Real estate market maintains momentum

Lauri Tiensuu, Director at Advium Corporate Finance

Finnish real estate market is still in fine form and firing on all cylinders.

If the year 2017 was white-hot with its record-breaking transaction volume (€10.2 billion), the year 2018 is red-hot. According to data by independent research organization KTI Finland, transaction volume for January-October was €7.3 billion, making it the second highest Jan-Oct volume of all time (after 2017).

Lauri Tiensuu, Director at Advium Corporate Finance, says that this year has surpassed the expectations of many industry experts. “The year 2017 was seen as such an outlier with, for example, the largest- ever property transaction in Finland taking place,” Tiensuu says, referring to Blackstone’s Polar Bidco acquiring the listed company Sponda and her assets. Another large property company transaction occurred as China Investment Corporation acquired Logicor from Blackstone’s fund.

“These two Blackstone deals contributed to half of the transaction volume, so it was a pretty extraordinary year in that regard. Nevertheless, this year we’re getting quite close to that total transaction volume, thanks to a multitude of transactions,” Tiensuu believes.

Going Shopping
This year is special also in regard to the fact that it features the largest ever single asset transaction in Finland: namely, Itis shopping center, which is now changing hands from Dutch property investor Wereldhave to a fund managed by Morgan Stanley Real Estate Investing. Itis shopping center is located in the Itäkeskus district in Eastern Helsinki, and it is one of the largest shopping centers in the Nordic countries. The gross transaction price was announced to be EUR 516 million, and net of deferred tax liability at EUR 450 million.

The hottest type of real estate in the land has not been retail, however, but offices – with almost one third of the total volume (31%). According to the statistics of KTI, some 211,000 sqm of new office space were under construction at the end of September in the Helsinki Metropolitan Area (Helsinki, Espoo and Vantaa).

Other cities are following suit: for example in Tampere, there is some 30,000 sqm of new office space under construction.

Time to Move
Tiensuu credits the solid economy as the key driver in the office boom.

“During the leaner years, many companies who had plans for new premises put those plans on hold. Now those companies are ready to make their move,” Tiensuu says, adding that for certain type of enterprises – such as IT/tech companies – great-looking, modern office is an important tool all around.

“In order to attract the best talent, for example, it’s really important to provide a working environment that is enjoyable,” he points out. These high-performance businesses regularly operate in sectors where the office-related costs do not constitute a huge slice of the total costs – and therefore it makes sense to woo people with killer premises.

More and more, these premises are multispace and flexible, Tiensuu believes. “We are seeing the total number of square meters coming down and efficiency per square meter going up.”

Cherry-picking in the Provinces?
Strong Finnish performance of late is no big surprise to industry people, also from an international perspective. The share of foreign investors is likely to grab two thirds of this year’s volume (66% by October) and also new international players have entered the market.

Tiensuu assesses that as Finnish economy indicators are solid, international players have taken interest – and have ventured also outside the “Big Three”, namely Helsinki Metropolitan Area, Tampere and Turku. There may be attractive “stones previously left unturned” in other areas, too – and as the foreign investors’ knowledge of the local markets has increased, they feel more confident in “going rural”.

Still, Tiensuu points out that the international players are far from a homogenous group: there are different types of companies with totally different agendas.

”Foreign core investors new to the market are extremely selective whereas the opportunistic investors have widened their scope and are venturing to quite exotic strategies. Between these two investor types there is a multitude of strategies being implemented.”

Hurray for Housing
In addition to offices – a traditional foreign investors’ go-to play – also the residential side has attracted the international crowd. Tiensuu comments that a stable residential market contributes to this trend – and also, for example, that in Finland you can more easily sell off single apartments, too.

“When you look around Europe and compare the situation to Finland, you can easily make the case that urbanization here is not yet on the same level,” Tiensuu says, adding that this should mean that there are opportunities to be tapped into in the form of residential market in the cities, for instance.

According to Tiensuu, also such properties as logistics centers and hotels are very much on foreign investors’ radar. “If you look at the evolution of logistics, for example, there is a powerful megatrend that supports development there,” Tiensuu says, referring to the rise of e-commerce which requires for the entire transportation chain to be reworked.

No Dark Clouds Ahead – Yet
But is the current winning streak sustainable? What is waiting for us around the corner, in 2019? – Tiensuu believes that the good times are not going away any time soon:

“The real estate market will continue to be very active, driven by both domestic and foreign demand.”

According to Tiensuu, there’s still plenty of “dry powder” stored up in the proverbial basements of industry players: there’s a lot of capital, earmarked for real estate, that has been raised from investors that still needs to find a happy home.

“There is unallocated capital all around Europe, and some of it is bound to make its way to Finland.”

In the RAKLI-KTI Property Barometer October survey, the prime yield for Helsinki CBD offices was assessed at 4.1% (10 basis points higher than in last spring’s survey). Office yields also increased slightly in all other cities. Prime retail property yields also increased slightly, while yields for residential properties continued to decrease and stood at 3.7% for central Helsinki. The Barometer respondents expect yields to remain rather stable during the next 12 months.

Get Creative
In his ten years in the sector, Tiensuu has seen the number of players increase and liquidity improve. Solid real estate assets of the yesteryear – such as retail or logistics Photo: Esa Ahdevaara / GSS Lucky-Design – have been joined by other types of properties with perhaps more nuances.

“Rental plots and multispace office solutions are examples of this. As new niché items keep appearing and gaining success, it seems clear that it pays to be innovative,” he says. Part of the outside-the-box mentality is recognizing the ongoing transition from infrastructure to services.

“The entire Space as a Service angle is on the rise and many players are exploring new roles as service providers more and more.”

Photo: Esa Ahdevaara / GSS Lucky-Design