The property transaction market remained hesitant in the second quarter. While inflation expectations continued to fall, central banks are generally cautious about interest rate cuts. In addition, elections were held in two of Europe’s largest economies and the Olympic Games were staged in Paris, which further slowed activity in our largest markets.
The value of European property assets has continuously fallen over the past seven quarters. However, the decrease in the last quarter was the lowest since the price correction began in the third quarter of 2022. With a touch of optimism, this can be interpreted as indicating that the market is slowly returning to levels where seller and buyer expectations will soon meet.
For Catella, we note that capital inflows and outflows in the core property funds business remain limited. We consider the latter a sign of strength in the currently challenging market conditions.
The Asset Management business delivered AUM growth from managing and developing property portfolios and repositioning assets to meet current market demands. This is evidence that our business model continues to generate growth opportunities even in a weaker and more hesitant transaction market.
Operating profit for the quarter was SEK 35 M, down SEK 53 M, mainly driven by significantly lower variable income in Investment Management (SEK -99 M) in year-on-year terms. In the quarter, we divested half our stake in asset management company CatWave to Söderberg och Partners, which already held 51 per cent in the company. The divestment had a positive effect on the profit of SEK 18 M, and in 2025 the remaining share of the operations are expected to be divested in 2025.
On the cost side, our initiatives aimed at increasing efficiency and digitalizing operations continue to yield positive results compared to the previous year, with costs down by SEK 55 M.
As part of our sustainability work, we published our first Principal Adverse Impact (PAI) report in the quarter. We consider it important to follow the EU regulatory framework for sustainable finance and to maintain a responsible investment strategy. In the quarter we also completed the United Nations Principles for Responsible Investment reporting (UNPRI) for the second year running. By being part of UNPRI we demonstrate that we maintain a responsible attitude and transparency towards investors and other stakeholders. As a further step on our sustainability journey, we are preparing for a green framework to enable the issuance of green bonds in the future.
Larger and more efficient fund platform
In order to take another step towards a stronger, more efficient, and larger fund platform in Investment Management, we communicated the merger of our two fund companies – Catella Residential Investment Management (CRIM) and Catella Real Estate AG (CREAG) in the quarter. CRIM’s focus is a fund offering aimed at European residential properties, while CREAG’s focus is commercial properties. By merging the front office in the new Catella Investment Management GmbH we are creating a more efficient function for capital raising, more coordinated investor relations, and stronger management and research operations. At the same time, CREAG can focus exclusively on cost-efficient growth, and on offering fund administration to Catella and external operators.
As previously mentioned, we have now actively started to raise capital for our new product strategy “European Living Development”. The strategy satisfies the extensive structural supply shortage of modern, sustainable and affordable housing in different segments. Supported by AI tools that identify attractive areas for investment projects and a higher return profile, it meets the investor demand of tomorrow. While the initial feedback from investors has been positive, both in terms of the strategy and pipeline, one must be humble by the fact that capital raising for new strategies takes longer in today’s market.
Assets under management in Investment Management totalled SEK 153 Bn in the quarter, which represents an increase of SEK 1 Bn in the previous quarter. As mentioned, growth is mainly derived from Asset Management and primarily Finland, where we signed several major mandates in the quarter.
Continued focus on completion
In Principal Investments, the focus remains on development and completion of existing projects for sale.
Our Kaktus investment project now has all lease agreements in place and we continue to look for the right buyer for the property.
Looking ahead, we are reviewing several potential investments, both in development projects where land prices have reached levels that support our return requirements and more European aggregation mandates with capital partners. With valuations that are now appearing to stabilize at a new level, we are seeing attractive investment opportunities.
Weak transaction market continued in second quarter
Although transaction volumes in Europe increased slightly on the previous quarter (+7 percent), volumes remained down by -59 percent compared to 2022, when the downturn started. We noted some increase in Corporate Finance activity in northern Europe, where a large degree of price corrections have already materialized. In southern Europe, and particularly in France, transaction volumes have been extremely low, driven by slower revaluation, political uncertainty and a challenging financing market.
In the second half of the year, we expect to see more deals completed in our pipeline.
Outlook
It is still too early to say that we have hit the bottom, but based on the dialogues we are having with investors, interest in investing in properties as an asset class is gradually increasing once again.
We have completed and are completing the necessary initiatives to increase efficiency and digitalize our operations. Some will take effect as early as this year, while others will contribute towards strengthening Catella’s growth and profitability when the market begins to recover.
Catella presents the Interim Report and answers questions today at 10 a.m. CET.
To participate, go to https://financialhearings.com/event/48741
Christoffer Abramson, CEO and President
Stockholm, Sweden, 21 August 2024
