The Finnish Property Market 2010

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1 The Finnish Property Market

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5 Contents Preface 7 1. Basic facts about Finland 8 2. The Finnish economy The Finnish economy returned to a growth path in the latter half of Finnish public finances are facing increasing challenges Export industries play a key role in the Finnish economy Strengthened consumer confidence supports growth Unemployment will continue increasing, inflation expected to accelerate in Finland s international competitiveness new approach required Institutional aspects of the Finnish property market Two forms of property ownership Market practices of property investment and renting Planning Taxation in Finland Structure and players in the Finnish property market Ownership structure: institutional investors remain the most significant players in the market Real estate service sector Property investment market in 2010 increased activity expected Property sectors market structure and practices The office market: increasing vacancies, pressure on rents The retail market: stronger performance so far Rental residential sector the strongest performance in Logistics market a developing property sector Property Markets in different regions Outlook for Helsinki metropolitan area: the dominant property market area in Finland Other growth centres: Tampere, Turku, Oulu, Kuopio, Lahti and Jyväskylä 48 The Sponsors of this publication 53 5 Key Terminology 56

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7 Preface aims to satisfy the information needs of international investors and other players interested in the Finnish property market. KTI Finland has published the report annually since The report provides a comprehensive overview of the Finnish property market structure and practices. KTI Finland can also provide more detailed information and analysis on the individual sub-markets for specific needs, upon request. This publication is sponsored by 15 companies representing the Finnish property investment, development, management and finance markets. The sponsoring companies include Aberdeen Property Investors, Citycon, Helaba, HYY Real Estate, IVG Polar, NCC, Newsec, Ovenia, Real Estate Training and Education Institute, Sato Corporation, SEB Merchant Banking and Skanska. Also, RAKLI the Finnish Association for Property Owners and Construction Clients, Greater Helsinki Promotion, as well as Invest in Finland, have provided financial support for this report. KTI wishes to thank the sponsors for their support. KTI Finland also publishes a monthly electronic newsletter, Finnish Property Monthly, which covers the latest news from the Finnish property market. To receive this newsletter via , please subscribe at kti@kti.fi. The report is also available in PDF format at We hope you find this worthwhile reading. Hanna Kaleva KTI Finland 7 KTI Finland is an independent research organisation and service company providing information and research services for the Finnish real estate industry. KTI maintains extensive databases on returns, rents, transactions, operating costs and customer satisfaction measures in the Finnish property market. Based on these databases, various kinds of benchmarking and analysis services can be provided. For more information, please call or visit

8 1. Basic facts about Finland 2. The Finnish economy 8 Geography Total area Distances Climate People Population Languages 338,000 square kilometres 1,160 km north to south 540 km east to west Cold winters, warm summers Mean temperatures: July: +17 C February: -5.7 C 5.35 million Density: 17 inhabitants per square kilometre Uusimaa region (southern Finland): 216 per km2 Lappi region (northern Finland): 2 per km2 Two official languages: Finnish, spoken by 90.9% Swedish, spoken by 5.4% Foreign nationals: 2.7% of population Religions Lutheran 81.0% Orthodox 1.1% Capital city Helsinki, 583,000 inhabitants Helsinki region, 1.3 million inhabitants comprising Helsinki and 13 neighbouring municipalities Espoo and Vantaa being the biggest Other important cities Espoo, 244,000 Tampere, 211,000 Vantaa, 198,000 Turku, 176,000 Oulu, 139,000 Jyväskylä, 130,000 Lahti, 101,000 Kuopio, 93,000 Economy GDP per capita 34,663 (2009) Most important exporting industries Electronics and electrotechnical goods Forest industry products Chemical industry products Metal and engineering products Currency Euro (since 2002) History and Independent democracy since 1917 governance Head of State Parliament Member of the European Union since 1995 President of Republic, Tarja Halonen (since 2000) One chamber, 200 members, elected for 4 years. Current parliament elected in The Finnish economy returned to a growth path in the latter half of 2009 Within a few decades, Finland has transformed itself from a society largely based on primary production and agriculture to one of the richest and most multifaceted economies in the world. Today, Finland is not only one of the most open societies worldwide, but also is one of the leading knowledge-based economies. Finnish advancement is a byproduct of a unique combination of growth in its economic base, combined with an egalitarian distribution of income and social cohesion that binds the population together, as well as a peaceful labour market all of which is backed by an extensive social security system. Measured by gross domestic product per capita, Finland ranked 13 in the OECD statistics in Finland is an open economy that places strong emphasis on foreign trade. Factors associated with the openness of the economy include a commitment to free markets combined with stable and functional political institutions. The egalitarian nature of the society, together with homogeneous economic and cultural structures, has contributed to the success of the economy. Finland s small size and scarcity of natural resources has pushed Finnish society to look for competitiveness from other sources. The ability of Finns to utilise advanced technology has proven to be one of the most important factors in the country s competitiveness. The global downturn started to affect Finland severely relatively late only in early Finland faced the crisis in a strong economic position, thanks to previous years heady growth. The dramatic decrease in foreign trade hit the Finnish economy hard, but the sharpest decline only lasted for a short period. Towards the end of 2009, the economy started to grow again, driven by the increase in exports. The Finnish GDP shrunk by more than 7% in 2009 Finnish GDP decreased by more than 7% in 2009 more than in the darkest years in the early 1990s. The collapse was mainly caused by declining exports, which decreased by ca. one-third, compared with In forecasts for 2010 and beyond, Finland is expected to return to a stable, but moderate, growth path. In its economic outlook report in late 2009, the Finnish Ministry of Finance forecasted a GDP growth of 0.7% for 2010 and ca. 2.5% for

9 GDP growth in Finland and in the Euro area % Finland Euro area A major part of the comprehensive Finnish social services is provided by municipalities, including education, healthcare, and senior citizen s care. Both increasing demand and heightened costs for these services, together with decreasing tax revenues, are generating increased pressure on municipalities finances. Local government finances are thus facing even greater challenges than the state budget. Due to the weak economy, the budgetary position of general government has slipped into deficit, amounting to 2.2% in 2009 and ca. 3.5% in However, while these deficit figures are clearly worse than what Finland has seen in previous years, they are nonetheless still at a level that many other countries will not easily achieve in the near future * 07* 08** 09** 10**11** *estimate **forecasts Source: Statistics Finland, OECD, Handelsbanken Public finances still on a relatively solid base In its forecasts published in mid-january, Nordea Bank presented a more optimistic scenario, with growth figures increasing above 2% already in This would return Finland to top rankings within the euro area. Moderate growth expected for Finnish public finances are facing increasing challenges The Finnish government has supported the economy in order to soften the impact of the downturn. The stimulus actions have been targeted at, among other things, accelerating public investments, supporting housing construction, and providing income-tax reductions. These government actions were supported by wellbalanced public finances. However, sharp decline in tax revenues, together with increasing expenditures and an expansionary state budget, has caused increasing pressure on the state coffers. Tax revenue is being hit by both increasing unemployment and decreasing corporate profits. State debt, which stood at 29.4% of GDP in 2008, increased to 37.2% by the end of In the state budget for 2010, it is estimated to increase to some 44% of GDP. Public debt is increasing rapidly but still at a moderate level One of the biggest challenges facing the Finnish economy is caused by the ageing of the population. The Finnish age pyramid is one of the most unfavourable within the EU. By 2020, the old-age dependency ratio (the ratio of those aged to those aged 15 64) will increase from its current level of 17% to 23%. The ratio is deteriorating rapidly because of the retirement of the baby-boom generations born after the World War II, as well as the increasing life expectancy of the population. Due to the ageing of the population, the workforce has started decreasing, and, at the same time, the need for social and welfare services is increasing. The Finnish age pyramid is among the most unfavourable in the world The economic crisis and weak employment, together with the rapidly ageing population, have raised discussions about the long-term sustainability of Finnish public finances. According to the Ministry of Finance, corrective measures need to be taken in order to strengthen central government finances. The measures include structural reforms to boost productivity of public services, critical assessment of expenditures, lengthening the duration of working-life, as well as moderate tightening of taxation. Political discussion concerning these measures has started and will accelerate in the near future with the onset of the next parliamentary elections, to take place in March The adjustments needed in order to strengthen central government finances will probably be the core content of the next government s political programme. 9

10 10 Corrective measures will be taken to strengthen the public finances 2.3 Export industries play a key role in the Finnish economy The Finnish economy s success or failure is highly dependent on foreign trade. In , exports accounted for some 45% of Finnish GDP. The collapse in exports during the latter part of 2008 and first half of 2009 had a serious impact on Finnish production and GDP. During the first half of 2009, Finnish exports declined more than in any other EU country. The sharp decline was due to the decreased demand for forest industry products, as well as the large weight of investment goods in Finnish exports, the demand for which usually reacts more rapidly to downturns than that of consumer goods. The exports started to increase again towards the yearend, and the total exports in 2009 decreased by some onethird, compared to After the first three quarters of 2009, exports accounted for 36% of Finnish GDP. The decline exceeded all expectations in the beginning of 2009, most economic research institutes forecasted a decline of 3 4%. The Finnish exports decreased by one-third in 2009 Exports are expected to be the main driver of growth in the Finnish economy in The Finnish economy is dependent on foreign trade, and Finnish exports also typically fluctuate more sharply than in many other countries. This is due to the significant weight of just a few industries and some major companies. The same factors, which in 2009 caused a dramatic decline in exports, might boost the Finnish economy to faster growth than in many competing countries. Also, the development in some key target markets, such as Russia, will hopefully help the Finnish economy to recover. Of the most important exporting industry sectors forest, chemical, metal, and electronics industry products the recession has hit the hardest metal and electronics industries, whose exports decreased by some 40 45%, compared to However, the change in demand for forestry industry products is expected to be more structural by nature, thus Finland s exports by countries, % of total exports Russia Germany Sweden USA United Kingdom Netherlands France Italy China Norway % Source: National Board of Customs requiring determined adjustments, as opposed to solely a turn in the economic cycle. Important target countries for Finnish exports started to recover towards the year-end, thus supporting the recovery of exports. The volume of Finnish exports is expected to increase moderately, by 6 7% in 2010 and It will take several years, however, before the total volumes will reach the levels seen before the recession. One factor affecting Finnish exports is the exchange rate, which strengthens the competitiveness of some important competitor countries, such as Sweden. Of the most important target countries for Finnish exports, Russia decreased the most in importance during 2009, with a decline of more than 40% in volume. However, the recovery of the Russian economy might improve the situation rapidly. Germany was the biggest target country for Finnish exports in 2009, followed by Sweden; however, the exports to both of these countries decreased by ca. one-third (Jan Nov 2009). The United States, China and the Netherlands increased their relative importance as target countries for Finnish exports in Photo: NCC

