-recurring costs of SEK 13 M. Adjusted for this, profit was in line with the previous year, despite decreased revenue excluding commissions, assignment and production costs of almost SEK 10 M. The outcome is the result of our initiatives aimed at increasing efficiency and digitalising operations, thus reducing costs.
Balanced capital flows
The Investment Management business area takes pride in having successfully balanced in- and outflows in the core business during challenging times. The majority of capital inflows were generated in Asset Management through the growth of new mandates, where investors appoint us to manage and develop property portfolios and to reposition them in the current and future market. This demonstrates that our business model continues to generate growth opportunities even in a weaker and more hesitant market. The work associated with new investment products continued successfully in the quarter, and we are now moving out of the product development phase and towards actively seeking investments alongside new and high-profile investment partners.
During the quarter, the initiative to merge our two fund management companies – Catella Residential Investment Management (CRIM) and Catella Real Estate AG (CREAG) continued. The ultimate goal is to create a stronger, more efficient and larger fund platform in Investment Management. The merger will result in a more efficient capital raising function, improved coordination of investor relations, and stronger management and analysis capabilities.
Investment Management’s assets under management totalled SEK 151 Bn in the quarter, which represents a decrease of SEK 1 Bn compared to the end of the second quarter, primarily driven by exchange rate differences.
Planned divestments
In Principal Investments, the focus continues to be on developing and completing existing projects for divestment. In the fourth quarter, we expect to divest the French development project Polaxis. The divestments will further strengthen our liquidity and open up for new investment opportunities that meet our return requirements.
At the end of September, Kaktus Towers was awarded the prize “Europe’s Best Tall Building” by an international jury of architects at CTBUH’s (Council on Tall Buildings and Urban Habitat) conference in London. The award recognises both the building’s innovative architecture and its contribution to modern and sustainable residential concepts that satisfy the needs of today and tomorrow. We continue active dialogues with potential investors of a sale of this landmark in central Copenhagen.
Looking ahead, we are evaluating potential investments in both development projects and several European aggregation mandates with capital partners. With valuations stabilizing, we see attractive investment opportunities.
Signs of transaction market recovery
As previously mentioned above, we are beginning to see a brighter transaction market in Corporate Finance, although this has not yet translated into a notable increase in the number of transactions.
While transaction volumes in Europe were up slightly year-on-year, they remain well below the levels seen two years ago, when the downturn began. We are optimistic that the number of transactions will pick up on several markets in the fourth quarter, as this is the most transaction-heavy quarter in historical terms.
Green investments
In support of future green investments in the real estate industry, we established a Medium Term Note-program (MTN) in the quarter. In September, we issued new senior unsecured green bonds at a total amount of SEK 600 M, which attracted significant interest. The new green bonds are listed on Nasdaq Stockholm’s list for sustainable bonds. The issue is the first under our green bond framework.
In the quarter, we also continued the process associated with the implementation of CSRD (Corporate Sustainability Reporting Directive) – a new EU Directive aimed at increasing transparency and responsibility relating to corporate sustainability reporting.
Outlook
I am humbled by the confidence the Board has placed in me to lead Catella into the future during the recruitment of a permanent CEO. As indicated above, I am optimistic about the near future after more than two challenging years.
We have done and continue to do the right things. During the period of reduced activity, we have worked diligently to improve efficiency and adapt the organization. We have maintained a strong liquidity and a strong capital position and are now well-positioned to take advantage of the upturn. Our upcoming divestments will further strengthen our position. As the market improves, Catella is in a strong position to capture and capitalize on the opportunities arising, and continue to create value for our customers and shareholders in the future.
Author: Catella
