Still Cruisin'

Year 2019 scored record-high rental levels in the Helsinki downtown offices

The opening of Mall of Tripla. Photo: YIT

The real estate market in Finland remains active, even if economy is showing signs of slowing down. Transaction activity remains on a high level – even though after a couple of years which featured sizeable blockbuster deals, the year 2019 was marked by smaller transactions.

According to real estate research company KTI Finland, property market professionals expect investment demand to remain high as the period of extreme-low interest rates continues. Director Petteri Kokko from investment bank Advium agrees:

“As the interest rates are still low and apparently will remain so for a while, investors are presently still finding real estate quite attractive,” he sums up.

The flipside, of course, is that due to the strong investment demand, prime property yields continue to compress. “This trend is likely to continue as well.”

Taking stock of the various asset classes, Kokko notes that office rents are perhaps “the most interesting” case. This year, the office rents in Helsinki Central Business District (CBD) have, again, reached new records: The median rent for new agreements started during March- August exceeded €30 per sqm per month for the first time ever, and the upper quartile increased strongly to almost €37 per sqm per month.

Office Glory

The outlook is positive for the near future, as well. The respondents of the RAKLI-KTI Property Barometer, conducted in October 2019, expected office rents to increase in all major cities. The expectations are strongest in the Helsinki CBD where 65% of the respondents expect office rents to grow during the next six months.

“Prime location office rents have really picked up, mirroring a trend we saw start in Sweden a little while back,” says Kokko.

According to Kokko, there is room for office rents to soar even higher, if certain prerequisites are met. “Companies are looking for space utilization efficiency and are interested in modern premises. Many tenants are ready to pay a premium for such space right now,” he says.

Photo: Advium Corporate Finance Oy

Life Beyond CBD

Strong rental demand has spread from the Helsinki CBD to the surrounding areas, where occupancy rates and rents have continued to increase, too. The supply of highquality, modern office space continues to increase also in other submarkets, due to active new development.

Kokko points out that the question of “second city” liquidity is always in the minds of international investors venturing inland into cities such as Tampere, Turku and Oulu.

“Quality real estate in each of these three cities will most likely retain their liquidity, even if there is some turbulence along the way.”

Shopping Center Survival

Despite the challenging outlook of retail trade and shopping center markets, property market professionals’ expectations for retail rents are now more positive than in the spring. According to KTI Finland, the increasing shopping center supply in the Helsinki metropolitan area, is, however, increasing the uncertainty in the market, and pressuring the outlook for rents and occupancy rates.

Kokko agrees that shopping centers are a bit of puzzle: with the rise of e-commerce, the “death of the shopping center” has been making headlines for a while now, but Finland seems to be going against the trend – Mall of Tripla and Ainoa (completion of Phase III) being the latest additions to the roster in the metropolitan area.

“It appears that shopping centers with solid locations will do just fine, even if they have to adjust their offering to cope with the changing customer needs,” Kokko says, pointing out that it is now the “holistic experience” that the consumer is after. Building sprawling shopping complexes in a field somewhere, however, seems something that is best left to the previous century.

Rental Records

Similarly, plenty of questions abound in residential rents which continue to increase in all major cities despite the rapid increase in supply. In 2020, a record number of new rental apartments will be completed in the Helsinki metropolitan area. Strong rental demand supports the attractiveness of residential properties in the investment market.

Kokko remarks that the growing popularity of rental reflects a lifestyle choice: young people are not as keen to own their homes as previous generations.

“There must be a lot of different reasons behind this trend, but, for all intents and purposes, it seems that rental living is becoming more popular now.”

International Edge

The Finnish real estate market has had a rather international flavor for a long time, and the year 2019 is no different in this regard. Out of all transactions this year, the share of international investors was about 45 %. Demand has ranged from offices and apartments to societal real estate which seem to be gaining in popularity.

For some foreign investors, Finland is an old hat, while for more distant visitors the country is a fresh frontier: the emergence of South Koreans, for instance, into the scene has been widely noted.

“Korean investors have landed in Europe in a big way and they are, for the most part, seeking cashflow that is both long-term and stable,” he assesses.

Recipe for Success

Looking into the future – 2020 and beyond – Kokko believes that the winners and losers of the real estate race will be determined by a few key things.

“First of all, there is the sustainability angle. Climate and environmental concerns are now important to everybody in this business, and new technology will hopefully help to create smarter and more environmentally-friendly buildings in the near future,” he starts off.

The second issue is quality: there is a lot of worn-down supply in Helsinki offices, for instance, that will continue to struggle. “Modern, flexible premises is what the occupiers and investors want now and this is not going to change in the future.”

Third issue concerns connectivity: “middle of nowhere” properties have never been very popular, but now they are clearly in the bottom pariah class.

“Solid public transportation and accessibility across the board is required in most cases.”