2024 has witnessed a slow start in the Finnish property transaction market. The market values of investment properties have decreased in all sectors since the latter half of 2022. It is now estimated that the decrease in values will gradually bring the price perceptions of potential buyers and sellers closer together and thereby support the execution of transactions – but only if interest rates start to decrease as expected. The current economic situation creates pressures in the rental market. The demand for office properties is weighed down by both the weak economic development and the decreasing space needs among occupiers, which weakens the position of office properties in the investment market. The rental residential market is pressured by the oversupply of rental housing in the Helsinki metropolitan area, which is, however, expected to ease fairly soon due to the sharp decline in new construction volumes. In the first four months of 2024, the strongest investment demand has been directed at retail and industrial properties.
Together with key real estate fund managers and Rakli, KTI has today published the 2023 Special Investment Fund Review. The review contains the most important information and key figures for 2022 on special investment funds investing in real estate.
According to the KTI Property Index, the total return on properties owned by professional property investors fell to -2.7 per cent in 2023. The market values of investment properties decreased by an average of 7 per cent. The annual net income turned up after a decline of almost a decade and was 4.6 per cent in 2023.
The KTI Property Index results are based on 51 professionally managed real estate investment portfolios with a total value of approximately 37 billion euros. The index covers 39 per cent of the total property investment universe in Finland. The Index reflects the total return on properties held throughout the whole year and comprises annual net income and capital growth.
The first negative annual total return in the history of the Index
The result recorded for 2023 was the first negative total return in the more than 20-year history of the KTI Property Index. The market values declined in all property sectors, as the rising interest rate raised the yields for property investments and increasing uncertainty froze the property investment market. On the other hand, the net income on property investments increased, as indexations increased rents measured in euros. Falling market values also supported the increase in the annual income return.
Residential property values continued to decline
Residential is the largest sector of the professional property investment market, accounting for approximately 35 per cent of the total invested market. The total return on residential properties was negative for the second consecutive year and fell to -3.9 per cent in 2023. The market values of residential properties in the KTI Property Index have now declined by an average of almost 13 per cent from their peak at the end of 2021. Above all, market values are weighed down by the increase in yields: in the Index, the valuation yield for residential properties have risen by well over a hundred basis points in the last two years. The net income on residential properties increased slightly from the previous year, as rents increased and market values decreased. On the other hand, a weak average occupation rate of less than 93 per cent, as well as increasing maintenance costs weighed on net income. However, the increase in the supply of new and high-quality rental dwellings, as well as the sharply reduced construction volume since 2022 strengthen the outlook for residential rents and occupancy rates in the coming years.
Total return on office properties at all-time low
The total return for office properties fell to -7.1 percent, which is the lowest ever sector-level annual return in the history of the KTI Property Index. The decline in market values of office properties reached double digits in 2023, as the yields increased in the best locations in particular. Uncertainty in demand for office space is partly weighing on market values, and rentability of space requires continuous investments from the owners. The change in demand is also illustrated in the high amount of vacant office space: in the office properties covered by the Index, the average occupancy rate fell to 83 per cent in 2023.
Retail and industrial properties produced positive total returns
The total return on retail properties amounted to 1.8 per cent in 2023. Market values of both shopping centre and other retail properties decreased, but more moderately than in any other property sector. Income return remained healthy and kept the sector’s total return on the positive territory.
Industrial property sector, comprising different types of logistics, warehouse and manufacturing properties, narrowly outperformed the retail sector with a total return of 1.9 per cent. The impact of increasing yields was milder and rental outlook remained more positive than in other property sectors. Higher income returns typical of industrial properties also supported the total return. Industrial was the best performing property sector for the third consecutive year.
Total return on public use properties fell negative
The public use property sector, which has grown strongly in recent years, includes, for example, various kinds of care, educational and healthcare properties. Also in the public use property sector, the decline in market values pushed the total return into negative territory, to -1.4 per cent in 2023. Of the various subsectors, the market values of healthcare properties fell the most, while the values of educational real estate held their ground the best. The high occupancy rate of over 98 per cent and the increase in rents maintained the sector’s net income at a healthy level.
For more information: Hanna Kaleva, Managing director, KTI, +358 40 5555 269
KTI is an independent market information and research service company servicing the professional property investment sector in Finland.
