Line Ravlo-Losvik, DLA Piper
In the far north of Europe, among the Scandinavian countries, sits Norway with its long coastline, famous opera house and CBD investment opportunities. It is a safe harbour for both Norwegian and international real estate investors. But what makes the Norwegian real estate market such an attractive business destination?
Norway’s stable economy and its predictable legal system are two of the reasons the country is regarded as a safe harbour. Challenges related to the Norwegian currency and the relatively small market create no more than a small ripple on the calm surface of the investment environment.
The Norwegian economy is very stable. In Norway, the government pension fund amounts to 9.3 billon kroner. With 5.3 million inhabitants, that equates to 1.7 million kroner per person. Further, the unemployment rate is very low – only 3.5 per cent in May 2019 – and average salaries are high. Even during financial crises, the Norwegian economy has been less affected than many other European countries. In the real estate sector, this means that there is high demand for property, and so lease rates are also high, particularly in CBD areas. And with such demand, real estate prices are also increasing. Compared with other countries, the challenges in the Norwegian market can be considered moderate.
Even in retail, there is at least some sunshine peeking through the clouds – partly because of the 25 per cent value-added tax (VAT) and VAT refund system for foreigners, which make
Norway an attractive shopping destination for tourists.
PREDICTABLE LEGAL SYSTEM
It is easy to do business in Norway, which has a well-developed legal system with a clear legislative framework. This means that purchase agreements for some foreigners seem surprisingly short, because the legislation and legal interpretation regulates many situations.
Even though tax rates change from time to time, new laws enter into force, and new decisions are handed down by the courts, there are very few exceptions where changes appear out of the blue. Although the political landscape changes due to elections, and judges are replaced, the legal system and relevant framework for the real estate sector is remarkably stable, and Norwegian real estate lawyers can focus on the needs of the relevant investor rather than being nervous about changes.
Foreign investors should, however, take due notice of various notification duties and formalities. Delayed notices or mishandling of VAT could have an economic impact on an investment, without any corresponding value-add. Therefore, foreign investors should seek local advice on the acquisition, management and divestment of their Norwegian real estate assets.
BID AND ACCEPTANCE LETTERS
Complex bid and acceptance letters are not common in the Norwegian acquisition processes related to real estate, and the deal can be binding on the parties based on the bid and acceptance letter if the reservations and conditions of the purchaser and seller for completing the transaction are not clearly stated in these documents. We rarely see complex letters of intent, memoranda of understanding or more extensive preliminary legal documents. Exceptions are usually limited to complex deal structures.
Usually, reservations and conditions emerge following due diligence; financing of the acquisition; and final board approval of the negotiated purchase agreement. Both parties are usually free to withdraw from the transaction if the conditions are not met and reservations lifted.
Most purchasers initiate and complete legal, technical and financial due diligence before signing a purchase agreement. Some transactions also include commercial due diligence, typically in connection with hotels, shopping centres and other specialised assets.
There are usually some negative findings based on the due diligence – for example, immediate technical requirements necessary to comply with fire and safety or public law requirements. Most sellers agree to either meet such requirements or to give a purchase-price reduction to cover the expected costs for the target company. Further, there are usually some old encumbrances registered in the Norwegian Land Register on the property that the seller endeavours to delete, and there might be some mistakes in the rent roll that affect the agreed property value (this forms the basis for the purchase price). But such stumbling blocks are usually limited, and rarely become deal-breakers. Based on our experience, in less than 1 per cent of transactions findings in due diligence are not resolved as part of the negotiations.
SHARE PURCHASE AGREEMENTS
Share purchase agreements are standardised in Norway and property is sold “as is”. Hence, a purchaser cannot expect to receive warranties or undertakings related to fire and safety or fulfilment of public law requirements, or similar warranties related to the property, unless the requirement for such arises due to specific findings in due diligence. In general, sellers give a limited number of warranties related to the most important presumptions related to the shares and the properties, such as tax liabilities, complete and correct accounts and similar fundamental warranties. The large number of standard agreements limits negotiations related to share purchase agreements for single properties to a few clauses in addition to handling of due diligence findings.
