Office Developers in Oslo: An Analysis of Debt Finance Alternatives

Caroline Krefting

Student thesis: Master thesis


The purpose of this thesis is to find the optimal debt allocation for Norwegian developers of office properties in Oslo. The profile of the borrower will be identified and an analysis will be made of the Norwegian bond and bank market. Before making their lending decision, the lenders of capital measure the property developer’s risk of default. This is measured through the macroeconomic variables and the firms’ ability to generate cash flow and hold other assets. The Norwegian economy is currently strong, with high GDP growth and low unemployment, as the petroleum sector activates the mainland economy. The current and forecasted high office rent level, is triggered by increased demand for office space from high employment and lower supply from increased construction costs. The combination of high-expected rent level and low degree of vacancy, provides the office developers in Oslo with a strong ability to generate cash flow. The investors are willing to accept a low yield, i.e. pay a high price for office properties. Future oil price developments, relating to the instabilities in emerging markets and European countries are identifiable risks. The consequences could be fatal for the Norwegian economy as a whole and for the office developers in Oslo. New international regulations, Solvency II and Basel III, were created after the financial crisis in 2008. As a consequence, Norwegian banks’ lendings became more restrictive. Higher margins have been imposed, along with shorter durations and tighter lendings. The banks currently high stake in the mortgage loans to over-indebted households, financed by covered bonds, imposes a future risk. The future development is uncertain, a lower oil price could result in fatal domino effects. Some fear a new Norwegian banking crisis. The bank market is identified by uncertain future instabilities and expected margin increases. The bond market, offering fixed rates, no installments and long duration bonds, is then an attractive source of finance. Large and listed firms are recommended to combine short term bank certificates with long term lending in the bond market in the coming refinancing period. Especially property developers with long-term stabile portfolios are recommended to use bond financing. The bond and the currently restrictive bank market are however, offering a limited degree of capital to the smaller and unlisted firms. Foreign capital is identified to be an alternative choice of finance for these players.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages128