Press release – 28 February 2019 at 14.00

The Finnish property investment market delivered a total return of 6.6% in 2018, reflecting an income return of 5.3% and capital growth of 1.3%. Of the property sectors, residential properties delivered the highest total return while retail delivered the weakest.

Total returns by property sector in 2018

Residential properties back on top
Of the main property sectors, residential properties delivered the best returns for nine consecutive years between 2008 and 2016. After a year’s break, institutional residential property investments returned to the top position in 2018 with a total return of 8.8%. Hotels and industrial property investments also made it to the top three with total returns of 8.4% and 7.0%, respectively. Offices delivered a total return of 6.7%, virtually in line with the market average, whereas the total return of retail properties reached only 2.1%.

Residential income returns edged higher
Income returns for residential property investments edged slightly higher in 2018 on the back of higher rental income and occupancy rates. For Finland as a whole, the occupancy rate in residential properties averaged 97%. Residential returns in the Helsinki metropolitan area as well as in other major cities (Tampere, Turku, Jyväskylä, Oulu, Kuopio and Lahti) were somewhat higher than in the rest of the country supported by higher capital returns. The residential rental market has in recent years attracted more capital from institutional investors leaving residential as the largest sector in the Finnish institutional property investment market and with a 44% share of the KTI Index in 2018.

Record-low income returns for offices
Total returns for offices fell by one percentage point from last year to 6.7% in 2018. Positive contributions to capital values from lower yields and higher rental income were offset by higher operational and maintenance costs as well as capital expenditure needed to attract tenants. Overall occupancy rates improved somewhat averaging 84% in 2018 for Finland as a whole. The average income return for Finnish offices reached new record lows dropping below 5% for the first time in the history of the KTI Index. The lower returns reflect both continued high levels of interest towards higher valued properties with core characteristics as well as lower utilisation rates and higher costs.

Offices in Helsinki CBD outperformed by offices in the rest of the Helsinki metropolitan area
Office returns in Helsinki CBD fell from the record levels of 2017, leaving the total return at 4%, reflecting only marginal capital returns and a record-low income return. In contrast, offices in the rest of the Helsinki metropolitan area delivered a total return of close to 9% supported by strong capital growth. Outside the Helsinki metropolitan area capital values for offices outside continued to show declines in capital values on average.

Retail property values continued to head lower
In the retail property investment market, total return fell to 2.1% from 3.7% in 2017. Returns for shopping centre properties fell below the returns of other retail properties due to declining capital values also in the Helsinki metropolitan area. For other retail properties, capital values increased in the Helsinki metropolitan area and declined in other parts of Finland.

Hotel properties continued to show strong returns
The attractiveness of hotel properties has remained strong in the investment market in recent years. Hotel properties outperformed other sectors in both 2016 and 2017, and 2018 saw total returns expand further supported by a stable income return and higher capital values. Also for hotel properties, the Helsinki metropolitan area delivered higher returns compared to the rest of the country.

Total return by property sector 2000–2018

For further information, please contact:
Markus Steinby, tel. +358 50 464 7587
Hanna Kaleva, tel. +358 40 555 5269

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KTI Finland is an independent research organisation and service company providing information and research services for the Finnish real estate industry. KTI Finland has calculated the KTI Index since 1998 and it reflects the total return of annual income and capital returns on property investments. In 2018, 26 property investors contributed to the KTI Index and the database covers some €24 billion worth of properties.

The contributors to the KTI Index include: Aberdeen Standard Investments, Ahlström Capital, Castellum, CBRE Global Investors, Alma Property Partners, Areim Fastigheter, Avara, Avain Vuokrakodit, Citycon, Elo, Exilion Management, Genesta, HYY Real Estate, Ilmarinen, Julius Tallberg Real Estate Corporation, Keva, Kojamo, LocalTapiola, Mercada, Renor, Sampo, SATO, Tarkala-Rettig Kiinteistökehitys, Turku Technology Properties, Varma and Veritas.

According to the statistics of KTI, transaction volume in the Finnish property market reached EUR 9.3 bn in 2018. This is the second highest volume ever in the Finnish property market, reflecting a decrease of 9% compared to the previous year’s record-high volumes. The volume of the last quarter of 2018 amounted to EUR 3.7 bn, which is also the second highest quarterly volume in Finland ever. In total, the quarterly transaction volume has now exceeded EUR 1 bn for 15 consecutive quarters.

