Focus on growth in a cautious market
Following a long period of soft market activity, 2023 closed on a cautiously optimistic note, with inflation appearing to be under control and stock markets rising, driven by the hope of earlier-than-expected interest rate decreases. While the swap markets are pricing in interest rate cuts, increased geopolitical risks could affect this fragile optimism.
In European properties, we believe that most of the asset price adjustments are probably behind us, although this is likely set to continue to some extent during early 2024. Although the transaction market remained slow in 2023, the gap between prime assets with a solid sustainability profile and other parts of the property market widened. While this trend was most pronounced in the office segment, it is likely to spread to other segments as tenant preferences evolve. Industrial and logistics properties recovered faster in Europe compared to other regions, benefiting from a post-COVID trend related to changed supply chain management. In the residential segment, there is a structurally widening gap between supply and demand for affordable and sustainable housing in Europe. Given the already limited supply, stabilized construction costs and a shortage of – and halted – development projects, this represents a tailor-made opportunity for Catella. Our strength is founded on our local competence and project management ability, and during the year we will continue to introduce new products that meet the needs of a changing market.
Although we expect it to remain challenging to raise capital, at least during the early part of 2024, a renewed focus on fundamentals by investors should increase interest in active asset management, high-yielding investment strategies and opportunities to acquire resilient assets – factors that are to Catella’s advantage.
As previously mentioned, 2023 was a challenging year for the entire property sector and fourth-quarter transaction volumes in Europe were down by 50 per cent on the previous year – and down by as much as 78 per cent compared to the fourth quarter 2021. Nevertheless, Catella posted a positive operating profit for the full year, albeit down significantly on the record year 2022. The main reasons for the decrease included a hesitant market and the associated significantly lower variable income. A stronger SEK in the second half-year and higher interest rates also had a negative effect on net profit.
The changing market conditions led to adaptations in the organization throughout the year, with a reduction in full-time headcount by close to 30 or over five per cent (adjusted for acquisitions and divestments). Most of the cutbacks were the result of natural resignations and recruitment freezes, although restructuring programs also contributed, reducing profit for the year by close to SEK 10 M, and SEK 4 M in the quarter. Sometimes, challenging conditions can speed up necessary decisions, and we are now looking forward to an even more scalable growth journey.
At the same time as making adjustments to the organization, we have also completed some forward-looking initiatives. One example includes building up a central capital-raising function aimed at improving access to global institutional investors.
Growth in a weaker market
Investment Management’s assets under management increased by SEK 12 Bn in the year to SEK 152 Bn. The acquisition of Aquila Group complemented our business operations in France and Europe, adding a new source of capital in the form of investments from private individuals. Our latest fund, Ûpeka, launched in the second half of the year, has already raised EUR 20 M, of which half was invested in high-yielding assets in 2023.
Profit for the quarter was SEK 19 M as a result of lower variable fees, a stronger SEK against the EUR, and restructuring costs of SEK 3 M. The business area continued to return strong underlying profitability and long-term growth, which is always our focus.
Towards the end of the quarter, we completed major transactions in Finland and Spain, evidence of a brightening transaction market and demonstrating the strength of our offering.
A hesitant year for Principal Investments
After the end of the quarter, we signed an agreement relating to the sale of a logistics property in Jönköping. This was the final property in the Infrahubs partnership, which added SEK 280 M in liquidity. Since the start, the partnership has generated SEK 225 M in profit after tax for Catella’s shareholders, with most of the assets divested before the start of the market downturn.
Other development projects are progressing according to plan, albeit at a slower pace. We are in the process of finalizing the last commercial leases for the Kaktus property in Copenhagen and are now starting to actively market this unique property for sale.
Principal Investments’ investments totalled around SEK 1.7 Bn at the end of the quarter, distributed over 10 projects in six countries. With strong liquidity and continued price pressure, we continuously evaluate new investment opportunities that meet our required return thresholds and have the potential to generate new management mandates.
Continued weak transaction market
Although revenues in the Corporate Finance business area reached their highest level in eight quarters, we are still a long way off normalized levels. However, the outlook brightened a little in the fourth quarter with a stronger position in the Finnish, French and Spanish markets. We have also seen increased demand for advanced debt and restructuring advice, and we acted as advisor on major complex transactions in Sweden and Denmark during the quarter.
Despite a somewhat brighter outlook and a slightly more active market, in combination with falling inflation and a lower interest rate outlook, we plan for the relatively subdued trend to continue during the first half of 2024.
Given our strong financial position, both for Catella and in our funds, we continue the work of launching new products to meet the changing market conditions and reinvesting in long-term value creation throughout 2024.
Christoffer Abramson, CEO and President
Stockholm, Sweden, 09 February 2024
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