Newsec Finnish Property Outlook: transactions in Finland are now focused on residential and logistics as well as good offices

23.9.2021

The property investment market got off to an active start in Finland in the spring, accelerating even more during the summer, finds Newsec’s Finnish Property Outlook for the autumn. The highest activity is currently seen in residential and logistics properties as well as good office properties. At the same time, retail properties are offering an increasingly attractive risk/return profile for investors. Lease periods have become shorter in office leasing, with subletting being another notable phenomenon at the present time. 

In the second quarter of the year, the volume of property transactions was three times higher than in the corresponding period last year.

“The third quarter of the year has also got off to a very strong start, and we expect transaction volumes to remain high throughout the remainder of the year. By mid-September, the property transaction volume amounted to EUR 4.1 billion,” says Mikko Tenhola, Head of Newsec Advisory Finland.

Interest is currently focused on the residential market, logistics properties and the prime office market.  Several large residential portfolio transactions have been closed in Finland, and many investors have been buying properties under construction directly from construction companies. Many foreign investors already operating in Finland have expanded their investment strategy from commercial premises to the residential market as well.

Continued interest in good office properties

While there are many open questions related to the future need for office premises and the vacancy rates are increasing, investors still wish to allocate funds into office properties.

“In Sweden, the volume of office property transactions even appears to be reaching a record high this year. International investors and Finnish special investment funds have been the most active participants in the Finnish office property market,” Mikko Tenhola says.

There is still demand for properties as long as the principal criteria – location, tenants and level of quality – are right. Sustainability perspectives and environmental certifications are becoming increasingly important investment criteria for both investors and tenants.  Larger platform transactions – such as the portfolio of 22 properties acquired by Castellum from Brunswick and Blackstone – are also attractive as long as the above-mentioned basic criteria are in order. Larger portfolio transactions may even carry a premium since they allow investors to establish themselves in new markets.

Subletting and shorter lease terms are significant current phenomena in the office market

The long lease maturities valued by property investors have become less common, although it is too early to say that companies will not sign long leases at all anymore. Lease periods  have nevertheless become shorter: leases that used to have a term of 10–15 years are now more likely have a term of 5–7 years. The users of premises place a lot of value on flexibility.

“In terms of facility management, the focus has shifted from premises to users and their changing needs. A good tenant experience and responding to the changing needs of the tenant throughout the lease period has become even more important than it used to be,” says Miro Karttunen, Managing Director of Newsec Property Asset Management.

Many users of premises are also seeking several smaller locations instead of a single head office. This breaks the traditional anchor tenant framework but gives many property investors the opportunity to utilize their own property stock by offering a separate hub platform for a multi-location user.

The subletting market is the third growing phenomenon at this time. Some of the large office tenants do not need all of their premises at the moment and have therefore decided to sublet floor area that has become unnecessary due to the increase in remote work.

Start-ups and high-growth companies have been particularly interested in subletting, as they need highly flexible premises in any case, regardless of the COVID-19 pandemic. Premises are sometimes sublet fully furnished,” Miro Karttunen adds.

Retail properties offer attractive risk/return profiles

The euro volume of retail property transactions has increased in the Nordic countries and in the Baltics despite the decline in Continental Europe. This is due to the fact that, in Continental Europe, the focus of retail property transactions is on the high street properties that have suffered from the COVID-19 pandemic, whereas in the Nordic countries and the Baltics, the retail trade is focused on properties oriented around daily purchases with grocery retail services as well as good big box properties. Investors are also interested in similar locations in the Finnish market, but fewer locations have ended up being sold than in the neighbouring countries.

Retail properties offer an attractive risk/return profile in an investment market where the yield requirements for logistics and residential properties, for example, are constantly decreasing. It is possible that the allocation of retail properties in portfolios will increase again as competition keeps getting tougher in many other sectors,” Mikko Tenhola explains.

The tenant base for retail properties is changing

Fashion retail has already moved online to an extent and the premises previously occupied by fashion retailers have been taken up by, for example, discount stores, home appliances and electronics as well as interior decoration stores. The tenants replacing fashion operators typically pay slightly lower rent per square metre, which may result in pressure to lower the rents due to the changes in tenants. Many chains are doing well in spite of the pandemic and growing their network of stores, such as grocery stores and Rusta, which acquired the Hong Kong chain.

At least the most common products will be picked up in warehouses or the back rooms of stores in the future. So-called dark stores and restaurants’ dark kitchens are presenting a challenge to the owners of retail premises.

“A concept based purely on online sales and takeaway food does not need customer flows; instead, it has to be located optimally in terms of logistics,” Miro Karttunen adds.

 

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For more information, please contact:

Mikko Tenhola
Mikko Tenhola, Head of Newsec Advisory in Finland
Tel. +358 40 500 1310
mikko.tenhola@newsec.fi

Miro Karttunen
Managing Director, Newsec Property Asset Management in Finland
Tel. +358 40 193 1042
miro.karttunen@newsec.fi