One exception is forward transactions, where the sale takes place prior to completion of the actual building being sold indirectly. Even though there are separate standards for these transactions, our experience is that these purchase agreements usually must be tailor-made, and the number of changes and special clauses increases if the project under construction is not fully designed.
While some countries charge stamp duty for establishing a mortgage over a property, the fee in Norway is 525 kroner (June 2019). This means that investors do not have to make a complicated transfer of securities, but can simply establish new mortgages and delete the old ones.
Security may also, to a certain extent, be established in other assets, primarily a mortgage on the shares of the acquired target company. Such mortgages are established with no triggered fees.
The closing of a transaction where a company is the target usually takes place in a meeting with direct settlement between the parties. The relevant closing documents are signed during the meeting, the purchase price is transferred by way of SWIFT/direct payment, and the closing takes place simultaneously. The closing procedure is thus fairly simple, and predictable, for transactions in the Norwegian market.
It is worth noting that in order to complete closing without complications, foreign investors should have the funds available in a bank with offices in Norway prior to closing. Further, the know-your-customer process might take some time, so investors should allow for a few extra weeks to ensure that all the paperwork is completed in due time.
BASIC TAX RULES
Norwegian tax rules are fairly simple, and relatively predictable. In respect of real estate there are three main areas of taxation of real estate in Norway.
Property tax is payable, by decision of the local municipality, and the owner of the property will usually be the one liable to pay such tax. The tax rate can vary from municipality to municipality, within the maximum amount of 0.07 per cent of the tax basis per year. The tax basis is an estimated market value of the property. Property tax is in most cases included in the common cost, meaning that the tenant bears the actual costs.
Letting of real estate is not subject to VAT, as a general rule. This also means that the owner of real estate being let, as a general rule, does not have the right to deduct input VAT. However, through voluntary registration in the Norwegian VAT Register, most landlords that let out commercial premises will obtain the right to deduct all or a significant part of input VAT.
Capital gains and income from real estate is, as a general rule, taxable in Norway, with a current tax rate of 22 per cent of the capital gain or taxable income (profit before taxation). Dividends from a Norwegian limited liability company may be given to corporate shareholders with no, or a minimal taxation of the dividends under certain circumstances. Capital gains from the sale of shares in such companies are exempt from taxation for corporate shareholders in most circumstances. There are also interest limitation rules in Norway, which limit the amount of interest that can be paid with the right to reduce taxable income. In most cases it is possible to structure a real estate investment in Norway in such a way that the tax leakages are kept low, and profits can be distributed to foreign investors, at least foreign investors within the EU since Norway is part of the European Economic Area agreement.
Please note that the tax rates might change, and the description in this part of this article is based on the relevant tax rates in August 2019.
In contrast to several other jurisdictions, the law applicable for lease agreements is mainly based on non-mandatory law and the basic principle of the parties’ common agreement. Hence, a 10-year lease is a 10-year lease, without any right of renewal, obligation to pay compensation or similar special provisions, making predictability much easier than in many other jurisdictions.
However, even though leases in Norway are mostly based on a standard or various standards that are similar to one another, there are several examples where parties have negotiated and entered into leases that in principle could be perpetual or clauses that make it very difficult to verify the parties’ rights and obligations during the lease term.
While the disadvantages of investing in Norway are limited, two of the most significant barriers are worth mentioning.
First, Norway uses the Norwegian krone as currency, adding a new challenge for foreigners, since no other country in the world uses the krone as its currency. Although currency hedging is common among foreign investors, the price for such hedging can in some cases mean that the profits for the investor are significantly reduced.
Secondly, the Norwegian real estate market is very small compared with
other jurisdictions. The number of transactions is limited, and the total value is usually around 80–100 billion kroner per year. However, our experience is that there are always investors looking for real estate, so the market is still active, despite its size. That said, the number of investments in properties valued at above 1 billion kroner is more limited than for transactions of between 100 million and 500 million kroner.
Based on the above, there are very few barriers to investment in Norway and it appears to be a safe harbour for real estate investors, particularly in central Oslo or in the wider Oslo area.