11 Consumer confidence indicator Unemployment rate Finland Euro Area Finland Euro area Finland Euro area Retail sales* and households disposable income annual growth % Source: European Commission Households disposable income Retail sales *excl. car sales Source: ETLA, Statistics Finland 2.4 Strengthened consumer confidence supports growth Source: Eurostat, Bank of Finland and Statistics Finland 2.5 Unemployment will continue increasing, inflation expected to accelerate in 2010 Historically speaking, due to the solid growth of the economy, employment improved steadily following the recession that hit Finland in the mid-1990s but this halted in the latter half of During 2009, the number of employed decreased by some 80,000 people. Most job losses have been seen in private services and industry, whereas in public services, the number of employed has risen slightly. However, unemployment did not develop quite as negatively as expected: at the end of 2009, the unemployment rate was at ca. 8.3% clearly lower than expected even by the most optimistic forecasts. Unemployment has not risen as badly as feared mainly due to the contraction of the labour force, which is caused by the accelerated retirement of the baby boomers. Private consumption is also expected to support economic growth in After a panic break in early 2009, consumer confidence was restored towards the year-end, and stable developments in income, as well as low interest rates and decreasing savings rate, are boosting private consumption. The Federation of Finnish Commerce forecasts an increase of 0.5% for retail sales in The outlook is the most positive for consumer goods and car sales. Retail sales are expected to remain stable in 2010 Unemployment is expected to increase until spring 2010 Developments in unemployment lag that of overall economy, and it is thus expected that the highest unemployment rate will be seen in late spring of 2010, clearly exceeding 10%. Improvements are expected to start in the latter half of Inflation ended close to 0% in The Consumer Price Index was pushed down by the decrease in value-added tax (VAT) for food, as well as the low interest rates for loans, which are also included in the Finnish national price index. 11

12 Key Figures Finnish Economy * 2010** 2011** GDP (change in vol) 1,6 1,8 3,7 2,8 4,9 4,2* 1,0* -7,8 1,9 2,4 Inflation 1,6 0,9 0,2 0,9 1,6 2,5 4,1 0,0 1,2 1,5 Unemployment rate 9,1 9,1 8,8 8,4 7,7 6,9 6,4 8,2 10,5 9,6 Interest rates 3 months 3,3 2,3 2,1 2,2 3,1 4,3 4,8 1,3 1,5 2,5 10 years 5,0 4,1 4,1 3,4 3,8 4,3 4,3 3,7 3,7 4,0 Source: Bank of Finland, Statistics Finland, Nordea Bank * estimate ** forecasts Upward pressure on prices was caused by wage increases, which resulted from negotiations in During 2010, all the extraordinary occurances will stop decreasing prices, and, due to increase in energy prices, inflation figures will enter the positive territory again. However, inflation is expected to remain at moderate levels of 1 2% in 2010 and Finnish competitiveness ranks high in international comparison 2.6 Finland s international competitiveness new approach required 12 Finland is a stable, secure Nordic welfare society that recently ranked high in many comparative studies of economic and social performance. In the World Economic Forum s Global Competitiveness Index rankings for , Finland maintained its sixth position. Finland s strong position is based on high scores for both primary and higher education, where Finland holds the top ranking; as well as high-quality institutional environment. Non-existence of corruption and low business costs of crime and violence are regarded as major strengths of the business environment, together with transparency and functionality of the legal framework. Finland also scores high in innovation. On the other hand, inflexibility and restrictiveness of labour market regulations are seen as the major disadvantages from the country s competitiveness point of view. The limited market size is also one constraint of the Finnish economy. The British-based think-tank Legatum Institute ranked Finland number one in its Prosperity Index in late The nine evaluation criteria of the index include a country s economic fundamentals, but also softer measures, like personal freedom, health, education, and a safe and supportive society. In addition, there are broad issues, like quality of governance and domestic institutions, and the climate and opportunities for entrepreneurship and innovation. Finland ranked between numbers two and ten in all evaluation areas, thus narrowly beating Switzerland, Sweden and Denmark in total ranking. Finland s competitiveness and favourable business environment have also played an important role in the development of the real estate market, which has undergone a period of rapid internationalisation in the past five years. However, recent changes in the global marketplace have re-directed investor interest for core investments in larger, more liquid markets. In Price WaterhouseCooper s and ULI s report Emerging Trends in Real Estate Europe Helsinki held top positions between third and sixth within Europe in In the latest report, published in February 2010, Helsinki ranked twelfth among European cities with regards to new investments, and only fourteenth when it comes to performance of existing investments.

13 The most competitive national economies of 2010 (ranking in 2009) GCI 2010 score Switzerland (2.) United States (1.) Singapore (5.) Sweden (4.) Denmark (3.) Finland (6.) Germany (7.) Japan (9.) Canada (10.) Netherlands (8.) 5,0 5,1 5,2 5,3 5,4 5,5 5,6 5,7 Source: World Economic Forum In a recent publication of the Research Institute for the Finnish Economy (ETLA) entitled Nordics in Global Crisis Vulnerable but Resilient?, leading Nordic economists evaluated the Nordic societies and their position in the current global crisis. The authors see globalisation as the basis for growth in productivity and living standards that the Nordics have achieved. The small, open economies have successfully combined economic efficiency and growth with a peaceful labour market, a fair distribution of income and social cohesion and have performed well in global competition, at least so far. However, continuing trends in globalisation will put the model under pressure. Emerging economic giants, such as the so-called BRICs countries, will force the Nordics to restructure their economies at a rapid pace. Relocation of production and job losses need to be compensated by innovations and growth in new activities. The authors suggest increasing the productivity of public services, lengthening working careers, as well as preserving the security offered by collective mechanisms for sharing risks as means for preserving the welfare society core benefits during times of heightened pressures caused by globalisation and ageing populations. 13 Photo: NCC

14 14 3. Institutional aspects of the Finnish property market 3.1 Two forms of property ownership In juridical terms, owning property in Finland means owning the land and the buildings on it. This is the basic form of direct property ownership. It is also possible to own only the building and have a long-term lease agreement with the landowner, typically the municipality. Direct ownership and land lease agreements are registered with the Land Register maintained by local courts. Transactions with real property are official legal acts that have to be carried out according to a specified procedure. These transactions are public in nature and are registered and published by the National Land Survey of Finland. In some cases, defined in legislation municipalities have a preemptive right to real property transactions, but they seldom apply this right. In practice, it is very common for property ownership to be organised through a limited company (a real estate/ housing company) founded for the sole purpose of owning the property. In these cases, the legal owner of the real estate is the limited company, which may have one or several shareholders. The shares may be connected to a specific apartment/amount of space in the property, entitling the shareholder to physical control and occupancy of these premises. These types of company are called mutual real estate companies (keskinäinen kiinteistöyhtiö). This form of ownership is commonly used in both residential and commercial properties. The Housing Companies Act and Decree regulate mutual real estate companies that operate in the housing sector (asunto-osakeyhtiö). These regulations are always applied when more than 50% of the area of the building is designated for residential use. When establishing a mutual real estate company for commercial property, shareholders can choose to either apply the Housing Companies Act or the normal legislation for limited companies (Osakeyhtiölaki) as the regulatory framework for the company. The Housing Companies Act and Decree is currently being revised, and the new law will come into force in the beginning of July The main changes in the legislation have to do with long-term planning of repairs and the communication of those plans to the shareholders. There will also be some changes in decision-making procedures and responsibilities of shareholders in certain specific situations, such as in major refurbishment investments. These changes will thus affect mostly residential buildings. They aim to clarify the roles and responsibilities of the housing company, on the one hand, and its shareholders, on the other. In mutual real estate companies, rental agreements are made New law regulating mutual real estate companies coming into force in 2010 between the shareholder and tenant, and the rental cash flow goes directly to the shareholder. The mutual real estate or housing company is responsible for the management and upkeep of joint facilities, for which it collects a maintenance fee from the shareholders, the basis of which is defined in the company articles of association the basis being typically floor area designated for each shareholder. The division of these responsibilities between the company and its shareholders may be specified in the company s articles. The company can also take out a loan, for example, for renovation and modernisation, and use the building and real estate as collateral. Shareholders can use their shares in the company as collateral for their own loans. The other type of real estate company is a standard limited company (kiinteistöosakeyhtiö), founded for the purpose of owning a certain property or properties. In these companies, the shares are not connected to any specific premises. The company collects rents from the occupiers, and with this income is responsible for covering maintenance and operating costs. The real estate company can pay out dividends to its shareholders. Impact on market practices Owning property through a mutual real estate company is a more flexible form of ownership, for example, in cases where the ownership of a building is divided among several owners. The transfer tax rate is also lower: 1.6% on the shares of the limited company versus 4% on direct property. Transactions are also less complicated compared to direct ownership of real estate. Photo: NCC

15 The decision-making and management procedures of a mutual real estate company are defined in the company s articles, which have to fulfil certain requirements set by law. An individual owner s degree of control depends on their share of ownership, unless otherwise agreed in the company by-laws. A mutual real estate company is a flexible and common way to organise the ownership and management of property. In practice, the majority of commercial property transactions in the Finnish market are made by transacting the shares of real estate companies. These transactions are not public in nature, and it is, therefore, not easy to define the real market volumes. Photo: IVG Polar Legislation concerning renting and transactions Generally speaking, the Finnish legal system is simple and liberal. In principle, there are no restrictions on buying or selling real estate, but as real estate transactions are subject to certain provisions, it is advisable to use real estate brokers or lawyers when entering into property transactions. Transactions with housing or real estate company shares are straight forward. As soon as transfer taxes have been settled, the purchaser can be registered as the owner of the shares in the real estate/housing company s registers. Finnish legislation regulating rental agreements is among the most liberal in the world and is based on the idea of full freedom of agreement between two parties. There are no minimum or maximum lease terms, indexation is not regulated, there are no automatic rights for renewal and break clauses are possible, if agreed. Only in the residential market do some restrictions exist to protect the tenant, but even there the legislation has few restrictions. Due diligence and analysis services have rapidly increased in importance as foreign investors use more formal and stringent due diligence procedures. This has brought about new approaches to these processes, with typically several types of experts legal, technical, financial and tax working together. This has also affected domestic investors analysis processes. Currently, a wide variety of these kinds of services are offered in the market. 3.2 Market practices of property investment and renting Property investment Recent developments in the Finnish property markets including the emergence of new players, increased internationalisation and professionalism and more sophisticated analysis have resulted in new practices in property investment processes. These have also increased the use of specialist services in property transactions. Thorough due diligence processes have become standard approaches, especially in transactions with large assets or portfolios, and where international players are involved. The role of the advisor or property agent in the investment process varies depending on the situation and type of company. In large portfolio transactions, the parties typically use extensive advisory, corporate finance and investment banking expertise. In single asset transactions, advisors role is typically more limited. Market conditions affect investment processes The development of investment processes is also dependent on market cycles. During the most active years of , the use of auction processes in large transactions became common. In current market conditions, no auction processes are carried out, as the number of participants has decreased sharply. Other phenomenon brought about by the slowdown is the lengthening of the processes, which is sometimes due to the withdrawal of some of the original bidders. The average size of transactions has also decreased markedly. 15