The largest transaction of the year took place in Q4, when Kildare Partners acquired all shares in the listed property company Technopolis. The market value of Technopolis’ Finnish property portfolio amounts to some EUR 950 million. Altogether, more than a dozen transactions exceeding EUR 100 million were completed in 2018. Foreign investors remained very active in the market, accounting for 66% of the total volume in 2018 (71% in 2017).

Office properties were the most traded property type in 2018, accounting for 39% of the total volume (EUR 3.6 billion). Retail properties and residential portfolios accounted for 24% and 19% of the total volume, respectively. Care property transaction volume amounted to over EUR 600 million, which is the highest figure in this property sector ever. Also some large industrial and hotel properties were sold during the year.

More detailed information and analysis on property transactions in Finland can be found in the KTI Transactions information service. For more information, please 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). See the list of the largest recently published transactions in the Finnish property market: Major transactions listing.

The Finnish property investment market continues to develop strongly, although some weak signs of an expected turn are starting to arise. Uncertainty is increasing due to slowing economic growth as well as developments in the financial markets, where the turbulence in the stock markets and an expected increase in interest rates impact the attractiveness of real estate in the investment markets. Yields of commercial properties finally seem to be reaching their bottom level. Transaction volumes are, however, expected to remain high in the near future.

The strong economic development supports the rental markets, and in the Helsinki CBD office markets in particular, new records in rents have been reached.

In the retail property markets, an increase in the supply of shopping centres as well as changing patterns in consumer behavior are weakening expectations for shopping centre investment.

Demand for rental residential dwellings remains high and rents continue to increase in largest cities. Record-high construction volumes are markedly increasing the supply in 2018 and 2019.

Read more: KTI Market Review autumn 2018

Download KTI Market Review spring 2018

The Finnish property market continues to attract foreign investors. In 2017, foreign investor demand was mainly targeted at office and retail properties in prime locations. The positive outlook for the Finnish economy was reflected in the rental markets in 2017 both in commercial and residential property sectors.

The total size of the property investment market increased by 9% in 2017
The total size of the invested property market increased to €63.7 billion at the end of 2017. The growth is mainly a result of newly developed properties in the investors’ portfolios, but in 2017, also capital growth in most property sectors contributed to the growth. In 2017, foreign investors became the largest investor group in the market with a share of 29% of the total market size. The growth in foreign investors’ investments was a result of their dominating share in the transactions market. Domestic institutions have traditionally been the dominating investor group in the market, but despite the growth of their investment portfolios in 2017, their share of the total market decreased to 25%. Domestic non-listed investment companies and property funds continued to increase their portfolios actively in 2017, and their market shares amounted to 22 and 18%, respectively. The total investments of listed property companies decreased markedly in 2017, due to the delisting of the largest listed company Sponda, following the acquisition of the company by Blackstone’s Polar Bidco.

Transaction volume increased to €10.2 billion in 2017
The transaction volume reached a new record in 2017, showing an increase of 38% compared to the previous record reached in 2016. The total volume was boosted by several major portfolio transactions. At the time of the transaction, the value of Sponda’s Finnish portfolio amounted to some €3.7 billion. Another large portfolio transaction was the acquisition of the European logistics property company Logicor by China Investment Corporation with its investment partners. Measured by space area, some 8% of Logicor’s portfolio is located in Finland. Supported by some other major acquisitions, the share of foreign investors exceeded 70% of all transactions. In the transaction market, office and retail properties were the most attractive property sectors with shares of 40 and 26%, respectively.

Helsinki CBD offices outperform all other submarkets
The total return on the Finnish property investment market amounted to 6.6% in 2017. There were significant differences in the performance of different property sectors: hotel, office and residential properties outperformed the market on average, while negative capital growth in retail and industrial sectors pressured their performance. Helsinki metropolitan area continued to outperform rest of Finland in all main property sectors. The highest total returns were delivered by Helsinki CBD offices, where capital growth exceeded 9%, supported by both positive rental growth and yield compression.

Rental market outlook turned more positive supported by the strengthening economy
The Finnish GDP increased by some 3.2% in 2017. The growth was broadly based with exports, investments and private consumption all showing strong development. The positive outlook for the economy was reflected in the rental markets. According to the KTI rental index, office rents in Helsinki CBD increased by 3.5% in 2017. However, the high vacancy rate of offices limits the rental growth only to best locations and properties. Also residential rents continued to increase in all major cities despite the rapid increase in rental housing supply. Strong investment demand and healthy space demand boost new property development. At the end of 2017, there were some 128,000 sqm of new office space and 277,000 sqm of retail space under construction in the Helsinki metropolitan area.

