Past Performance and Future Promise of Nordic Real Estate Investment – the same, but different

// Nordic Insight - Genesta’s editorial platform for independent perspectives on real estate.

The Nordic real estate market has become a key destination for institutional capital, thanks to low political risk, strong public finances, and solid economic fundamentals. Investment allocations exceed the region’s economic weight, with appetite expected to grow through 2025. This insight considers the outperformance of Nordic value add funds by region and style, examining how sectoral composition and structural differences shape the performance of this dynamic yet stable market.

Over the past decade the Nordic region has cemented its position as an attractive destination for institutional real estate capital. The region is generally associated with low political risk, relatively strong and stable public finances and mature real estate markets, and a rapid pace of urbanisation expanding its principal cities. At 11.5%, real estate allocations across all funds to Denmark, Finland, Norway and Sweden are significantly higher than their aggregate share of European GDP (8.1%)[1]. Indeed, all four markets are represented within the top ten preferred destinations for institutional capital averaged over the past five years[2]. Current investor intentions suggest that the regions share of real estate investment capital will expand further in the near-term. The proportion of investors identifying all four countries as a preferred destination has increased, with Denmark, Finland and Sweden remaining within the top ten target destinations for 2025 (Figure 1).

[1] INREV (2025) Quarterly fund index allocations; Eurostat (2025)

[2] INREV (2025) Investment Intentions Survey

Figure 1

Nordic region is favoured by investors

Source: INREV (2025) Investment intentions survey

There are multiple factors that are strengthening investor sentiment towards the region. The Nordics are associated with strong and stable political risks and in an environment of increased geo-political uncertainty are perceived to offer a safe haven. This is also reflected in the recent downward trajectory of bond rates and expectation that they will remain broadly stable in the medium term[3]. Excepting Finland, public finances are currently robust and suggest that the markets are well-positioned to withstand economic volatility that might arise from wider geo-political or financial market turbulence. Although economic performance has been divergent across the Nordic countries post-pandemic, they are expected to converge over the coming years as Finland and Sweden catch up to Denmark and Norway. Economic growth across the region is expected to strengthen through 2025 and assisted by more controlled inflation, interest rate modertation is bolstering growth and reducing finance as well as mortgage costs.

[3] Nordea (2025)

Figure 2

Interest rates are expected to moderate and stabilize

Source Nordea (2025) Nordea Economic Outlook, 19 May 2025

The expected performance of the Nordic real estate markets benefits from these risk attributes and in addition, offers real estate investors a number of advantageous characteristics. This paper considers the long-term performance of Nordic real estate. Using the INREV quarterly fund index, it explores the structure of allocations through funds, identifying differences in performance by style and sector between the Nordic and wider European region, and within the region.

Comparative long-term performance of Nordic real estate

A comparison of total return performance indicates that there is a strong correlation between Nordic and all INREV index funds, with periods of under and over performance (Figure 3). In the period after the global financial crisis (GFC), the strength of the Nordics public finances and relatively strong economic growth prospects generated a flight to safety across all asset classes. The acceptance of low and negative bond rates reflected the value placed on certainty and this was also reflected in real estate pricing. In part this was driven by lower bond rates, but a lower risk premium was also associated with the greater certainty of income and future pricing presented by the region.

Figure 3

Comparison of European region and Nordic real estate fund performance

Source INREV quarterly fund index

As core European markets moved from recovery into modest growth by 2016 this differential eroded. During the pandemic the Nordic markets outperformed, in part because of differences in policy decisions and/ or their duration. Notably, the construction industry continued in Denmark, Finland and Sweden in comparison to shutdowns in many European markets, while the benefits of financial stimulus and low interest rates supported growth. However, the resultant inflation from expansionary monetary policies following both the GFC and subsequently the pandemic that impacted all economies, required an even sharper correction in base rates in the Nordics than elsewhere, mirrored in real estate pricing.

Investment style and the role of value add

However, these trends are more pronounced when considered by investment style, which is particularly important when considering the Nordic index (Figure 4). Broken down by style, value add has a weighting of 52% within the Nordic index in comparison to a value add weighting of 6.9% for the INREV quarterly index. Indeed, the Nordic region accounts for 38% of all value add funds in the INREV index, while representing a mere 2% of core funds.

In part, this higher weighting may reflect the impact of market size on investment mode. Institutional investors identify strategic opportunity and in planning the execution of their investment strategies, subsequently select the most appropriate mode. Being more asset management intensive, value add strategies require a local operating platform. Given the scale of the Nordic markets, fund structures are often a more efficient means of strategy implementation for cross border investors than establishing a proprietary platform in the Nordic region.

Figure 4

Total return outperformance of Nordic value add funds

Source INREV quarterly fund index

The outperformance of Nordic value add funds is striking and yet, is somewhat understated given they currently comprise 38% of the All value add funds index and therefore must have a positive impact on its performance. Given the high weighting of value add funds in the Nordic Index, their outperformance can be considered across different time periods.