16 Rental practices Rental practices in the Finnish commercial property market are varied, and the liberal legislation regulating them gives the parties lots of freedom in agreeing on the terms. A common term in Finnish lease agreements is until further notice : an indefinite contract is valid until either the tenant or landlord wishes to terminate it after an agreed notice period, which might be three, six or 12 months, typically. These indefinite lease terms are especially popular in smaller office units, but are widely used in other property types, as well. The indefinite leases often last long, as both parties typically tolerate temporary fluctuations in the market. This means that at the peak of the market tenants might pay less than the current rental value, whereas in the downturn they pay more. Both parties normally accept this, and do not exercise the break clause easily. For its part, the landlord wants to avoid periodic vacancy and the cost of searching for a new tenant. In turn, tenants are not willing to pay the cost of searching for new premises and the costs of moving. Both parties interest in this kind of flexibility is based on the assumption that in the longer term, the contract rent is adjusted to correspond to the long term rental value. Photo: NCC Indefinite lease agreements are commonly applied in multi-tenant offices 16 Where fixed terms are used, the contract periods are typically quite short compared with international practices. In multi-tenant office buildings, a typical fixed term is from three to five years. In the commercial property market, it is also common to agree on a fixed-term lease, which then continues automatically for an indefinite period until one of the parties wishes to terminate it. Typical leasing practices in Finland Sector Shopping High street Super- Offices, Offices, Industrial, Residential centres shops markets multi-tenant single-tenant logistics Lease term / until / until year / until further notice further notice further notice Basis for rent Space area / Space area Space area Space area Space area Space area Space area turnover Rental payments Monthly Monthly Monthly Monthly Monthly Monthly Monthly Indexation Cost of living Cost of living Cost of living Cost of living Cost of living Cost of living Cost of living Rent review Annually Annually Annually Annually Annually Annually Annually Internal repairs Tenant / Tenant Tenant Tenant / Tenant Tenant Landlord landlord landlord External repairs Landlord Landlord Tenant Landlord Tenant Tenant Landlord Building insurance Landlord Landlord Tenant Landlord Tenant Tenant Landlord Property taxes Landlord Landlord Tenant Landlord Tenant Tenant Landlord The cost-of-living index 1951:10 =100 is a long time series calculated from the latest consumer price index (currently consumer price index 2000 = 100) and its development, therefore, follows the consumer price index. Many rents, such as those on dwellings, business premises or land, are usually tied to the cost-of-living index. From the user s point, the cost-of-living index is the most usable one, because index revisions do not interrupt the series and the point figures of the costof-living index are published monthly at the same time as the consumer price index. (Statistics Finland)

17 Photo: Sato For larger units, longer fixed-term agreements are commonly applied. For a purpose-built, single-tenant office building, a net lease of ten years or more is common. The need for corporations to outsource operational property assets has brought innovations in traditional saleand-leaseback agreements, which are mostly financial deals in nature. Agreements in large single-tenant buildings often have lease terms of up to 20 years. The terms of this kind of agreements are also driven by accounting issues. The popularity of this kind of deals is driven by real estate and financial market developments. In 2009, some of the biggest property transactions were sale-and-leaseback deals between corporations and institutional investors. In 2009, three of top 10 property transactions were saleand-leaseback deals Tenants rights are quite limited in the commercial property market for example, a tenant has no statutory right to a lease renewal. There are, however, a variety of different options that are exercised on this issue. Traditionally, rental agreements are for gross rent, which includes net rent plus a service charge covering typical operating costs and minor repairs. Gross rents are very common in multi-tenant buildings in all property types. In some specific property types, such as business parks, the lease agreements typically include a varying amount of business services offered to tenants. In these cases, the total rent includes the base (net) rent as well as a separate service charge. In single-tenant buildings, it is more common to apply net rents. In some cases, the rental agreement is for net rent, but the landlord takes care of the management and maintenance of the building, the costs of which are then charged separately from the tenant. This kind of agreement is sometimes called a shared rent. Rents can be indexed freely in all indefinite leases and in fixed period leases where the term exceeds three years. The Consumer Price Index is the most commonly used index. Turnover-based rents are becoming more common in shopping centres, and they usually consist of a minimum base rent supplemented by an agreed share of turnover. However, the turnover-based part of the rent is typically quite low, as the landlord wants to secure a stable base for their cash-flow. The market downturn and over-supply of office space, in particular, has given rise to different means to attract tenants. Besides a decrease in rent levels, tenants strengthened negotiation power has increased the use of rent-free periods, stepped rent increases and tenant improvements, among other things. 3.3 Planning Land use in Finland is regulated by the Land Use and Building Act, which came into force at the beginning of The system has three levels of land-use plans including a regional land-use plan, local master plan and detailed local plans. National principles for land-use and regional structure are defined by the Council of State. These national principles of land use are reflected in the regional plans, which embrace structural, functional and environmental considerations. Regional plans are confirmed by the Ministry of the Environment. The local master plan is an instrument for guiding and co-ordinating land use at a general level. It is produced by local authorities, but the Centres for Economic Development, Transport and the Environment must be consulted in order to ensure that national targets are taken into account in local plans. Detailed local plans are used to regulate the building and formation of the physical townscape. In addition, every local authority has its own building ordinance, the content of which is defined according to local needs. In the current act, local authorities have extensive powers to make independent decisions in land-use planning matters. It is also possible to agree on joint master plans between 1 Gross rents are where the land rent, insurance, property taxes and most service expenses are paid by the owner. This means that management and maintenance costs for both indoor and outdoor areas of the building are the owner s responsibility. This is also the case with heating, water and waste disposal. When it comes to cleaning and electricity, the owner is responsible only for the public areas of the building. Normally, tenants have their own energy and cleaning agreements regarding the space they use. The owner is also responsible for repair and replacement costs if caused by normal wear and tear. 17

18 Photo: NCC 18 municipalities forming a homogenous urban area. These joint master plans require the approval of the Ministry of the Environment. Together with the increased co-operation and integration of the municipalities, these kinds of plans are becoming more common. The Land Use and Building Act oblige municipalities to adopt an open and interactive approach to planning. The local planning process is aimed at facilitating the involvement of all those concerned in planning: landowners, residents and businesses in the area. In practice, this new interactive process has been proven to lengthen the planning processes. More detailed regulations and controls on land use and construction are included in the Land Use and Building Decree. Regulations and guidelines that complement the legislation in the Land Use and Building Act are included in the National Building Code. Building permits are approved by municipalities. A building permit may be granted if the plan allows the type and size of building that is being applied for. Special permits to exceed or change the use of the planned space can also be granted, although these are becoming increasingly difficult to obtain. Planning and landuse regarding retail development is under discussion Planning and building permit practices have recently been discussed actively, and they have been criticised for their lack of holistic approach to sustainability and urban structure issues, among other things. Municipalities compete with each other by using planning and land-use issues to attract taxpayers both companies and residents and employers, which can sometimes impact their planning decisions. 2 The reform of regional state administration came into force on 1 January 2010, introducing two new types of regional administrative agencies: the Centres for Economic Development, Transport and the Environment and Regional State Administrative Agencies. Centers for Economic Development, Transport and the Environmant are new agencies whose tasks comprise those of the former Employment and Economic Centres, Road Districts, Regional Environmental Centres and State Provincial Offices. The centres are responsible for steering land-use and buildings through regional plans. Regional State Administrative Agencies tasks consist of those of the former state provincial offices, occupational health and safety districts, environmental permit agencies and regional environmental centres.

19 Vivid discussion about planning and land use regarding large retail units The Finnish Ministry of the Environment is currently working on new land-use and planning legislation for large retail units. The discussion was initiated by the Ministry s study of planned retail projects in More than 200 large projects were identified, of which the combined space exceeded 5,200,000 square metres. Additionally, the ten biggest projects accounted for one-third of the total area. One of the triggers for discussion was a planned 100,000 square metre out-of-town Ideapark shopping centre in Vihti, which the current minister opposed. The reasoning provided was that the project was not in line with the current planning framework. The justification for the new regulation is mainly based on four major prevailing trends in retail property development. Firstly, the average size of new projects has increased markedly during the past decade. Secondly, a significant number of the new projects are being planned outside the city centres, which raises environmental issues on the authorities agenda. The other two trends have to do with the change in retail unit characteristics, which are not taken into account in the current regulatory framework. Many of the planned large units concentrate increasingly in leisure and recreation, in addition to traditional retail space. Additionally, the differences between different retail unit types e.g. the ones trading consumer goods and those concentrating on special, large unit-size goods are becoming more blurred. According to the Ministry of the Environment, all these trends set new requirements for steering and regulation through planning. Working group suggests new means for steering A special working group consisting of government officers, set by the Ministry for the Environment, completed its report in late Their report introduces the following means for improving the steering of retail development: - regulation concerning large retail units should be concentrated as a separate chapter within the Land Use and Planning Act - regulation concerning the location of retail units should be tightened, and new units should mostly be located within the existing urban areas. The definition of citycentre area should be harmonised throughout Finland in co-operation with the Ministry, municipalities and regional authorities. - the need to reconsider the size limit for large retail units, currently standing at 2,000 sqm, should be examined - specific regulation for units trading special, large unit-size goods to be included in the regulation of large retail units (currently excluded) - the role of regional land-use plan to be strengthened with regards to the development of units with regional significance, e.g. the maximum size of retail units should be defined at the regional level instead of current local decision-making - the largest units to be taken under the Environmental Impact Assessment procedure - regional service supply survey procedures to be developed, and their use as background information in regional and local plans to be strengthened - data and analysis systems to be developed to support the steering of retail units, including e.g. more detailed statistical information on demographics, consumption and traffic, as well as more sophisticated use of GIS and other analysis methods. Law to be revised in 2010? The Ministry is currently working on the legislation, and discussions with different interest groups have started. Basically, most of the authorities and industry associations who left their comments to the Ministry s report are in favour of a more holistic approach to planning. However, opinions on the means for tighter steering differed quite significantly. Industry spokespersons raise the risk of overlapping regulations and more complicated permission procedures. Also, regulation of the size and location of different retail units, as well as the procedures for environmental assessments, are still under discussion. The Ministry aims to introduce the law into parliament during Photo: Sini Pennanen 19 3 Environmental impact assessment (EIA) procedures are designed to ensure that the impacts of any development projects with significant environmental impacts are adequately examined, and to provide opportunities for interest groups and individual citizens to participate in and influence the planning of such projects. The process has to be initiated by the party responsible for a development project, and they are also responsible of the costs of the EIA procedure, including all expenses caused by investigations, as well as administrative costs for authorities. The Centre for Economic Development, Transport and the Environment is the competent authority in these processes.

