Make the Deal
Property transactions hit an all-time high in Finland in 2016 – but what will the new year bring?
Real estate is keeping it real. The year 2016 witnessed the highest property transactions volume ever in Finland. Already in early December, the transaction volume in the Finnish property market hit its new annual record level with approximately EUR 6.4 billion. The former record, dating back to 2007, was EUR 6.29 billion.
S upported by continuously low interest
rates, property investments are attracting both domestic and foreign investors. Yields are being pressured by the high investment demand, which is now, increasingly, being seen also outside the Helsinki Metropolitan Area( HMA).
” In addition, the activity within real estate transactions is very high globally,” notes Janne Larma, CEO of Advium Corporate Finance. The same applies to M & A volumes on a global scale: Investors are investing in those asset classes where they see attractive risk / return ratios.
“ Finnish real estate is providing, both in absolute and relative terms, attractive expected returns. We have witnessed new investors in the Finnish market during the last 12 – 24 months. The Finnish REITs are attracting a lot of capital and they are nowadays a big investor group in Finland,” Larma says. By December 2016, the share of foreign investors was about 28 per cent of all transactions.
Builder’ s Game
Recently, Finland has witnessed a trend where construction has become the most significant engine of the economy. The Finnish Confederation of Construction Industries RT expects construction volumes to increase by some 6-7 % in 2016. The volumes are increasing in residential, commercial and public property sectors; the residential construction volume is expected to increase by as much as 20 % for the year.
Infrastructure construction is also increasing, supported by both the development of new residential areas as well by investments in the improvement of existing traffic infrastructure. Construction is, however, already being checked by availability
54 Nordicum of skilled workforce and delivery capacity of construction materials.
Larma strongly believes that the year 2017 will be another good year for real estate investments in Finland, from the perspective of both volume and returns.“ We do not expect European Central Bank to raise short term interest rates and even though the euro government bond yields will likely increase, they will remain at a very low yield compared to real estate yields.”
Urban Excellence
Janne Larma is also of the opinion that the growth centers in Finland will continue to grow – which means that the long-term outlook for real estate in these cities is good.“ Having said that, there are, of course, locations and types of properties which are less attractive and will have a less rosy outlook.”
“ The most important thing for communities is growth,” Larma points out. The population of the city must grow in order to“ guarantee” a decent expected return for the real estate investment.
“ In addition, your investment lot size should be proportionate to the size of the market. If you can tick both these boxes, I believe the best returns can be made in the‘ second cities’ in the coming two years.”
Go Strong, Go Long
During 2016, several exceptionally large portfolio transactions of existing properties took place – and there are delightfully many investors out there that are playing“ the long game”. Larma notes that the more Finland is able to attract investors that are investing with a long-term horizon, the better it is for the Finnish real estate market.” Quite many of the new foreign investors are investing based on this strategy,” he says.
“ We naturally need also those investors who keep the property for 3 – 5 years and then sell in order to keep the market liquidity at an attractive level. Finland is attractive as our yields are higher than those of our closest peers. Our market is very transparent, the rents are at a reasonable level and the economy in the growth cities is doing well,” Larma says.
The dropping office vacancy rates have been an issue in the HMA, and now the situation seems to have stabilised somewhat – and rents have increased slightly in the best areas. With many companies looking for space efficiency( and smarter space in general) also new office premises are being built continuously.
Oldies Goldies?
But what do you do with all that old office space that is no longer attractive in( almost) anybody’ s eyes? – Janne Larma sees various ways to deal with this issue: There are several good examples of converting or totally refurbishing old buildings to modern office space, residential or hotels. Take, for example, Brondankulma which was converted to modern office space, Bulevardi 12 – 14( converted to residential use) and Yrjönkatu 13( converted to hotel) in Helsinki.
“ On the other hand, Kasarmikatu 21 is an example where an office building was demolished and a modern office building is currently being built.”
According to Larma, it is quite clear that an inefficient, old office building needs to be totally refurbished in order to attract tenants.“ The hard fact, however, is that outdated / inefficient office space outside city centres is not always worth the effort as the refurbishment sometimes costs close to as much as building greenfield,” he adds. l