Initially, the outperformance of value add in the period post GFC reflected bi-furcation in the real estate markets. Risk aversion transcended across all asset classes, not merely by country, but also by location and quality. Within real estate, this was manifest in a sole focus on assets in prime locations, in capital cities, with a longer-term secure income. This resulted in wide spreads between this ‘super’ prime and all other assets, regardless of risk characteristics or real estate fundamentals.

Across the Nordics, especially in Sweden and Finland, real estate markets had been relatively immune to the debt driven real estate bubble that had fuelled global markets. Indeed, the economic cycle in Finland and Sweden had started to move into recovery as the GFC took hold. As a result, these real estate markets were characterised by relatively low leverage and an absence of a supply overhang, with adjusted pricing largely reflecting the global credit crisis. Given the absence of development finance, value add investors in the region benefitted from high yielding, but otherwise low risk, income secure assets. Even as pricing moderated for income secure assets, pricing remained elevated for those with shorter income or tenant engineering risk. However, accelerating economic growth in the region had a limited response from real estate supply, enabling value add investors to undertake asset management tenant engineering and repositioning strategies with limited market timing risk. Such opportunities attracted a strong weight of capital and such mis-pricing opportunities gradually eroded.

However, structural change delivered new opportunities in the region. The acceleration of online shopping in the second half of the previous decade intensified during the pandemic. Although it negatively impacted the retail sector, it greatly expanded the demand for distribution and logistics facilities, and the pandemic further heightened demand for additional storage facilities by both manufacturers and distributors. Equally, expanding urban populations generated demand for private rented sector (PRS) housing.

Agility of Nordic funds to adapt to structural risk and opportunity

Although these new structural opportunities characterised the wider European real estate markets, Nordic funds have demonstrated greater agility in responding to them. Figure 5 compares the structure of the INREV and Nordic fund indices by sector at five yearly intervals from 2014. It is clear that Nordic funds executed a sharper pivot towards industrial / logistics and residential sectors than the fund industry as a whole. In part, this may reflect the higher weighting of value add funds which are usually closed end and therefore the Nordic index reflects a higher number of fund terminations and more recent vintages, facilitating a more rapid shift of focus and portfolio allocations.

Figure 5

Greater agility of Nordic fund sector composition

Source INREV quarterly fund index

This difference in sector allocations is an important factor in the out-performance of Nordic value add funds. Figure 6 illustrates the total return performance of sector funds within the INREV quarterly index and demonstrates the consistent upward trajectory of the industrial / logistics and residential sectors over the past fifteen years and the decoupling of this performance from other sectors from mid 2017 for Industrial/ logistics, and end 2020 for residential. Although the industrial / logistics sector readjusted to the normalisation of demand - especially additional storage space – following a period of exceptional demand during the pandemic, it has resumed its longer term upward trend.

Figure 6

Divergent performance of real estate sector funds

Source INREV quarterly fund index

In contrast, structural change has negatively impacted the retail and office sectors. The retail real estate sector has faced multiple headwinds since 2015. Most significantly the impact of online retailing which has a triple effect of diluting in-store sales, raising the overall retail cost base with the addition of digital platforms and customer fulfilment/ logistics solutions, and reducing the total store footprint required to achieve customer reach. As the retail market adjusted to this structural change it had to absorb the impact of the pandemic on store sales, household finances and household demand, and the impact of inflation and higher interest rates on real disposable incomes. Institutional investors turned their attention to the opportunities that this structural change created, especially in the logistics sector. At the same time, many investors divested their retail assets, resulting in a sharp re-pricing of the retail sector. Currently, investor appetite for retail assets that demonstrate stable income returns is slowly reviving as they are offering higher yielding investments relative to other opportunities.

In recent years, the office sector has also been subject to repricing given perceived higher risks to income. Following the pandemic, there has been an ongoing tension between return to office and work from home policies across many markets. The impact on office markets varies across cities and is most severe in markets that have a very distributed workforce, involving long – and in some instances, expensive – commuting patterns. The impact also differs across industry sectors as well as within sectors, as the ability to work remotely effectively varies with job function. This has created uncertainty as to the impact on stock and supply equilibrium. In addition, much of the existing stock requires retrofitting to near net zero (NNZ) and the cost is often not reflected in market pricing. Together these factors are increasing uncertainty for net income and investment return expectations.

Institutional investors strengthen focus on longer-term, stable income stream delivery

Such risks to income and value are important as most institutional investors are seeking longer-term, secure and certain income streams from their real estate investments, rather than being focused on shorter term financial returns which tend to be more sensitive to economic cycles. As real estate has a lower liquidity, transparency and higher specific risk it rewards longer term investors that don’t need short term liquidity with a risk premium over other fixed income products such as bonds. This compensatory return assists in meeting their fiduciary duty to deliver the future income requirements of their underlying savers and investors. In addition to allocations to core real estate investments comprising the acquisition of existing, longer term and stable income streams, institutional investors also make allocations to value add investments that provide an additional return for a higher, but limited risk to income.

