The global economy has entered a macro environment with high and volatile inflation, low productivity growth, and higher nominal interest rates (compared to the previous decade). We continue to see a higher-for-longer interest rate environment, causing continued downward pressure on riskier asset classes as the market adapts. Geopolitical risk compounds this view with the potential impact on the energy markets and the general inflationary nature of conflict. Real estate has become more heterogenous as an asset class and we believe that all property asset classes are set to bifurcate further. Segments with CPI-connected rental markets, somewhat higher yield levels, and low equity valuations are expected to outperform in the near term, with high ESG credentials an additional factor.

Office values are under intense pressure from ESG-conversion needs and from vacancies driven by new working models. However, the contrarian capital is starting to focus on prime supply-constraint locations, with the aim of redeveloping assets to prime ESG stock meeting the flexible office needs of the future. For the first time in a long time, market conditions now favor more active asset management over passive investing. In this challenging market, Catella's pan-European offering of vertically integrated local experts and asset managers will help our clients succeed.

The impact of the rising yields in residential assets has been largely offset by rental growth. Significant housing stock is owned by the older demographic groups with lower debt level, while the high cost of debt will likely deter younger buyers and push that market back to renting. At the same time, the demand for and requirements of ESG-compliant assets keeps increasing, which should strongly support sustainable build-to-rent investments in the right micro locations. Catella already offers two separate pan-European Article 9 funds, and we are working to deliver a new offering that meets the growing demand for affordable and sustainable housing.

In other segments, we see ESG-compliant new construction space in Logistics and Industrial assets in high demand - the on-shoring trends and purchasing patterns here continue to point to growth with a simultaneously limited supply. Catella is developing attractive assets through our French platform, while our logistics fund continues to grow on the back of strong investor demand.

In an uncertain market with limited transaction activity, Catella continues to focus our operations while simultaneously advancing our positions. On the European market, transaction volumes decreased by more than 60 percent year-on-year, to EUR 22 Bn.
Reduced transaction activity affects all three business areas, while also requiring that we adapt our organization. We have been doing this on an ongoing basis during the year, and in the quarter we reduced headcount in several companies further, which generated some restructuring costs.

At the same time as we are adapting operations to the prevailing market conditions, we are expanding our business. In September, we completed the acquisition of 60 percent of Aquila Group for an initial purchase consideration of SEK 113 M. The acquisition adds more than SEK 15 Bn in assets under management and represents another step on our growth journey. With one of the largest independent operators in property investment management in France now on our team, we will benefit from key synergies with existing operations in France and Europe, while it is also of major strategic importance to broaden operations by adding a new source of capital from private investors through the French fund operations.
 
Sluggish market for capital raising
Lower inflows to traditional property funds is the natural consequence of higher interest rates, continued uncertainty, and lagging property valuations. However, interest in opportunistic investments is increasing, a market where we have solid competencies and where we are focusing our growth efforts.

Apart from the acquisition of Aquila Group, assets under management largely remained unchanged, adjusted for exchange rate effects, on the preceding quarter. We consider this a sign of strength given the current market conditions, and are pleased to see continued growth in assets under management in our Article 9 funds, which have the sharpest sustainability focus.

Investment Management’s profit amounted to SEK 26 M in the quarter, the result of a sluggish transaction market as well as some M&A and restructuring costs. Underlying fixed management fees continued to increase by 14 percent on the previous year, driven by increased assets under management. It is worth noting that income from Aquila Group was not included in profit for the quarter.

Looking ahead, Investment Management is holding strong in a turbulent market, with stable fixed revenues, extensive committed capital, and continued strong relationships with our investor base. In addition, we are seeing increased interest in more actively managed mandates, while the acquisition of Aquila Group opens up the prospect of new capital inflows from the private investor market.

Broader focus in Principal Investments
One of Catella’s strengths lies in that we co-invest in development projects with the aim of generating returns as well as attracting new business through management mandates. We also invest in new ideas generated within the organisation. This is an area that is set to expand in future, partly through additional investments in our funds in Sweden and the UK, as well as the fund now being launched within Aquila Group. We have also added our investment in Pamica to the business area. Catella was one of the first investors in Pamica, and further investments were made in the latest investment company, Pamica IV, this year.

Even if progress has been made in our investment projects, we anticipate that divestments of completed projects will remain limited in 2023. At the same time, we are seeing more opportunities for new investments that meet our return requirements as market prices continue to adjust and more opportunistic investment opportunities arise.
At the end of the quarter, Principal Investments invested a total of some SEK 1.7 Bn in 10 projects across six markets.
 
Advisory market remains hesitant
Transaction volumes in the quarter were at their lowest since 2009, which naturally affects Corporate Finance. Income decreased by approximately SEK 20 M, which generated an operating profit of SEK -6 M (6).
We continue to have a solid pipeline of transactions, but in order to realize these in the near future we would need to return to a more normalised transaction market, and it is difficult to predict when this is likely to occur.
 
New opportunities for growth and profitability
We continue to advance Catella’s positions on a sluggish market, while simultaneously adjusting our cost structure. We develop products and solutions adapted to the new market environment while simultaneously investing in digitalization, sustainability, and AI. These investments will drive scalability and competitive advantages in the longer term.

The current market conditions highlight the importance of being a resilient and forward-looking company that is able to adapt to a changing market environment. This is at the core of Catella’s business model and values.

 
Christoffer Abramson, CEO and President
Stockholm, Sweden, 27 October 2023

Catella presents the Interim Report and answers questions today at 10 a.m. CET. To participate, go to https://financialhearings.com/event/46283