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.
Total return on the Finnish property investment market amounted to 0.6 per cent in 2022. This was the lowest annual return ever in the history of the KTI Property Index dating back to 2000. The returns were weighed by a negative capital growth. Income return also continued to decline.
KTI Property Index results are based on the portfolios of 44 professionally managed property funds, with a total property portfolio value of approximately €35 billion. The Index covers 37% 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.
Total returns by property sector 2022
Market values declined, pressured by increasing yields
Market values of investment properties declined by 3.4 per cent on average in 2022. The annual decrease in values was the largest in the entire 23-year history of the Index. The rise in interest rates started to raise property yields in 2022, which was the main driver for the decline in values. The deterioration of the overall economic situation and the increase in uncertainty also increased pressure on the returns of property investments. The average annual income return amounted to 4.2 per cent in 2022.
Spread of total return by property sector 2013-2022
Total return on residential properties at an all-time low
Residential is the largest sector in the Finnish real estate investment market. Supported by rising market values, residential properties have offered strong returns over the past decade. In 2022, however, market values of residential properties decreased for the first time in the history of the KTI Property Index. In recent years, the income return on residential properties has decreased year by year, mainly weighed by the increase in market values. In 2022, income returns were also pressured by the decline in occupancy rate, and the average income return of residential properties fell below 3.5 per cent. The total return on residential properties was the lowest of all sectors in 2022 and amounted to -2.6 per cent.
Industrial properties outperformed all other sectors for the second year in a row
Industrial properties were the only sector with a positive capital growth in 2022, and the sector produced the highest total returns for the second consecutive year. The total return of 10.2 per cent was supported by both a positive capital growth and a healthy income return of over 6 per cent. Of the various segments within the industrial property sector, the highest total return of nearly 13 per cent was produced by logistics properties, which account for more than 50 per cent of all industrial properties in the KTI Index database. Total return on warehouse and manufacturing properties was significantly lower than that of logistics properties.
Both market values and income returns of office and retail properties declined
The two traditional large commercial property sectors, office and retail properties, have in recent years been challenged by both the COVID-19 pandemic and the recent development in the financial markets. Total return on office properties amounted to 2 per cent in 2022, as market values decreased by over 2 per cent on average. The office market is characterised by an increasing polarisation between the most wanted prime properties and properties of lower quality and location. Even in the best properties, the tightening user requirements require increasing investments and refurbishments in order to maintain occupancy rates, which also weighs both market values and income returns.
For retail properties, capital growth turned negative again in 2022 after a temporary recovery in the previous year. However, thanks to a stable income return, total return remained healthy at 4.3 per cent. The capital growth of shopping centre properties was close to zero, while the market values of other retail properties declined by well over one per cent. However, the clearly higher income return kept the total return on other retail properties markedly higher than that of shopping centres.
Total return on public use properties weighed by increasing yields
The amount of public use properties – for example, nursing homes, educational, healthcare and other properties needed for public service properties – owned by professional investors is currently well over €9 billion. The total return on public use properties declined from almost 10 per cent in 2021 to 3 per cent in 2022. Also in the public use property sector, capital growth was negative for the first time ever, as yields increased due to the rise of interest rates. The income return remained healthy at over 5 per cent.
For more information: Kasper Joukama, Director, KTI, +358 400 764 547 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.
Property investment activity decreased in the latter half of 2022 in the Finnish property market due to the increased economic uncertainty. The transaction volume of the first half of 2022 amounted to almost €4.5 billion, which was the highest H1 volume ever. In Q3 and Q4, transaction volumes reached €1.5 billion and €1.2 billion, respectively. The total transaction volume of 2022 amounted to €7.2 billion, and the volume increased by 2% from the previous year. The largest transaction of the year was the acquisition of the Stockmann department store property in the Helsinki CBD by Keva for €400 million in the first quarter of the year.
Residential and public use properties most traded property sectors
Residential properties were the most traded property sector for the second consecutive year, accounting for 29% of the total volume (€2.1 billion) in 2022. Public use properties accounted for 21% of the total volume, and they reached a new record annual volume of more than €1.5 billion. Sector’s transaction volume was boosted by several transactions, where municipalities sold their service properties to property investors. Transaction activity of hospital and other healthcare properties in particular was high in 2022.
