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Index-linked Bond Real Estate

Basic and Extra

Why invest in Index-linked Bond Real Estate?

In 2011, economic growth will eclipse the debt crisis. The signs of decelerating global growth have mostly faded; instead, the dampening effect of the higher raw material prices on growth is now considered the primary risk, which surpasses the debt crisis. Nonetheless, growth forecasts have been upgraded across the board.

The faster-than-expected recovery has not, however, shown much in real estate prices, which are still far from the pre-crisis levels. In the United States, the combination of the expected acceleration of economic growth and the record-low real estate prices is tempting from a real estate investor's perspective. In Europe, rental income from real estate is on the rise and the credit environment is becoming more benign. In addition, muted new construction will increase price pressure on the real estate sector.

Index-linked Bond Real Estate gives you attractive exposure to the real estate markets. If the share prices of the relevant real estate investment companies rise, you will obtain a yield on your investment. The nominal capital invested in the bond is repaid at maturity regardless of the share price performance.

Index-linked Bond Real Estate

Real Estate is an index-linked bond issued by Nordea Bank Finland Plc with a maturity of about 5 years. Its yield is based on the performance of an index basket formed of two equity indices which reflect the share price performance of real estate investment companies. The reference assets carry equal weights in the index basket.

The bond comes with two alternatives: Basic and Extra. The alternative Basic is suitable for a cautious investor. Its yield at maturity is 110% of the increase in the value of the index basket in accordance with the terms of issue. The alternative Extra suits risk-tolerant investors who seek a higher return. Its yield at maturity is 210% of the rise in the value of the index basket in accordance with the terms of issue. Nordea repays the nominal capital of the bond at maturity irrespective of the performance of the index basket.

The increase in the value of the index basket is calculated based on the percentual difference between the initial and final prices of the indices serving as the reference assets. The initial price is the closing price of the reference assets on 5 April 2011. The final price is the average of the semi-annual closing values of the reference assets from 18 September 2011 to 26 March 2016. If the value of the index basket falls or remains unchanged, no yield is paid.

Risks of the investment

The index-linked bond involves a risk of the issuer Nordea Bank Finland Plc’s repayment ability. The risk relating to the issuer's repayment ability means the risk that the issuer becomes insolvent and cannot fulfil its commitments. The investor can lose the invested capital and the possible yield partially or in full in the event of the issuer's insolvency. Nordea has a credit rating Aa2 by Moody's and AA- by Standard & Poor's. The bond is unsecured.

The investor can lose the invested capital exceeding the nominal value either partially or in full. In the Extra bond this premium risk is about 10%, as its subscription price is about 110%. The investor can also sell Index-linked Bond Real Estate on the secondary market before maturity. The repurchase price may be above or below the bond’s nominal value. In normal market conditions Nordea quotes a secondary market price for the bond on all banking days when banks are generally open in Finland.

Reference assets

50% iShares Dow Jones U.S. Real Estate Index Fund
50% iShares Dow Jones U.S. Real Estate Index Fund is an exchange-traded fund (ETF) the performance of which follows the shares prices of US real estate investment companies. It consists of 79 companies (in February 2011) active in the real estate sector in the U.S. The companies comprise holding and development companies as well as Real Estate Investment Trusts (REIT). Further information: www.ishares.com.

50% FTSE EPRA/NAREIT Developed Europe Index
FTSE EPRA/NAREIT Developed Europe Index is a euro-denominated capitalisation-weighted price index consisting of the shares of 82 (in February 2011) European real estate investment companies. The companies come from 15 different countries. Finnish real estate investment companies are represented by Sponda Plc, Citycon Plc and Technopolis Plc. Further information: www.ftse.com/indices.

Historical performance of the reference assets August 2002–January 2011. For comparison purposes the graph also shows the historical performance August 2002–November 2010 of the S&P/Case Shiller Composite 20 index, which reflects the development in residential property prices in the 20 biggest metropolitan areas in the US. The S&P Case Shiller index number is published with a delay of around two months. Source: Bloomberg. Starting level indexed at 100%.

The presented figures describe previous yield or performance, and no reliable assumptions on future yield or value can be made based on them.

Yield table: Index-linked Bond Real Estate Basic and Extra

Change of the index basket according to the terms of the issue	Real Estate Basic		Real Estate Extra
	Issue price ca.	100%	Issue price ca.	110%
	Participation rate	110%	Participation rate	210%
	Value at maturity	Return p.a.	Value at maturity	Return p.a.*
100%	210%	16.0%	310%	23.0%
75%	183%	12.8%	258%	18.5%
50%	155%	9.2%	205%	13.3%
25%	128%	5.0%	153%	6.8%
0%	100%	0.0%	100%	-1.9%
-25%	100%	0.0%	100%	-1.9%
-50%	100%	0.0%	100%	-1.9%

* 10% premium included in the yield calculation.

Simulated historical yield

The historical value at maturity, had the investment been made in accordance with the issue terms in August 2002–January 2006, and the yield on a direct investment in the index basket. The investment would have matured in August 2007–January 2011 (weekly observations). The yield on a direct investment has been calculated using one initial and closing value without averaging the final value.