Read more about the structure, players, market practices and conditions in the Finnish property investment market on The Finnish Property Market 2018 -report, published today. The report is published annually in March.

Download The Finnish Property Market 2018

KTI wishes to thank the sponsors of the publication: The City of Helsinki, Colliers International Finland, KIINKO Real Estate Education, LocalTapiola, Newsec, RAKLI, SATO, SEB Group, Sirius Capital Partners, Skanska and YIT.

Printed reports can be ordered from kti(a)kti.fi (price 49 € + VAT).

More information: Hanna Kaleva, hanna.kaleva(a)kti.fi, tel. + 358 40 555 5269

Markus Steinby, M.Sc. (Econ.), has been appointed Director, Client Relations and Business Development, and member of the management team at KTI Property Information Ltd from 1 April, 2018. For the last ten years, Markus has been based in Stockholm and joins KTI from MSCI Real Estate where his responsibilities have been focused around client coverage in the Nordics. His earlier career background includes global real estate investment experience from the Property Multi-Manager team of Aberdeen Asset Management as well as various equity research positions across several Nordic investment banks. With this background Markus brings on board strong international experience and knowhow on property investments and finance.

Total return on the Finnish property investment market amounted to 6.6% in 2017. Income return continued to decrease and stood at 5.4%. Capital growth amounted to 1.2% on average. In all property sectors, the Helsinki metropolitan area outperformed other parts of the country.

Returns by sector in 2017

Residential properties continued to perform well
Of the main property sectors, residential properties delivered the best returns for nine consecutive years between 2008 and 2016. In 2017, residential continued to perform well, but lost its top position for hotels and offices. Total return for residential properties amounted to 7.5% in 2017 (8.0% in 2016). Other major cities (Tampere, Turku, Jyväskylä, Oulu, Kuopio and Lahti) and the Helsinki metropolitan area outperformed the rest of Finland due to the negative capital growth outside the main cities.

Capital growth for residential properties decreased slightly from previous years. However, supported by both increasing rents and strong occupancy rate, income return increased slightly in 2017 compared to the previous year. Occupancy rate for residential properties stood at 96.5% in 2017 on average.

Professional investors have increased their investments in rental residential properties in recent years, and residential is currently the largest sector in the Finnish property investment market. Its share of the KTI Index database stood at 41% in 2017.

Total return for offices strengthened in 2017
Offices outperformed the other main property sectors in 2017 with a total return of 7.7%. Supported by decreasing yields, capital growth turned positive after several years of sluggish development. Income return continued to decrease due to both low occupancy rate and increasing costs. Occupancy rate for offices stood at 82.6% in 2017. Also, professional investors’ concentration on higher-quality assets with higher market values and lower yields has decreased the level of income return.

Investment performance continued to be strongest for Helsinki CBD offices, with total return exceeding 14% in 2017 – the highest annual return in the KTI Index history. Supported by high returns in the CBD, the total return for the Helsinki metropolitan area offices exceeded 8%. For the main cities outside the Helsinki metropolitan area as well as for the rest of Finland, capital growth for offices remained negative.

Capital values for retail properties decreased outside the Helsinki metropolitan area
In the retail property investment market, total return remained low at 3.6%. Geographical differences were, however, emphasized in the retail property markets: for the Helsinki metropolitan area the total return exceeded 7% mainly due to the strong performance of shopping centre properties. In the metropolitan area, capital growth of shopping centre properties was supported by both decreasing yields and increasing rental values. For other retail properties in the Helsinki metropolitan area, as well as for both shopping centres and other retail properties outside the metropolitan area, capital growth was negative in 2017.

Hotel properties delivered the best returns in 2017
The attractiveness of hotel properties has increased in the investment markets in recent years, and the hotel property stock has increased in the Helsinki metropolitan area in particular. In 2017, hotel properties delivered the highest total return among all sectors, amounting to 8.7%. Also in the hotel property market, the Helsinki metropolitan area clearly outperforms the rest of Finland.

Total return by property sector 2000–2017

For further information please contact: Pia Louekoski, tel. +358 400 959634 and Hanna Kaleva, tel. +358 40 555 5269

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KTI Finland is an independent research organisation and service company providing information and research services for the Finnish real estate industry. KTI Finland has been calculating the KTI Index since 1998. 28 property investors contribute to the KTI Index. The database currently comprises some €25.5 billion worth of properties, thus covering about 40% of the total property investment market in Finland.