Despite of a few large office property transactions in Helsinki, the office property transaction volume decreased to €1.2 billion, which was the lowest annual volume since 2014. Also the volumes of retail and industrial property transactions amounted to approximately €1.2 billion. All these three commercial property sectors accounted for some 16% of the total volume in 2022.
Share of foreign investors decreased slightly compared to 2021
Foreign investors’ activity decreased towards the end of 2022, but, however, their share of the total volume in the latter half of the year increased markedly compared to the beginning of the year. In total, foreign investors accounted for 48% of the total volume in 2022 (€3.5 billion), while their share was more than 50% in both 2020 and 2021. Some 45% of foreign investors’ investments were originated from other Nordic countries. Five new foreign property investors entered the Finnish market during the year. The most significant newcomer was the Dutch Orange Capital Partners, which acquired over 4,000 rental apartments in two large portfolio transactions, together with Singaporean GIC. Of the domestic property investor groups, property funds were, again, the most active buyers, accounting for 31% of the total volume.
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) or Olli-Pekka Virkola (olli-pekka.virkola(a)kti.fi, +358 50 330 5287).
The changing economic and investment market environment challenges the real estate market. Transaction market has been active so far, but a clear decrease in volumes is expected in all property sectors. The deteriorating economic situation and the cost pressures of companies are reflected in the office and retail rental markets, where vacancy rates are expected to increase. In the residential market, however, the uncertainty is expected to strengthen rental demand.
The Finnish property market developed positively on almost all fronts in 2021: the transaction market was brisk, positive economic developments supported the rental market, and strong investment and rental demand boosted construction. Expectations for 2022 were also positive at the beginning of the year, until the war in Ukraine changed the outlook.
However, the war does not seem to have any immediate severe effects on the Finnish property market: the transaction volume for the first four months of the year clearly exceeds that of the previous year, and investor interest extends widely to various property sectors. However, the effects of the war will extend to the Finnish property market, at least indirectly, through increased uncertainty and a deteriorating economic outlook. Over time, the changing economic and investment market environment will be reflected in both real estate investment demand and the space needs in different property sectors.
According to the statistics of KTI, the transaction volume in the Finnish property market amounted to €7.0 bn in 2021. The volume increased by 24% from the previous year, and by 10% compared to 2019. Transaction activity was especially high in the latter half of the year, when Q3 and Q4 transaction volumes reached €2.1 billion and €2.2 billion, respectively. Also the number of transactions increased markedly: in 2021, approximately 340 property transactions exceeding one million euro were carried out, compared to 260 transactions in 2020.
The largest transaction of the year was the acquisition of Kielo’s office property portfolio by Castellum for €640 million. The portfolio comprised 22 office properties in the Helsinki metropolitan area, Tampere, Turku, Jyväskylä and Lahti. The second largest transaction of 2021 was completed by CapMan’s new residential property fund, who bought 1,854 rental apartments from ICECAPITAL. The transaction price amounted to over €500 million.
Residentialthe most traded property sector
Residential properties and portfolios were the most traded property sector in 2021, accounting for 33% of the total volume (€2.3 billion), followed by office properties (29%), industrial properties (15%) and public use properties (13%). Retail property sector has suffered the most from the pandemic, and the volume of retail property transactions decreased to some €700 million in 2021, corresponding to approximately 10% of the total volume.
Share of foreign investors amounted to54%
International investor interest in the Finnish property market has remained strong. In 2021, foreign investors completed large transactions in all main property sectors and accounted for 54% of the total volume. In total, foreign investors acquired properties worth €3.8 bn, while their sales totalled €1.8 bn in 2021. About half a dozen new foreign property investors entered the Finnish market during the year. Over 60% of foreign investors’ investments were originated from other Nordic countries, mainly by operators who have their own local organisations in Finland. Of the domestic property investor groups, property funds were the most active buyers, accounting for 29% of the total volume.
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) or Olli-Pekka Virkola (olli-pekka.virkola(a)kti.fi, +358 50 330 5287).
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