	Average value at maturity	Average annual return
Basic	140,0%	7,0%
Extra	176,4%	9,9%*
Direct investment	108,0%	1,5%

* 10% premium included in the yield calculation.

Issue terms in brief

Issuer	Nordea Bank Finland Plc; credit ratings Aa2 (Moody’s) and AA- (Standard & Poor’s).
Loan number and ISIN	Real Estate Basic 4479 A FI4000020979 Real Estate Extra 4479 B FI4000020987
Issue date	21 February 2011
Maturity	1 April 2016
Subscription period	21 February - 31 March 2011
Places of subscription	Nordea Bank Finland Plc and its branches in the Baltics.
Subscription price	Basic 4479A: variable, about 100% Extra 4479B: variable, about 110%
Minimum subscription	1,000 euros
Yield at maturity	Basic 4479A: 110% of the rise in the index basket value in accordance with the issue terms Extra 4479B: 210% of the rise in the index basket value in accordance with the issue terms
Reference asset	The following index fund and equity index form the index basket: 50% iShares Dow Jones U.S. Real Estate Index Fund (Bloomberg: IYR UP Equity) 50% FTSE EPRA/NAREIT Developed Europe Index (Bloomberg: EPRA Index)
Initial price	The closing prices of the reference assets on 5 April 2011
Final price	Average of the reference assets' semi-annual closing prices from 18 September 2011 to 18 March 2016
Repayment of capital	The issuer Nordea Bank Finland Plc repays the nominal capital of the bonds in full at maturity irrespective of the performance of the index basket. The bonds involve a risk of the issuer’s repayment ability and of losing the premium (in Extra bond about 10%).
Security	The bonds are unsecured.
Structuring cost	The subscription price includes a structuring cost of about 0.9% p.a. (see the terms of issue for more details). No separate subscription or management fee is charged on the bonds.
Secondary market	In normal market conditions the issuer Nordea Bank Finland Plc quotes a repurchase price for the bonds, which may be lower or higher than the nominal value.
Taxation	No tax is deducted at source for non-residents in Finland.
Safe custody	Free of charge with Nordea Bank Finland Plc.
Cancellation of the issue	The issuer has the right to cancel the issue based on changes in the economic circumstances or if the total amount of subscriptions is low, or if something should occur that the issuer considers might endanger the issue.
Listing	An application will be made for the bonds to be listed on NASDAQ OMX Helsinki.

Loans 4479A (Index-linked Bond Real Estate Basic) and 4479B (Index-linked Bond Real Estate Extra) under the MTN programme (a medium-term note programme reported to the Finnish Financial Supervisory Authority from Sweden in accordance with the Prospectus Directive) of Nordea Bank AB (publ) and Nordea Bank Finland Plc, dated 25 May 2010. The bond-specific terms and the base prospectus are available at the places of subscription. Read the issue terms and the base prospectus before subscription. The Swedish version of the terms is binding and thus applied in possible dispute situations.

Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S.

The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets on the date of this document and are subject to change without notice. This document is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.

The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results.

Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.

This document may not be copied, distributed or published for any purpose without the prior consent in writing of Nordea Markets.

Recovery will light up the real estate gloom

The US economic outlook for 2011 is now quite bright and appears more encouraging than a few months back. After the slowdown in H1 2010 the economy appears to have gradually gained momentum and is set to accelerate further thanks to the tax cuts approved in December. Happily, the fears of a new recession have proved groundless, as we expected. What is more, economic growth is expected to be brisker in the next few years than the GDP figures indicate since demand is structurally more advantageous than previously. In 2010 growth was fuelled by restocking, but in the future it will be based on end demand.

We have upgraded our 2011 growth forecast for the euro area mainly thanks to the markedly brighter outlook for export demand. Furthermore, there are increasing signs that the continuing growth in industrial production will boost business investment, which will strengthen the recovery.

Improved prospects for real estate investment companies

The improved economic environment has boosted the outlook for the real estate market – and consequently for listed real estate investment companies. Real estate investment and renting are once again on the rise, as demand for business premises is increasing and the credit conditions are normalising.

Even though business premises are underutilised in places, demand for modern premises will pick up in the wake of companies' expansion of their businesses. Moreover, the increase in economic activity will fuel the demand for premises needed for logistics and trade.

Some crucial factors in terms of real estate investment companies' rental income and profits are the vacancy rate and the trend in market rents. Higher demand for business premises will push the vacancy rates up, which in turn will raise the rents. Higher activity among investors is now increasing the number of real estate trades, and the pick-up in demand will improve the market values of properties. For the time being, growth has focused on the best and most central areas, but it is likely to expand to other areas, too. This trend is also positive from the perspective of listed real estate companies, as the values of their portfolios and consequently their net assets per share will go up.

The difference between the current interest rate level and net rental income is still record-breaking in many localities, which supports the values of properties. The position of real estate companies will be interesting when inflation expectations increase because most rental agreements are index-linked, which means that inflation will increase rental income. In the past, listed real estate companies have paid out good dividends, which maintains a positive and sustainable share price performance.

Sources: Nordea Economic Research and Nordea Equity Research