The contributors to the KTI Index include: Aberdeen Asset Management, Ahlström Capital, Alma Property Partners, Areim Fastigheter, Avara, Avain Vuokrakodit, Barings Real Estate Advisers, Citycon, Elo, eQAsset Management, Etera, Exilion Management, Genesta, HYY Real Estate, Ilmarinen, Julius Tallberg-Kiinteistöt, Keva, Kojamo, LocalTapiola, Mercada, OP, Renor, Sampo Group, SATO, Tarkala-Rettig Kiinteistökehitys, Turku Technology Properties, Varma and Veritas.

MSCI KTI NORDIC PROPERTY SEMINAR
24 May 2018 | Helsinki, Finland

We are pleased to invite you to join us at 14th MSCI KTI Nordic Property Seminar in Helsinki. The program will focus on the following themes:

Setting the scene: financial and macroeconomic conditions and their impact on property investment

• Leena Mörttinen, Director General, Financial Markets Department, the Finnish Ministry of Finance
• Bård Bjölgerud, CEO, Pangea
• Will Robson, Executive Director and Global Head of Real Estate Applied Research, MSCI

Focus on cities: the impact of urbanisation on property investment markets and strategies

• Jeremy Kelly, Regional Director, JLL Global Research
• Brenna O’Roarty, Principal, RHL Strategic Solutions

Structuring real estate investments

• Niklas Hammarskjöld, Investment Manager, Aberdeen Standard Investments
• Mika Ohtonen, Partner, Roschier Attorneys

Residential investment markets: outlook in the Nordics

• Mika Matikainen, Senior Partner, Head of CapMan Real Estate
• Fredrik Söderlund, Head of Asset Management & Transactions in the Nordic Region, AXA IM Real Assets

More speakers will be published soon at https://kti.fi/nordicpropertyseminar/.

Register and join us for the premier Nordic property investment event. We look forward to seeing you in Helsinki in May!

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EVENT DETAILS

Time: Thursday 24 May 2018 8.30 – 17.00, followed by drinks reception

Venue: Finlandia Hall, Mannerheimintie 13, Helsinki, Finland

Fees: Conference Fee: EUR 600 + VAT, MSCI/KTI Clients: EUR 500 + VAT

Improving economic conditions support property investment and rental markets. Attractiveness of the Finnish market is supported by competitive yield levels and, increasingly, the positive outlook of the economy. In the transaction market, another record volume will be reached this year. Foreign investors dominate the current transactions market, while domestic investors are increasing their portfolios predominantly through investments in new development.

Construction volumes continue to increase. The positive development of real estate markets is concentrated in largest cities in terms of investment and new construction as well as rental development. In the Helsinki CBD, office rents in best locations and premises are higher than ever before. On the other hand, the amount of vacant space remains high. In the retail rental markets, there is increasing differentiation: the attractiveness of the largest retail centres in the Helsinki metropolitan area is strengthening, whereas in the smaller cities and centres, the uncertainty is increasing. Residential rents continue increasing in all major cities despite the rapid growth in supply.

Read more at the new KTI Market Review.

The KTI Rental Residential index for new agreements increased by 1.1% p.a. in the Helsinki metropolitan area. Rents increased most in Vantaa, by 1.6%, whereas in Helsinki and Espoo, rental growth slowed down close to 1.0%. Rental growth figures were now the lowest since 2007.

In the main cities outside the Helsinki metropolitan area, rents in new rental agreements increased by 1.2% p.a. Outside the metropolitan area, rents increased most in Turku, Jyväskylä and Oulu, while in Tampere and Lahti rents remained almost unchanged.

Rents in all prevailing rental agreements have now increased almost at the same pace as those in new agreements. The KTI Rental Index for all prevailing rental agreements increased by 1.4% p.a. in the Helsinki metropolitan area, and by 1.3% in other main cities.

KTI Rental Residential indices comprise rental residential dwellings owned by professional property investors. KTI Rental database includes information on some 84.000 rental agreements. Indices for new rental agreements comprise agreements started within the past six months (1 October – 31 March). Indices for all agreements include all agreements prevailing as of 1 March. Based on the KTI database, rental levels can be calculated on 260 submarkets in 35 cities.