Supply does not meet demand in the property market
Properties remain an attractive investment area as a result of better yields and a more secure operational environment compared to other investment items. The main obstacle is that supply does not meet demand. In addition to the Helsinki city centre, investors are interested in other prime submarkets in the metropolitan area as well as Turku and Tampere.
There is also strong demand for modern logistics properties in good locations. These offer better yields than office properties, and the growing e-commerce sector is boosting occupier demand which, in turn, helps maintain rent levels that are high even in comparison to the rest of Europe.
According to Newsec's estimates, transaction volume – which is used to measure property market activity – will reach approximately EUR 6.5 billion in Finland in 2020, bringing it to the same level as the previous year. In 2021, this volume is expected to decrease to approximately EUR 6 billion. We do not predict many large-scale billion-euro platform deals of the kind that have boosted transaction volumes in previous years. We therefore expect the transaction volume to return to its long-term level.
There is strong investment demand for properties in the Helsinki city centre and prime office property yields have already decreased to close to 3 per cent. Occupier demand is also strong, and occupancy rates have remained high.
"This has pushed up rents, and the rents of good properties are expected to rise to a record high. New offices constructed near the centre, for example those in Pasila, have not had an impact on rents in the city centre. Users are willing to pay for top locations," says Mikko Tenhola, Head of Advisory Newsec in Finland.
However, low yields are reflected in the demand in the Helsinki metropolitan area. Properties that have good accessibility, in particular by rail, and that are located near transport hubs, attract investors specifically because of their higher yields.
"The best submarkets, such as office properties in Keilaniemi and Leppävaara in Espoo, offer good yields with fairly moderate risks," says Tenhola.
In addition to the Helsinki metropolitan area, both domestic investors and the growing group of international investors are interested in the larger university cities, where property transactions are mainly hindered by the limited supply of good properties.
Investor demand for rental apartments continues to grow, from both domestic and foreign investors. At Newsec, we believe this will lead to a further drop in apartment yields. There is also occupier demand for apartments in growth areas, and vacancy rates are extremely low. Furthermore, demand is not limited to small apartments – large apartments are also sought after.
Retail properties, on the other hand, are regarded as challenging. Despite this, a fairly large number of retail property transactions took place in 2019, amounting to approximately a quarter of the total Finnish property market transaction volume.
"Retail property demand is selective, and retail property ownership requires expertise and active management, but there is still demand for good properties. Investors pay particular attention to the location and overall commercial value of the properties," says Tenhola.
Grocery stores and other everyday service providers that attract a steady footfall and are recilient to the competition from e-commerce are regarded as ideal anchor tenants. However, shopping centre market supply has increased within a short period of time with the completion of large-scale shopping centre projects in the Helsinki metropolitan area. This, together with e-commerce, is putting added pressure on both occupancy rates and rent levels.
Well-functioning logistics is key when it comes to the competition brought about by e-commerce. The pressure to make even faster deliveries is intensifying, increasing the demands put on logistics properties. Only a decade ago, automated pallet handling was the main topic of discussion in the logistics industry, but today the focus is on individual products that must be delivered to individual customers efficiently. Location is naturally extremely important, but the indoor space must also be equipped to meet the demands of e-commerce.
In Finland, the rents of modern logistics properties are relatively high compared to the rest of Europe and other Nordic countries. Gross rents for good properties and the best locations can exceed EUR 10/sqm/month. Gross rents for prime properties are just over EUR 7/sqm/month in Berlin and approximately EUR 4.5/sqm/month in Greater Paris, for example.
The rents in Finland are being pushed up by various factors, including strict energy, fire safety and soundproofing regulations that in turn have an impact on construction costs. Other such factors include the shortage of modern logistics properties in the Helsinki metropolitan area in particular. There is little speculative development compared to demand.
Due to changes in logistics and material flow as well as the uncertain market situation, third-party logistics operators, or 3PL operators, are unwilling to take the risk of committing to long leases when their own client contracts tend to be short.
"Logistics property leases have therefore shortened to 1–3 years when they used to last 7–10 years or even longer. Large-scale operators are able to commit to longer leases provided that they have an established reputation, a broad customer base and well-functioning facilities," says Olli-Pekka Mustonen, Head of Research Newsec in Finland.
Logistics automation will extend leases going forward, a development that has already begun elsewhere in Europe.
Investor demand for logistics properties has seen a notable increase over the past couple of years. The yields of the best properties are now close to 5 per cent, which is significantly more than in prime office properties. This has increased investors' interest.
"With the growth of e-commerce, the logistics network is experiencing high user demand, which is expected to lead to decreasing yields. The yields of the best logistics properties in Europe have already begun to fall and are now below 4 per cent," says Mustonen.
Mikko Tenhola, Head of Advisory Newsec in Finland
Tel. 358 40 500 1310
Olli-Pekka Mustonen, Head of Research Newsec in Finland
Tel. +358 44 522 2693
Miro Karttunen, Head of Property Asset Management Newsec in Finland
Tel. +358 40 193 1042