According to the KTI statistics, the property transaction volume amounted to €2.6 billion in 2023, which was the lowest volume since 2013. Both in 2021 and 2022, the annual volume exceeded €7 billion. The average size of the transactions was clearly lower compared to previous years, and the number of transactions decreased markedly. In 2023, approximately 180 professional property transactions exceeding one million euro were carried out, while in previous years the number has varied between 250-350 transactions.
In the last quarter of the year, transaction volume amounted to €820 million, which was 38% lower than in the corresponding period in 2022. The highest quarterly volume in 2023 was recorded in April-June, which was the only quarter when the volume exceeded €1 billion. Both in the first and third quarters, the volume remained at only about €400 million.
Residential properties the most traded property sector
Residential properties were the most traded property sector for the third consecutive year, accounting for 27% of the total volume in 2023. However, the volume of residential property transactions only amounted to slightly over €700 million, which was the lowest volume in this sector since 2014. The largest residential portfolio transaction of the year was recorded in late spring, when the US investor KKR acquired 1,200 rental apartments across Finland from Kruunuasunnot. Avant Capital Partners acted as KKR’s investment partner in the transaction.
Both industrial and public use properties accounted for 22% of the total volume. In the industrial property sector, the volume was boosted especially by logistics property transactions. Public use property transaction volume decreased by 65% compared to record-high volume of 2022, but a couple of large public use property portfolios were sold also in 2023. In the last quarter of 2023, eQ Community Properties Fund sold two care property portfolios to Nrep and Northern Horizon’s fund for a total price of approximately €175 million. Also Kinland was active in the transaction market in 2023.
Office and retail property transaction volumes remained low, and they accounted for 17% and 10% of the total volume, respectively. Swedish investor Niam acquired three significant office assets in Finland in 2023 and was the most active player in the office market.
Foreign investors carried out transactions in all property sectors
Foreign investors continued to be active in all property sectors in 2023. In total, foreign investors acquired properties worth over €1.4 bn, while their sales totalled less than €0.5 bn. More than half of foreign investors’ investments were originated from other Nordic countries. KKR was the only newcomer, who entered the Finnish market during the year. Of the domestic property investor groups, property funds were, once again, the most active buyers, accounting for 21% of the total volume. The shares of other domestic investor groups remained low.
More detailed information and analysis on property transactions in Finland can be found in the KTI Transactions information service. For more information, contact: Mikko Soutamo (mikko.soutamo(a)kti.fi, +358 50 548 0480).
The adjustment of the Finnish property market to the rapid increase in interest rates during the past year and a half is still in progress. Property transaction volume remains low, only at €1.8 billion in the first three quarters of 2023. Property yields continue to increase, although real market evidence for yields remains very scarce. Outlook for rental markets remains subdued in office and retail markets, whereas in industrial space markets, rents are expected to continue increasing. In the rental residential markets, the rapid increase in supply in Helsinki metropolitan area in particular has limited rental growth in recent years, but the construction volumes are now decreasing sharply, which is expected to melt down the oversupply.
Kati Paatela (M.Sc. Tech, BA(Hons)) has started as a Director at KTI Property Information Ltd in August. Her responsibilities include client coverage and service concepts. Kati returns to KTI from Elo Mutual Pension Insurance Company where she was Portfolio Manager responsible for international real estate investments. Kati’s previous experience includes Portfolio Management at Sampo Plc and an Analyst role at SEB.
The property investment market sentiment is dominated by the change in the financial and investment markets and the uncertainty of the overall economic outlook. Property market transaction activity has slowed down dramatically in recent months. Differing price perceptions of potential buyers and sellers effectively prevent transactions from happening. In the rental markets, residential market is characterised by an increasing supply of small apartments, especially in the Helsinki metropolitan area, due to which the increase in rents has been significantly lower than inflation during the past year. In the commercial property rental markets, the economic uncertainty is holding back the renting of office and retail premises. The strongest rental market situation is in logistics premises, where occupancy rates remain high and rents still have room for growth.
Together with key real estate fund managers and Rakli, KTI has today published the 2023 Special Investment Fund Review. The review contains the most important information and key figures for 2022 on special investment funds investing in real estate.
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