20 3.4 Taxation in Finland Taxes in Finland are levied by the central government, municipalities and the church. Individual taxpayers income can be divided into two categories: earned income and capital gains. Income tax is paid to the state at a progressive rate, and to the municipalities, at a flat tax rate. Capital gains tax is fixed, and it currently stands at 28%. In Finland, resident individuals are taxed on their worldwide income. Residents are taxed according to progressive tax rates for national tax purposes and flat rates for municipal ones. The highest state tax rate is 30.5% of earned income. Municipal tax rates vary between 16.50% and 21%. Working group discusses the means for developing taxation income and cutting public-service levels exist in almost all municipalities. In the Finnish tax system, the taxes most relevant for property investment are property taxes, capital gains taxes, transfer taxes, corporate taxes and VAT. Tax on real property Real property situated in Finland is subject to a real property tax, which is based on the taxable value of the property. The taxable value is defined by local tax authorities and is generally about 70% of the market value of the property. The revenue goes to the municipality where the real property is situated. Land used in forestry or agriculture is exempt from real property tax. Tax rates in different municipalities vary between 0.5% and 1.0% of the taxable value per annum. Tax rates for permanent residences are lower and vary typically between 0.2% and 0.5%. For non-built construction sites, a specific tax of 1 3% is levied. In the Helsinki metropolitan region, specific minimum rates for this tax are in place. 20 In addition to the actual taxes, there are some obligatory social security contributions that are paid by taxpayers, some of which are included as taxes in OECD s international tax comparison statistics. Social security contributions paid by Finnish employers include payments to the national health insurance scheme, national and occupational pension schemes, as well as unemployment scheme. Part of these contributions is paid by individual taxpayers, for example, one-fourth of all pension contributions are paid by insured persons. The level of taxation is clearly above the average for OECD countries. In 2006, the ratio of total taxes to GPD was 43.5%, which was the sixth highest among OECD countries. The past government took serious actions to ease taxation on earned income, which are now continued by the current government. The timing of tax cuts have also been justified as a part of economic stimulus actions during the current downturn. However, the extensive supply of services provided by the public sector, together with the ageing population, increases the challenges on public finances. In the current financial environment, decreasing taxes from corporations and the unemployed create pressures on public finances and thus reduce possibilities for further tax cuts. As an end result, many municipalities have been obliged to increase their tax rates. Further pressure to increase taxable Capital gains taxes Any investment income (dividends, net rental income and capital gains) is taxed at a flat rate of 28%. Financial costs, such as interest expenses that are directly related to the investment income, are deductible. For tax purposes, persons present in Finland for a period of less than six months are considered non-residents. They pay tax in Finland only on income received from Finland. Finnish employers collect a 35% tax at source on wages, unless they have received a tax-at-source card instructing otherwise. The earned income of persons staying in Finland for more than six months is taxed according to the same rates as that of permanent residents of Finland. However, foreign key employees may qualify for a special tax at the flat rate of 35% during a 24-month period if they receive any Finnish-source income for duties requiring special expertise. For these key employees, specific rules concerning work and salary levels apply. See Photo: Kimmo Torkkeli

21 Non-residents have a limited tax liability on capital gains in Finland. If they receive dividends, interests or royalties from Finland, the payer withholds a final source tax. For dividends, a 28% tax rate is applied on the disbursement to non-eu and non-tax-treaty countries. Finland has special tax treaties with several countries, which normally set a lower percentage for this tax. If the shares fall into the category of direct investment, and the beneficiary company fulfils the requirements of the Parent-Subsidiary Directive, no tax at source will be levied. Dividend income is partially double-taxed in Finland. The tax consequences depend on the type of company that pays the dividend whether it is publicly listed or not and also, for non-listed companies, on the net assets of the company. Transfer taxes Tax on the transfer of real property is 4% of the transfer price. When the transaction is made by buying shares in a housing or real estate company, the transfer tax is 1.6% of the transfer price 5. The transfer of securities is tax exempt if the transaction takes place through the stock exchange or if both the buyer and seller are non-residents. Shares in a real estate or housing company are, nevertheless, always subject to transfer tax. Transfer tax is usually imposed on the purchaser. Corporate taxation The corporate tax rate in Finland is 26% of corporate profits. Companies resident in Finland are liable to pay tax on their worldwide income. Non-resident companies are taxed on their income derived from Finland and all income attributable to a permanent establishment in Finland. In principle, a company from a non-tax-treaty country is liable to tax, regardless of any permanent establishment. The concept of income considered in corporate taxation is rather broad because it covers several income types, such as proceeds from selling merchandise, rental income, fees and compensation for work or services and the profits from investing financial assets. An expense incurred in acquiring or maintaining a business is deductible. According to Finnish accounting rules, income and costs are registered in the year of delivery (not payment) of goods or services. Costs for acquiring fixed assets are deducted by depreciation in taxation. The declining balance method applies to the depreciation of buildings and other structures. Depreciation for each building is calculated separately, with a maximum rate varying from 4% up to 25%, depending on the type of building or structure. Taxation of partnership structures Taxation issues are of great importance in structuring real estate fund structures. In real estate funds targeted for domestic investors, partnership structures are most commonly applied. In principle, partnership is a passthrough structure from a taxation point of view, and income and capital gains are taxed according to the investor s own tax status. The interpretation of a partnership s tax status might depend on the organisation and the type of activities of the fund. Taxation of a partnership s income generated by property business can either be taxed according to income taxation rules or as business income. Therefore, the tax authorities should be consulted when the fund structure is set up. However, Finnish partnership structures cannot be beneficially applied for funds targeted at foreign investors. Value added tax Value added tax (VAT) is another tax that is relevant for property investment. The standard VAT rate is 22%, which is calculated on the total charge for goods and services. There are some lower VAT rates for specific groups of goods and services. The standard VAT rate has been proposed to be increased to 23% in mid In Finland, it is optional for a property owner to apply for VAT liability for collecting rents. The liability is granted given that certain requirements are met concerning the premises and tenants. The tenant must also be VAT liable. In these cases, the VAT included in the rent is deductible from the tenant s final VAT. The property owner can deduct the VAT included in the cost of services of the property. Under Finnish VAT legislation, a taxable entity is also entitled to deduct VAT included in the costs for the construction of a new building as well as the restoration of an existing building, provided that the relevant property is intended for the use of a VAT taxable business activity. This deduction will then be revised if the use of the property entitling to a deduction decreases or if the ownership of the property is transferred within a set revision period. In some circumstances, an increase of taxable use could also lead to a revision. From the beginning of 2008, this revision is proportionate to the lapse of time. This means that the full amount of deducted VAT will not be subject to revision as was the case under the previous rules but only a decreased amount in accordance with and proportionate to the time lapsed under the revision period. The revision period has also been extended from a five-year period to a ten-year period. 5 No tax is imposed if a person aged between 18 and 39 acquires his or her first owner-occupied permanent home. There is no transfer-tax liability if the transfer is due to an inheritance, a donation or a division of property subject to matrimonial rights. 21

22 Corporate tax rate Capital gains tax rate Tax rate 26% Note 28% Levied on profits from selling real property, buildings, securities such as housing company shares, shares in listed companies, etc. VAT 22% Special rates for food (17%); medicine, books, transportation, cultural events, etc. (8%); and newspapers and periodicals (0%). Tax on real property Transfer tax, real property Transfer tax, securities % Depends on municipality and type of property. Taxable value defined separately for the building and the land. 4% The majority of transactions are carried out by selling the shares of a (mutual) limited realestate company, when the transfer tax is 1.6%. 1.6% Transfer of securities is tax-exempt if the transfer takes place through the stock exchange or if both the seller and the purchaser are nonresidents. Shares in a housing company are always subject to transfer tax. A working group investigating the development of taxation The Finnish Ministry of Finance established a working group in late 2008 to examine developments in Finnish taxation. The group should complete its work by the end of 2010 so that its results can be used in political discussions preceding the parliamentary elections in The group will assess the need for changes in taxation caused by developments in the economic environment, as well as by the challenges related to the current tax system. The objective is to create a framework that supports the sustainability of economic development, ensures the provision of public services, as well as takes the requirements of sustainable ecological development into account. The group presented its interim report in late It identified the ageing of the population, globalisation of the economy, and Finnish responsibility with regards to climate change as critical background factors for taxation. In its preliminary results, the group outlined ideas for broadening the tax base, and, at the same time, moving emphasis from income taxes towards taxes based on consumption as the main means to develop the Finnish tax system. By keeping the taxation on earnings at a moderate level, it is believed that the system would encourage people to work, which supports productivity and prevents unemployment. Regarding corporate taxation, the group is likely to suggest a lower tax rate, but a broader tax base. This approach is believed to support Finland s competitiveness as an attractive location for businesses.the group also suggested that taxation could be used as an efficient tool for steering towards alternative energy use and other environmentally friendly practices. The fact that the total level of taxation cannot be decreased is taken as a given limiting background factor in the discussions. The reform aims thus at defining such tax basis and tax rates that would support the success of the Finnish economy in the future in the best possible way. Source: Finnish Tax Administration, 22