Real estate is a dynamic asset class and offers investors a wide range of investment risk profiles. Institutional capital requirements are focused on generating the return required to meet known future liabilities. As the timing and scale of these liabilities is known, institutional investors have the capacity to act as patient capital enabling decision making to consider sustainable long-term, cumulative returns through the investment horizon. With an emphasis on income returns, they are able to hold through cyclical swings, focusing on cumulative income driven returns allowing for value add strategies that exploit mis-pricing. Equally, they are able to pursue value add strategies that enhance the quality of existing income returns and reduce risk over the life-time of the asset.

The long-term risk and return of the INREV quarterly index, Nordic and sector fund indices are presented in Figure 7. Nordic value add funds deliver the strongest returns, but given they are also subject to higher volatility, on a risk adjusted basis their return is more modest. However, as demonstrated in Figure 4 volatility has been skewed to the upside. On a risk adjusted basis residential delivers the strongest return, followed by the industrial sector funds which deliver a higher absolute return but again, subject to greater volatility. Over a ten year horizon, core delivers a higher risk adjusted return than value add funds. However, this time period includes the readjustment of market pricing to higher bond rate and interest rate movements. Over the same period the availability of real estate finance also contracted, with value add investments disproportionately impacted.

Figure 7

Nordic value add funds deliver strong risk adjusted return

Source INREV quarterly fund index

These pricing movements resulted in negative capital growth which is the principal driver of the volatility experienced (Figure 8). In contrast, income returns have been broadly stable across short and longer-term investment horizons. Institutional investors focused on income have the capacity to hold through economic cycles and benefit from the stability of income returns. For short and medium term strategies, market timing risk has the capacity to greatly enhance, or debilitate total returns. Timing precision requires considerable expertise and is especially difficult amid periods of geopolitical uncertainty and financial market volatility.

Figure 8

Income returns are broadly stable through investment horizons and higher in Nordics

Source INREV quarterly fund index

Mapping appetite to opportunity across the Nordics

The stability and expected growth of the Nordic economies in the medium term has positively impacted real estate market prospects. Income returns are expected to strengthen as investment and domestic demand expand while risks are cushioned by robust public balance-sheets, reducing the impact of potential market shocks that might arise in an era of elevated global uncertainty. The opportunity for Nordic real estate markets is mirrored in indicative surveys of institutional investors allocation plans.

Equally, investors have considered real estate opportunities by sector. Given the recent and longer term outperformance of Residential and Industrial -both absolutely and on a risk adjusted basis - and the continued strength of underlying fundamentals, it is perhaps unsurprising that investors have also indicated a strong preference for allocations to these sectors. All of the European and 79% of inter-regional respondents to INREV’s investor intentions survey indicated European residential as a preferred sector, and 85% European and 86% of inter-regional investors identified the industrial sector. In contrast, less than half of all investors favour retail.

These sector weightings have implications for the allocation of capital within the Nordic region. Although at a regional level the breakdown of Nordic funds by sector indicates that capital within the region has already pivoted strongly to these sectors, there is considerable variation at a country level. Figure 9 shows the allocation of Nordic fund portfolios within the Nordic region by country and sector. Sweden accounts for over 40% of Nordic fund portfolios by value, reflecting its greater economic size and Stockholm’s position as the regional business capital, as well as its central geographic position within the region. Together, these factors are reflected in the greater weighting towards the industrial sector as it has a larger manufacturing sector, acts as a regional distribution hub and in addition has a larger population.

Figure 9

Nordic countries are divergent across countries as housing policy overshadows unmet demand

Source INREV quarterly fund index

However, despite Sweden’s larger population size and significant housing shortage, allocations to residential are underweight relative to its population size. This is due a restrictive rent regulatory regime that extends across housing segments and constrains the financial viability of developing and operating private rented sector housing. In contrast, regulatory frameworks in Finland and Denmark provide for institutionally investable opportunities, with the demand supply imbalance in Denmark making it particularly compelling.

Investors indicate that the retail, and to a lesser extent office sectors are less preferred. However, almost 62% and 46% of European investors indicate an appetite for office and retail investments, respectively. Indeed, while investor activity in these once dominant sectors remains low in a historical context, these sectors have become relatively high yielding. The strength of economic growth and expansion of household demand in the Nordics is expected to attract investors seeking value through income return and mis-pricing opportunities in these sectors.

Looking forward, it is anticipated that more stable bond rates and lower short term interest rates coupled with increasing investor appetite will result in positive capital growth for Nordic real estate. This growth is expected to be underpinned by rental growth as occupier demand strengthens and real disposable household incomes expand. However, there is considerable variation in the opportunities across the region, notably by sector and this is expected to result in the divergence in real estate market structures - and therefore performance - intensifying within the region.