Despite the challenges in the Finnish economy, the Finnish property market continues to attract both foreign and domestic investors. Market volumes are boosted by both new investors coming into the market and portfolio restructurings of traditional investors. In the commercial property markets, strongest demand is targeted at prime assets and areas. Residential properties have rapidly strengthened their position in the investment market, supported by both continuous rental growth and inflow of new capital.
Transaction volume increased to €5.5 billion in 2015; brisk start for 2016
The total property transaction volume in 2015 increased to €5.5 billion, which is the second highest volume ever and 27% higher than in the previous year. The volume was boosted by several major portfolio transactions. Domestic funds and investment companies actively increased their portfolios in 2015, while foreign investors accounted for one third of all transactions. 2016 has started briskly in the transactions market, and already by the end of February, the volume has reached some €1.4 billion. This is the first time since 2008 when the first quartile’s volume will exceed the €1 billion threshold.
The total size of the property investment market increased by 9% in 2015
The total size of the invested property market increased by some €4.5 billion in 2015, ending up at €54.5 billion. The growth is a result of both newly developed properties in the investors’ portfolios as well as some major sale-and-leaseback transactions from corporations to investors. Domestic institutions remain the biggest player group in the market, although their share has decreased markedly in recent years and currently stands at some 29%. Domestic funds and non-listed investment companies have increased their shares rapidly, and they currently account for some 37% of the total market. Foreign investors owned some €12 billion worth of Finnish properties at the end of 2015, and accounted for some 22% of the total market.
Institutional investors restructure their property portfolios
Finnish pension institutions have contributed to the transactions market through active implementation of their renewed property investment strategies. In the past, direct domestic investments had a dominant position in their portfolios, but in recent years, many pension funds have targeted the majority of their new investments abroad with the aim of increased international diversification. This has also resulted in major restructurings in their domestic portfolios. In 2014 and 2015, several major transactions were released, where institutions transferred their formerly direct property holdings to joint venture structures with other, most often Swedish, institutions. In total, Finnish institutions sold some €1.2 billion worth of properties in 2015.
Helsinki CBD offices outperform all other submarkets
The strongest international interest is targeted at offices in the Helsinki metropolitan area. However, due to the oversupply of office space, investor interest is almost solely targeted at prime areas and assets, where the perceived risk in the cash-flow is the lowest. This has resulted in yield compression in the Helsinki CBD in particular, with prime yields currently standing at some 4.7%. This still represents a healthy gap compared to most other European capitals. In the KTI Index, the total return for Helsinki CBD offices increased to 11.6% in 2015, supported by strong capital growth. In most other submarkets in the Helsinki metropolitan area, the market values of offices continued to decrease. The main driver for falling values is the high vacancy rate, which, according to Catella, currently stands at 13.3% in the Helsinki metropolitan area.
Retail market characterised by active new development
At the end of 2015, there were almost 190,000 sqm of new retail space under construction in the Helsinki metropolitan area, and some major projects just about to be started. New development is mostly concentrated around the station areas of the new rail connections – Ring Rail Line and the western metro line. Need for new retail space is based on the continuous population growth in the area. Main shopping centres and retail property portfolios have recently attracted both domestic and foreign investors, and in 2015, retail accounted for some 32% of the total transaction volume.
Residential continues to perform strongly
Residential investments have increased in attractiveness in recent years supported by strong demand for rental apartments in main cities. Increasing rents have attracted new investments in the market and several new funds investing in the residential sector have been established. In 2015, the total value of residential property transactions increased to €1.2 billion, which is the record volume ever by a large margin. Thanks to the large amount of capital coming to the market, residential became, together with offices, the biggest sector in the property investment market, with a share of 29% of the total market. Residential has been the best performing sector in the KTI Index for eight consecutive years, supported by increasing market values. In 2015, residential properties delivered a total return of 8.9%.
For more information, please contact:
Hanna Kaleva, KTI Finland, +358 40 5555 269, hanna.kaleva(a)kti.fi
Read more about the structure, players, market practices and conditions in the Finnish property investment market on The Finnish Property Market 2016 -report, published today.