23 4. Structure and players in the Finnish property market 4.1 Ownership structure: institutional investors remain the most significant players in the market According to KTI estimates, the size of the Finnish professional property investment market is ca. 38 billion. The ownership structure of the market has changed markedly during the past few years. Only a decade ago, the market was dominated by domestic institutions such as pension funds, in particular. They still remain major players in the market with a share of some 37%, but their dominance has decreased together with the emergence of foreign investors, domestic funds and other players. the annual pension contributions. In the Finnish pension system, the majority of the contributions are used to pay the pensions of the insured, but part of the annual contributions is transferred to reserves for future pensions. At the end of 2009, the investments of pension insurance companies and funds administering the statutory occupational pension schemes amounted to some 125 billion. At the end of 2009, the total property investments of Finnish pension institutions amounted to 13.8 billion ( 13.1 billion in 2008). This figure includes both direct and indirect investments in Finland and internationally. The structure of the Finnish property investment market (38,6 bill.) Institutional investors Institutional investors have traditionally played a dominant role in the Finnish property investment market. Pension insurance companies and pension funds are the biggest representatives in this group. The Finnish pension system is a mixture of basic public pension regime and the employment based pensions insurance. The occupational pension scheme administered by pension insurance companies and pension funds and foundations organised by employers receives the bulk of Non-listed property companies 12 % Listed property companies 12 % Charities and trusts 1% Others 1 % Real estate funds 11 % International investors 24 % Institutional investors 37 % Source: KTI (Annual reports, query for investors, KTI estimates) The biggest property investors in Finland (fair values of direct holdings at the end of 2009, EUR billions) Institutional investors Non-listed property companies/funds Listed property companies International investors Varma Mutual Pension Insurance Company Sponda Ilmarinen Mutual Pension Insurance Company Tapiola Group and Tapiola Funds' VVO Local Government Pension Institution Sato Citycon Aberdeen s funds' investments in Finland CapMan Real Estate RBS Nordisk Renting OP-POHJOLA-group (managed by Pohjola Property Management) Pension Fennia NIAM Avara Suomi Ltd Technopolis Etera Mutual Pension Insurance Company Protego Real Estate Investors Norgani Hotels Suomi Mutual Nordea Life Assurance Finland Ltd Wereldhave Finland Genesta Property Nordic Sponda Real Estate Funds Fennia & Henki-Fennia 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 Source: Annual Reports, Query for Investors, Press Releases 23

24 Pension insurance companies remain major players in the market Real estate investments proportion of the total investment portfolios varies markedly between funds and is currently ca. 11.1% on average for all Finnish pension institutions. During the past years, their proportion has varied markedly, from 9.1% at the end of 2007 to 12.5% in The differences are mainly caused by fluctuations in share prices. The seven pension insurance companies are the biggest private sector players within the Finnish pension system. There was some 10 billion worth of properties at the end of 2009 in their portfolios, representing some 12.8% of their total investments. Almost 90% of all pension institutions property investments are in Finland. In total, property s share of their domestic investment portfolios is as high as 28.3%. At the end of 2009, their foreign property investments amounted to only 1.5 billion. Foreign investments are made totally through indirect vehicles, mainly to European non-listed property funds. Varma and Ilmarinen are the two biggest pension insurance companies in Finland, with total investment portfolios of ca. 30 and 26 billion, respectively. Varma is the biggest property investor in Finland with a direct domestic portfolio of some 3.9 billion. The portfolio has increased markedly in recent years, mainly through active new development. Even though direct investments represent the bulk of Finnish pension funds property investment portfolios, they have also expanded into indirect real estate investment recently. Domestic pension institutions are major investors in all major Finnish non-listed property funds. Access to debt capital and third-party management have been their major motivations for indirect holdings. However, the tightening of the financial market has decreased the attractiveness of indirect investment recently. Finnish pension funds have always kept portfolio management functions in-house, as Finnish legislation requires the investment decisions to be made by institutions themselves. In terms of property and asset management of the institutions portfolios, some differing strategies can be identified. Some institutions have outsourced their traditionally large in-house management units to service providers. Others want to retain control on their tenant interface in particular, and thus emphasise the importance of in-house asset management. Some Finnish institutions, for instance Pohjola and Tapiola, have founded separate fund/asset management companies to manage their property investment portfolios. These companies are wholly-owned subsidiaries of these institutions. They also offer management services to other clients and have launched unlisted funds. Listed sector There are currently three recognised property companies listed on the main list of the OMX Nordic Exchange in Helsinki: Citycon, Sponda and Technopolis. Julius Tallberg Kiinteistöt Oy, a relatively small listed-property company was de-listed in early Thanks to a positive share price development in 2009, the combined market value of the listed companies stood at 24 Portfolio allocations of major property insurance companies, Loans receivables Bonds Other money market instruments and deposits Shares Real estate investments Other investments % Pension Fennia Pension Tapiola Etera Ilmarinen Varma Pension Veritas The local government pansions institution Source: The Finnish Pension Alliance TELA

25 1.7 billion at the end of This represents an increase of some 80% compared with the end of After a very poor performance in 2008, the share prices of listed property companies developed favourably in The OMX Property Investment Sector Index rose by almost 60%, while the overall OMX Index increased by only 11%. The shares of listed companies are currently trading at a clear discount compared to their net asset value. Sponda is the biggest of the Finnish listed property companies with a portfolio of 2.8 billion ( 2.9 billion at the end of 2008) consisting office, retail and logistics properties. During the past few years, Sponda has expanded its business in the Russian market, specifically in the Moscow and St Petersburg regions. Its current holdings in Russia amount to some 180 million. Sponda is also a co-investor and/or manager in four unlisted property funds with a combined gross asset value of some 670 million. Technopolis concentrates on technology centres in Finland and Russia. It also continues investigating market opportunities for expansion to other European countries. At the end of 2009, the fair value of its property portfolio stood at 597 million ( 594 million in 2008). Julius Tallberg Kiinteistöt Oy is a relatively small listed company whose ownership is dominated by the founding family and management. Due to the small size of the company, as well as concentrated ownership and low trading volumes, the company will be delisted in March The Finnish property sector s efforts to create a REITtype property investment vehicle have not been successful. In 2008, the Ministry of Finance prepared a proposal for a listable property investment company model; however, it only granted tax transparency for funds investing in residential properties. The provisions for tax transparency have still not been finally accepted by the European Commission. The small listed sector comprises three major companies Citycon is a property company specialising in shopping centres and retail properties. Its portfolio comprised some 2.15 billion worth of properties at the end of 2009 ( 2.11 billion in 2008). Citycon currently owns 33 shopping centres, 22 of which are located in Finland, eight in Sweden and three in the Baltic countries. Measured by market value, foreign investments currently comprise c.a. one-third of Citycon s portfolio. Non-listed property companies The biggest non-listed Finnish property companies, VVO, Sato and Avara, are all major players in the rental residential markets. They hold significant subsidised residential portfolios, as well as major market portfolios. In recent years, they all have been active in property development, producing new assets both for their own portfolio as well as those sold for owner-occupied housing. The economic downturn has, however, limited their business opportunities in selling owner-occupied apartments, and they currently only focus on developing new rental dwellings for their own portfolios. VVO s portfolio currently consists of ca. 39,000 rental residential apartments in 50 municipalities in Finland, the majority of which are located in larger Finnish cities. Finland s two largest pension insurance companies, Varma and Ilmarinen, are VVO s largest owners. Share performance of the Finnish listed property companies OMX Helsinki CAP index ja OMX Helsinki Real Estate -index (index, 6/2000=100) OMX Helsinki Real Estate -index OMX Helsinki CAP -index Source: Nasdaq OMX Market capitalisations of the Finnish listed property companies EUR million Sponda Citycon Technopolis Source: Nasdaq OMX 25

26 Photo: IVG Polaris 26 Sato Corporation s current holdings comprise nearly 23,000 apartments. Sato s main owners include major institutions, such as pension insurance companies Varma and Ilmarinen, as well as life fund Suomi. Sato is in its early phases of expansion to the Russian markets. During 2009, Sato continued active restructuring of its portfolio through acquisitions, new development, and disposals. The third major residential property owner, Avara, together with its group companies, owns and manages nearly 20,000 rental and right-of-residence apartments. During 2009, Avara reorganised its company structure by separating its investment and property management operations into two separate companies. Non-listed property companies investing in commercial property include some major foreign investors that have established an office in Finland or bought a Finnish company with an existing organisation. These include Genesta, IVG Polar, Wereldhave and Norgani hotels. Real estate fund management companies There are currently some 14 significant Finnish fund management companies offering non-listed funds for mainly domestic institutional investors. The first major Finnish property fund was launched by CapMan in Since that, some 30 funds have been started. Most of the Finnish non-listed property funds are structured as limited partnerships. Taxation of partnerships is favourable from a domestic investor s point of view, as they are pass-through entities, provided that their business operations meet certain conditions. In the early years following the emergence of the fund market, use of debt capital was one of the institutions main motivations for investing in these funds. Currently, access to third-party management, as well as to some specific properties or property types, have increased in importance as criteria for investing in these funds. In some cases, fund structures are also used as tools for splitting the ownership of a certain property or property portfolio. New domestic fund managers entering the market The Finnish property fund management companies have divergent backgrounds, which also affects their strategies significantly. CapMan is originally a private equity company, for whom property investment was a new business area. Aberdeen Property Investors background is more on asset and property management, although fund management is currently their core business area. Pohjola and Tapiola are traditional Finnish institutional investors that organised their property investment management in separate companies during the 2000s. These companies then expanded into the fund management business. They offer funds to their shareholders and other investors. IceCapital, Evli and Auratum are examples of companies whose background is in investment banking and management, yet currently offer property funds for their clients as one alternative asset class. Many of the Finnish funds can be considered as club-deallike arrangements where a limited number of investors joined forces to establish a property fund for specific purposes. Examples of these kinds of arrangements include Exilion, NV Property Investment, AB Forum Capita and PE Property Fund. These management companies typically have relatively small organisations, and they operate in close co-operation with their investors.

27 Finnish property fund management companies Fund Manager Aberdeen Property Investors Finland Oy Number of funds Launch year of the first fund Target sector(s) Investors Commercial Domestic and international institutions, private investors Asuntoturva Oy Residential Private investors, domestic institutions Auratum Real Estate Oy Commercial (2 funds), Residential (1 fund) Private investors, domestic institutions CapMan Real Estate Commercial Domestic institutions CFI Management Oy Commercial Domestic institutions, corporations Evli Property Investments Oy Healthcare properties Domestic institutions Exilion Capital Oy Commercial Domestic institutions AB Forum Capita Oy Commercial Domestic institutions, foundations IceCapital Real Estate Residential Domestic institutions Asset Management Oy Property Tapiola Oy Commercial (4 funds), residential (1 Domestic institutions fund) NV Kiinteistösijoitus Oy Commercial Domestic institutions Pohjola Property Management Ltd Commercial Domestic institutions Sponda Plc Commercial Domestic institutions Table: Finnish property fund managers Sources: Survey to managers, press releases, www-pages International investors The inflow of foreign capital to Finland was at its highest level in 2006 and 2007 with dozens of new investors entering the market in both years. There are currently more than 70 foreign property investors in Finland. In 2009, however, only two new foreign investors entered the market. In total, the foreign investors have acquired more than 12 billion worth of Finnish properties. The foreign investors currently form a diversified group of players with varying strategies and management practices. Some of them have established their own offices in Finland (e.g. IVG, NIAM, Nordic Real Estate Partners, Sveafastighteter), whereas some have Finnish co-investors as local representatives, with companies such as Genesta and Sponda acting as their Finnish counterparts. Collapse in the market share of foreign investors in transactions In 2009, foreign investors acquired less than 300 million worth of Finnish properties. This represents only 17% of all transactions in the market. In 2006, which was the most active year in this sense, foreign investors accounted for two-thirds of all transactions, and almost 60% in The biggest foreign acquisition of 2009 was made by a newcomer in the market, when German investor Commerz Real AG bought the Swing Life Science centre in Espoo for 120 million. On the seller side, foreign investors share was 13% of the total transactions volume. Biggest foreign investors in Finland 27 RBS Nordisk Renting NIAM Protego Norgani Hotels Wereldhave Finland Genesta Property Nordic ING REIM 0,0 0,2 0,4 0,6 0,8 1,0 1,2 EUR billion Source: Annual Reports, Query for Investors, Press Releases

28 Public sector Corporations 28 Public sector entities are very important players in the Finnish property market. The Finnish state has concentrated most of its property holdings in a government-owned enterprise called Senate Properties, whose task is to develop, manage and let the state s property holdings. It also sells or redevelops the properties no longer needed by state authorities. Senate is by far the largest property owner in Finland, with a balance sheet of some 6.0 billion. Its diversified portfolio consists of offices used by state agencies and ministries, prisons and cultural buildings, as well as properties used by the Finnish Army. From the beginning of 2010, all the university properties previously owned by Senate properties were transferred to three limited companies. Senate remains minority shareholder in these companies, while the universities own a two-thirds majority. This change had to do with a wider legislative reform increasing the autonomy of Finnish universities. Finnish municipalities are typically highly significant players in regional markets and own the majority of properties required for public administration and service provision, such as offices, schools, nurseries and healthcare centres, as well as cultural buildings. It is estimated that they currently own some 90% of all premises they use. Real estate management has gone through considerable development in most municipalities in recent years. All major municipalities have centralised their real estate management functions and tend to apply a market-oriented management policy for instance, by charging internal rents from the occupiers. Traditionally, property occupiers have played a significant role in the Finnish property market through their ownership of large property portfolios. The majority of commercial property stock has traditionally been owner-occupied. The proportion of owner-occupancy is currently estimated to be somewhere below 60% and is thus close to the average level found throughout Europe. Major Finnish corporations have adopted different strategies with regards to their real estate management. The broadening and development of the property investment and finance market has enabled the execution of these strategies. During , Finnish corporations sold worth some 1.1 billion of properties. In most cases, the companies remained as tenants in these buildings by relatively long leases. In the quiet transaction market of 2009, there were two sale-and-leaseback deals included in the list of top five transactions: one executed between Finnair and NV Property Fund, and the other between Kesko and Varma. The transaction prices of these deals were 77 and 156 million, respectively. SOK and Kesko, the two major Finnish retail chains, are active players in the property market. They emphasise the role of property development in their business strategy. They have, however, adopted slightly different strategies with regards to property ownership. While SOK has maintained, or even strengthened its control over properties through ownership, Kesko has been more active in restructuring its portfolio and sold big parts of its portfolio in sale-andleaseback deals. Industrial companies still typically own their production properties. For office properties, more varied ownership and finance strategies are applied. Examples of sale-andleaseback transactions of Finnish company headquarters in include UPM, Amer and Stora Enso. Companies using dominantly office or light production space, such as professional services, media and IT/ telecommunication companies, are pursuing increasingly sophisticated workplace strategies. International companies are also increasingly executing these strategies globally. These strategies emphasise the space usage and occupier view. This kind of approach also impacts their preferences for ownership and financial issues, with many of them emphasising increased flexibility in leasing solutions.

29 4.2 Real estate service sector Together with the development of the Finnish investment market, the Finnish real estate service sector has undergone a phase of rapid development during recent years. Currently, a wide variety of management, advisory, transaction and brokerage services are available, thus enabling the adoption of different management strategies, as well as market entry of new players. Asset and property management services Professional asset and property management services have been widely available in the Finnish property market since the early 2000s. Before that, all major investors had large in-house real estate management teams that managed the tenant relationships themselves. The main drivers behind the development of the supply of management services include large investors willingness to reorganise their management activities as well as foreign investors market entry. Photo: NCC Management service companies have different backgrounds Currently, the major players in the Finnish asset and property management service sector include both traditional Finnish players (e.g. Ovenia, Realia) as well as major international companies (e.g. Aberdeen, Newsec). Some managers concentrate on only management services, whereas some of them also offer other services, such as advisory and consultancy. Aberdeen Property Investors Finland Oy currently emphasises the management of the group s own funds, but it also offers management services to other clients. In total, it currently manages some 2 billion worth of properties in Finland, of which some two-thirds is Aberdeen s own Finnish funds assets. Realprojekti, a subsidiary of CapMan Real Estate, is another example of a management company mainly servicing the company s own funds, but also offering its services to other clients especially as a specialist shopping centre manager. Newsec is another major player in the asset and property management sector. Newsec offers a wide spectrum of real estate management, advisory and analysis services for both domestic and international property investors and corporations. It recently reorganised its activities into two separate companies: Newsec Management and Newsec Advice Oy. Another major manager in Finland is Ovenia Oy, which concentrates on asset, property and facilities management and advisory services. Ovenia s major clients include its owners Sponda, Varma and Sampo, together with other major property investors and occupiers. Ovenia currently manages some 6 million sqm of properties in Finland. Realia Group is a domestic major player in the real estate advisory, valuation and management market. The Group s management services are offered through Realia Management (commercial) and SKV (housing management). Comreal Management, a sister company of broker and advisor Comreal Oy, is another newcomer in the Finnish management service market. Domestic companies concentrating only in asset and property management services, mainly offered to property investors, include e.g. Corbel, KJ-Kiinteistöjohto and Kiinteistömanagement J. Juhola. YIT, the major Finnish construction company, currently mainly concentrates on technical management services. ARE is another example of a service company with a technical background. Facilities management services to occupiers are offered by both specialist management companies and traditional service companies that have expanded to offer the whole service chain. Service companies with background in traditional service provision e.g. cleaning, catering, maintenance currently also offering management services include ISS, Lassila & Tikanoja and SOL. Coor Service Management, on the other hand, is an example of a company only concentrating on services management. 29

30 Advisory, valuation and transaction services The supply of different types of advisory services accelerated rapidly in recent years because of the increased liquidity of the market and the entry of new players. Many of these companies have had to adjust their activities to the slowing market, even though the need for downsizing has remained pretty moderate in most cases. Advisory services are offered by both management companies and by specialist service providers. The rapid development of the market has encouraged new companies to enter. Nowadays, a colourful mixture of small domestic entrepreneurial firms and big global companies can be found. Of the major management companies, Newsec, Ovenia and Realia Group, also offer valuation, advisory and transaction services. Catella Property Group is a major player in valuation, advisory and brokerage services in the Finnish commercial property market. Both Catella and Newsec have recently divided their management and advisory services into separate companies. Newsec currently operates under the brands of Newsec Advice (transactions, advisory and brokerage), Newsec-Maakanta (valuation) and Newsec Asset Management. Catella s asset management services were concentrated in the Group s asset management division Amplion. Domestic and international supply in the service market In addition to the actual transaction services firms, corporate finance related services are offered by some, mainly domestic companies, including Advium and Catella. Moreover, global business consultancy firms, such as KPMG, Ernst & Young and PricewaterhouseCoopers, also offer real estate specific services in Finland. Financing services Property financing has traditionally been organised via Finnish banks. Major Finnish banks include Nordea Bank, OP-Pohjola Group and Sampo Bank. In the past, all these banks and their predecessors had an extensive interest in the property market via their significant property holdings. Currently, only OP-Pohjola Group has significant property ownership. During the past few years, several major specialised players in the real estate finance market entered the Finnish market, including Eurohypo, HSH Nordbank, Aareal Bank, SEB Merchant Banking and the Royal Bank of Scotland. However, the financial crisis caused significant problems to many of them, and the market has been restructured recently. The first player who reacted to the changing market circumstances was HSH Nordbank, who closed its Finnish office in late Also, Eurohypo and RBS are downsizing their operations markedly. However, some new players are expanding their operations in the property finance market, including the German wholesale bank Helaba (Landesbank Hessen- Thüringen), who has included northern Europe as its target region since Property development 30 Of the major international firms, DTZ has been present in the Finnish market since 2004, when the activities of a Finnish valuation company and a brokerage were merged under the DTZ brand. Jones Lang LaSalle entered the market through the acquisition of GVA Finland in April 2007 after having explored the market for several years. Colliers International also opened its office in Finland in 2007 and merged with Finnish advisory and agency firm Yritysresurssit. CB Richard Ellis s Finnish operations were organised through co-operation agreements with Finnish companies up until 2009, when the company established its own office in Helsinki. Other foreign companies in the transactions and leasing service market include Leimdörfer and NAI Finland. Also, Cushman & Wakefield were present in the market for a couple of years, but the company closed its Helsinki office in One example of the domestic transaction and leasing service companies is Tuloskiinteistöt Oy. A newcomer in this market is Finadvice Oy, a company set up in late A typical feature of the Finnish property market is that there are not many players specialising solely in property development. Active players in the property development field include construction companies, property companies and some owner-occupiers. Major construction companies involved in property development include NCC, Skanska and YIT, who have all been very active in this field in the past few years, and have co-operated with both domestic and international investors. Skanska has organised its development operations in the Nordics through Skanska Commercial Property Development Nord. NCC Property Development is known especially as an active developer of its Business Park concepts. Other examples of domestic construction companies that are active in property development include SRV, Lemminkäinen and Hartela. Property development was a major business area for these companies during the upturn. In 2009, only very few new projects were started. Some owner-occupiers large retailers SOK and Kesko, in particular are significant and professional property developers. They typically have strong bargaining

31 power with local authorities in planning issues because they both increase employment and bring tax revenues to municipalities. Institutional investors traditionally have quite conservative strategies concerning property development and have stipulated, for example, stringent requirements for pre-letting. In recent years, however, some have tightened their co-operation with developers and committed themselves at earlier stages of the project in order to get access to the best assets. 4.3 Property investment market in 2010 increased activity expected The volume of major transactions collapsed to some 1.8 billion in This represents a decline of 59% compared with the previous year s figure, which, in turn, was almost one-third lower than the record figure of Towards the end of the year, the volume increased moderately with the last quarter representing some 35% of the year s total volume. The volume of Q4, 610 million, was the highest quarterly figure since the third quarter of Construction companies are major developers Transactions volume decreased dramatically in 2009 Finnish property investment companies are also active developers that focus on increasing assets to their own portfolios. Sponda, Citycon and Technopolis are all very active players in property development in their own core areas. There are also some smaller non-listed property companies and funds active in property development in their niche markets. One example of this kind of companies is Renor, which concentrates on redevelopment of old industrial premises. Additionally, some property funds include property development in their strategy. Development consultancy is offered by quite few, mainly smallish companies, who often have some specific knowledge in certain area. The share of foreign investors of all transactions, 17%, was clearly lower than in 2007 and 2008, when it amounted to 59% and 44%, respectively. Domestic institutions and property funds increased their market share in the quiet market. Retail remained the most popular sector in the transactions market, with its market share exceeding 30% of all transactions. Yields of prime properties stopped increasing after the first half of By that time, they had increased by some 0.8 percentages from their lowest level in mid The yield correction has thus been markedly more moderate than in many other European markets. However, there is not much market evidence on actual yield levels, because of the sluggish transactions market. In a barometer survey carried out in late 2009, market professionals expected prime yields to remain stable in Transactions volume in the Finnish property market 1000 MEUR Domestic buyer International buyer Source: KTI Prime property yields in Helsinki CBD % residential office retail Source: RAKLI-KTI barometre survey 31

32 Profile of investors, based on transaction prices (total volume approx. 2008: 4,14 bn and 2009: 1,76 bn) BUYERS SELLERS 2% 8% 4% 9% 14% 34% 6% 13% 7% % 1% 6% 37% 45% Institutional investors Property Companies Corporations International Investors Construction Companies Domestic Funds Other Investors 45% 2% 8% 14% 29% 22% 5% % 8% 13% 36% 32 The average size of property transactions decreased markedly in The year s biggest transaction was only executed in December, when pension insurance company Varma bought a 156 million portfolio from Kesko. In addition, there was only one transaction exceeding 100 million that being a 120 million deal between Etera and Commerz Real Estate. The transactions market is expected to recover, at least moderately, in However, the year has started very quietly, with just a few major transactions recorded by mid-february. Property market professionals are optimistic about both domestic and foreign investment demand. The increase in liquidity might emerge both from the repressed need for portfolio restructurings and increased pressures from lenders on the most leveraged portfolios. However, no major distressed sales have been carried out so far, as banks seem to remain patient so long as investor cash flow can cater the interests. Year 2010 has started quietly Measured by the KTI Index, the total return on the Finnish property market decreased to 3.8% in Capital values decreased by 2.5%, while net income remained stable at 6.4%. The performance was disrupted mainly by the increase in valuation yields. Contract rents continued increasing slightly, but occupancy rates decreased by some 1 percentage. In comparison with other asset classes, property performed badly due to strong performance of the equities market, in particular. 3% % Properties (KTI Property Index) Bonds (Sampo Government Bond Index B) Equities (OMX Helsinki Cap GI) Property Equities (OMX Helsinki Real Estate GI) Source: KTI Total returns of different asset classes Source: KTI, OMX, EFFAS

33 5. Property sectors market structure and practices 5.1 The office market: increasing vacancies, pressure on rents Stock The total stock of office space in the main Finnish cities amounts to some 11 million square metres. Of this, more than eight million square metres is located in the Helsinki metropolitan area, the dominance of which in the Finnish commercial property market is greater than in many other European centres of the same size. The office stock in Helsinki region has increased by more than 450,000 sqm during the past three years through completions of newly or redeveloped office space. Other growth centres, the Tampere and Turku regions, in particular, also accommodate significant office stocks, amounting to some 940,000 and 710,000 sqm, respectively. Players Offices have typically played a dominant role in Finnish institutional property portfolios. In the KTI Index, for example, offices currently represent some 34% of the total database. However, their share has decreased constantly during the past few years. The largest proportion of investable office stock is multitenant office buildings, typically located in city centres and Commercial property stock in major Finnish cities, Helsinki Metropolitan area Helsinki Espoo Vantaa Tampere Turku Oulu Kuopio Jyväskylä Retail Office Industrial and warehouse sqm Source: Statistics Finland Main office areas in the Helsinki metropolitan area 33

34 Total returns by property sector 2009 Capital Growth Income All Property 3,8 % Offices 2,7 % Retail 2,6 % Industrial 4,5 % Residential 7,5 % -2,5-3,5-3,7-3,2 6,4 6,4 6,5 7,9 1,8 5, sqm Source: KTI specific office areas. The second category is single-tenant buildings used typically for company headquarters. The third office category is business park type properties located by good traffic connections. This category, in particular, has been increasing quite rapidly in recent years. Large institutions tend to invest in all these office property types. During the past few years, foreign investors have invested in all these office categories, as well. The biggest investors in the office sector include large Finnish institutions, e.g. Varma and Ilmarinen; listed companies Sponda and Technopolis, as well as some specialised non-listed domestic funds; e.g. CapMan s and Aberdeen s funds. Foreign investors involved in office transactions in include mainly German funds, managed by e.g. Deka, Commerz Real, IVG and UBS. Rental practices Rental practices in the office market are varied. The terms of rental agreements differ significantly between different office sub-categories. In multi-tenant office buildings, rents are typically gross and an indefinite lease term is commonly applied. Active market players, such as property companies and some pension funds, favour gross rents. In this kind of agreements, effective property management is crucial, as the cost risk is carried by the investor. Typical operating costs for office properties vary between 2.50 and 3.50 per square metre, depending on the location and characteristics of the building. As such, they might represent a significant proportion of the gross cash flow. In an indefinite lease agreement, both parties can terminate the contact within the agreed notice period, which might be three, six or 12 months. Fixed lease terms are commonly applied in larger office units, which are typically developed for a certain occupier. In single-tenant buildings, the terms are usually quite long, between ten and 20 years. In these agreements, net rents are commonly applied. These kinds of agreements are also typically applied in sale-and-leaseback deals, with lease lengths varying between five and 15 years. 34 Photo: Kimmo Torkkeli

35 Business parks compete with flexible agreements and extensive service supply. Service options comprise typical business services, such as reception, security, cleaning, catering, postal services and meeting facilities. Business park rents typically consist of the actual rent plus a separate service charge. Rental agreements are normally fixed term for three to five years. Office rents are typically linked to the Cost of Living Index. The office market in 2010 The current market downturn has affected office market segments somewhat differently. On one hand, prime offices have retained their strong position in the market, and their rents have remained relatively stable. However, on the other hand, some occupiers might be attracted by lower rent levels, which might be more easily offered in secondary locations. The Helsinki central business district (CBD) retains its position as the top office location in Finland. That is also where rents and vacancies have showed the strongest performance recently. The development of the KTI rental index turned slightly negative in According to Catella, the vacancy rate of the CBD stands currently at ca. 7%. Other attractive office areas in the Helsinki metropolitan area with modern stock include Ruoholahti in Helsinki, Keilaniemi and Leppävaara in Espoo and the airport area in Vantaa. In cities outside of the Helsinki region, offices are typically concentrated in city centres and one or two office areas outside city centres. At the end of 2009, there were only few ongoing new office development projects in the Helsinki metropolitan area. Additionally, there are some redevelopment projects of existing space undertaken with the intent to increase attractiveness through improved quality. Outside the Helsinki region, there were some ongoing new office development projects in Tampere and Kuopio. In the current letting market situation, tenants have a strong bargaining position and can negotiate improvements and rental levels, among other things. In the beginning of the contract, some rent-free period can be applied, or the rent can be stepped, e.g. increased at an agreed pace during the agreement term. According to Catella Property, the office vacancy rate currently stands at 12.3% (Q4 / 2009) in the Helsinki metropolitan area. In a barometer survey targeted at property professionals in late 2009, the vacancy rate was expected to increase in all major cities within the next year. Office projects completed in Helsinki metropolitan area Rentable area, sqm* sqm In 2009, some 150,000 sqm of new or redeveloped office space was completed in the Helsinki metropolitan area * If information on rentable area hasn t been available, rentable area has been estimated based on gross area information. Sources: KTI, Reed Business Information Total returns on office investments Leasing office space has been quite challenging during the past year. Job-cuts, weakening corporate results and increased economic uncertainty have decreased occupiers space needs. At the same time, the supply has increased markedly in the Helsinki metropolitan area, in particular. Vacancy rate for 0 offices will increase in Total return Income return Capital growth Source: KTI

36 36 Development of prime office yields % Q2 / 2007 Q4 / 2007 Q2 / 2008 Q4 / 2008 Q2 / 2009 Q4 / 2009 London Stockholm Paris Helsinki Oslo Source: Jones Lang LaSalle, KTI (Helsinki) The development of rents and vacancies vary strongly between sub-markets, with the prime office locations being hit less than non-prime locations and buildings. In the RAKLI KTI barometer survey, rents for prime offices in Helsinki CBD were expected to fall by 3% in In this sense, the outlook was most negative for Espoo, where rents were expected to decrease by 5%. However, the decrease is more significant in non-prime premises and in areas suffering from high vacancies, in particular. Investment demand for offices continued decreasing during 2009 with offices representing only 22% of the low investment volume. Total returns for offices decreased to 2.7% in This represents a clear decrease compared to the previous year s 4.9%. Total return consisted of a capital growth of -3.5% and an income return of 6.4%. Capital growth was pressured by increasing valuation yields, while rental values remained stable. Income return remained stable despite the 1 percentage decrease in occupancy rates. Prime office rents, Q4/2009 Rents and yields in Helsinki and other European capitals In terms of yields, rents, as well as vacancies, the Helsinki office market seems to be less volatile than many other European capitals. The yield compression, which lasted from 2004 until 2007, never pressed even the prime yields below 5%. Yields then increased between 2007 and 2009, with the correction now appearing being over. According to RAKLI KTI Property barometer, the yields have increased by some 0.8 percentages from their lowest level. During the market upturn, the prime office rents increased by some % per annum in Helsinki CBD. In the current downturn, they just started to decrease in the latter half of The market professionals views on prime office rents in Helsinki CBD, for instance, showed a moderate decrease of 4% in The retail market: stronger performance so far Stock The total stock of retail space in major Finnish cities amounts to ca. 7 million sqm. Of this, almost half is located in the Helsinki metropolitan area. The overall outlook for retail remains clearly more positive than that of offices. This applies for rents, vacancies, as well as new development. Retail development has been active in recent years in all major cities. Timing-wise, construction of new retail space was first concentrated in the Helsinki metropolitan area, where several major projects were completed in In 2009, new shopping centres opened in, for example, Tampere, Turku and Mikkeli. There are still several ongoing construction projects, which will add to the retail space in Tampere, Jyväskylä and Kuopio regions, in particular. Retail investment has increased in attractiveness in recent years, and retail currently represents some 24% of the total value of the KTI Index database. Its share has mainly been strengthened through the completion of new developments in investors portfolios. London Paris Milan Moscow Dublin Stockholm Madrid Oslo Amsterdam Helsinki Brussels Warsaw Budapest Berlin Copenhagen e/sqm/year Source: Jones Lang LaSalle, KTI (Helsinki)

37 TOP 10 Shopping Centres in Finland Center Retail GLA Main Owners Location ITÄKESKUS Wereldhave Finland Ltd HELSINKI SELLO KEVA, Etera, Pension Fennia ESPOO IDEAPARK Private investors LEMPÄÄLÄ JUMBO Rodamco Europe, Pension Fennia, HOK-Elanto, Kesko Plc VANTAA ISO OMENA Citycon Plc, Gic ESPOO MYLLY Kauppakeskus Mylly Ltd RAISIO HANSA Several owners: institutions, non-profit fund, property companies TURKU TRIO Citycon Plc LAHTI SKANSSI Capman Real Estate Fund II TURKU KAMPPI Protego Nordic Retail Fund HELSINKI Source: Finnish Council of Shopping Centres Players Finnish pension funds, property companies, international investors, local investors and owner-occupiers comprise the main investor groups in the Finnish retail sector. In recent years, also many foreign investors have acquired retail properties in Finland. The ownership of shopping centre properties is concentrated in big investors portfolios. The Finnish shopping centre market is dominated by Citycon, who currently owns 22 shopping centres in Finland. Some Finnish pension institutions own whole, typically regional, shopping centres, but also often enter into joint investments with other investors in bigger centres. For example, the Sello shopping centre in Espoo is owned jointly by three pension institutions. The Finnish shopping centre market has also attracted foreign investors, such as Wereldhave, Rodamco- Unibail, ING Reim, Protego Real Estate and GIC Real Estate. Domestic property funds, such as those managed by Aberdeen and CapMan, have also invested in shopping centres, concentrating in smaller centres in the Helsinki area and some larger ones in other cities. Also, Sponda owns some 500 million worth of shopping centre properties. Of the several major shopping centre projects planned in Finland, not many will start before the revival of the market. High street shops are typically located in CBD office buildings, and, therefore, major office investors, such as Sponda and Ilmarinen, also are significant retail owners. High street shops typically compete for consumers with out-of-town shopping centres. Therefore, in many regional cities, the attractiveness of city centres has been increased 37 Photo: Citycon

38 through facelifts of the space supply, extending pedestrian areas, as well as by increasing parking facilities. Hypermarket and supermarket investments are traditionally favoured by Finnish institutions due to the typically long leases and secure cash flow. This sector has also attracted foreign investors recently. Retail operators, SOK and Kesko, in particular, remain major owners of hypermarket and supermarket buildings. There are still several, typically 20,000 30,000 sqm hypermarket development projects, going on in different parts of the country. Rental practices Rental practices in the retail market vary significantly according to both type of retail unit and the preferences of the investors and tenants. Rental agreements are normally longer in retail than in the office market. Fixed terms are more commonly applied in the retail market, as location is a key factor in the retail trade, and tenants want to ensure this with agreements. The typical minimum fixed term for retail space is three years. In many cases, agreements are first made for a fixed period and are then continued for an infinite time period. These kinds of terms are typically applied in high street shops especially. In hypermarket and supermarket properties, investors are increasingly cash-flow driven, and agreements are typically relatively long-term contracts with net rent. In shopping centres, anchor tenants often have leases of five to ten and even 15 years, with renewal options sometimes applied in shorter leases. Other tenants have typically shorter leases. The use of turnover leases is gradually increasing in shopping centres. The retail market in 2010 The outlook for retail property market remains clearly more positive than in the office market. Market conditions do, however, affect different types of retail units differently. Even though overall retail sales decreased by 1.6% in 2009, sales of consumer goods continued to increase by almost 2%. The biggest hits were in durable goods, such as car and furniture sales, due to the economic uncertainty and consumer increased interest in saving during the beginning of the year, in particular. Generally speaking, sales of expensive and luxury products were affected more than daily, more affordable goods. The differing impact on retail sales between sectors also resulted in an increase in the variation of retail property performance. In the best shopping centres, it is still relatively easy to find a new tenant for a vacant space, even though the number of potential tenants has decreased. Rents have remained stable in the most popular shopping centres. However, affordability varies significantly between different retailer types. In the Helsinki CBD, rents for prime high street retail have continued their relatively strong development, even though the sharp increase of seems to have lessened, and even turned to a slight decrease. According to the RAKLI KTI barometer survey, prime rents decreased by some 3% in Rents are expected to remain stable in However, overall market sentiment suggests that even the retail rental market will become tighter during Between 2005 and 2007, retail sector was the best performing property sector with total returns supported by decreasing yields, increasing rental values as well as strong cash flow. The returns were strengthened by the improvement in the quality of the retail space included in the KTI Index. In 2008, retail lost its top position to residential. In 2009, total return on retail fell further, and stood at 2.6% Returns decreased because of the negative capital growth of -3.7%. Thanks to increased rent passing, income return increased slightly, standing at 6.5%. 38 Prime retail rent in the Helsinki CBD eur/sqm/month Source: RAKLI-KTI barometre survey

39 Total returns on retail investments % Rental residential sector the strongest performance in 2009 Stock Total return Income return Capital growth Source: KTI There are some 2.5 million dwellings in Finland. Of these, about 40% are single-family homes. More than 44% of the dwellings are in apartment buildings. The average size of a Finnish household has decreased constantly and is currently 2.1 persons. Therefore, the demand for smaller dwellings has been increasing steadily, especially in urban locations. Two-thirds of Finland s housing stock consists of owneroccupied homes, and home ownership is widespread in all forms of housing, including apartments as well as detached and terraced houses. There are slightly less than 800,000 rented dwellings in Finland. Of these apartments, ca. 50% have been provided with some kind of public subsidy either state housing loans or an interest subsidy. In recent years, the dynamics of the housing market has been affected by the overall development of the economy and conditions in the financial markets. In early 2000s, easing availability of finance strengthened the demand for owner-occupied housing, which caused an increase in housing prices. At the same time, rental demand was stable or even decreasing, which made the net income available from residential investments non-attractive. This resulted in a decline in the supply of rental apartments in favourable locations, in particular, as it was attractive to realise profits of previously rented apartments, which was done by private investors, especially. In the latter part of the 2000s, however, high house prices and relatively moderate rental levels made rental housing more attractive for tenants again. This resulted as a strong 7 10% annual increase in rents for especially small apartments and centrally located dwellings between 2006 and Players The players in the rental residential market vary according to the sector. In the subsidised market, municipalities are the major players, with e.g. the City of Helsinki owning some 43,000 rental apartments. There are also some significant private, non-profit companies in the market (e.g. Sato, VVO, and Avara). There are various forms of public subsidy for the supply side; some have specific strict rules for tenant selection and rents are regulated, whereas other forms of subsidies allow a more market-oriented approach. On the other hand, tenants are also subsidised through public housing support. Of the rental apartments in the non-subsidised free market, more than 50% is owned by small investors, mainly individuals. The so-called professional residential investment market currently consists of some 150, ,000 dwellings. The scattered ownership affects the rental markets and results in great differences in market practices, rental levels and professionalism of players. Some pension funds and insurance companies have traditionally had significant residential property investment portfolios. However, starting from the early 2000s, some players sold their residential properties because of their typically low net cash flow as well as their management intensiveness. Some of the institutions sold their residential 39

40 40 properties to big specialised companies, such as Sato and VVO. As a result, pension funds Varma and Ilmarinen are currently big owners of these companies, and can thus exploit an indirect investment strategy. However, they both still also hold significant direct portfolios comprising more than 4,000 dwellings. There are currently also some non-listed property funds specialised in residential property investment, including funds managed by Icecapital, Asuntoturva and Kiinteistö- Tapiola. These funds have both institutions and private individuals as investors. The first, and currently only, foreign investor in the Finnish residential market is WH-Asunnot, a subsidiary of Danish property-development company KE Project A/S. Housing construction The long-term need for new dwellings is estimated to be around 30,000 dwellings per year. Of this, some 12,000 13,000 are needed in the Helsinki region. These targets have proven a challenge. During the economic upturn, new construction concentrated on owner-occupied housing. As the financial crisis started, the demand for new residential dwellings collapsed, new starts were frozen, and the stock of unsold dwellings increased in developers balance sheets but only temporarily. With the commencement of the financial crisis, the Finnish government introduced new tools to boost housing construction. By targeting stimulus actions in housing construction, the government has tried both to support employment in the construction sector while increasing the supply of moderatelypriced housing. The stimulus actions targeted at the housing market include interest subsidy for new production, as well as subsidies for renovations of older buildings. The stimulus actions have worked well in new housing construction. The quota of the interest subsidy was used rapidly, and some 12-13,000 new subsidised dwellings were started in 2009, of which about half are located in the Helsinki region. The subsidy will continue in 2010, as well. Towards the end of 2009, the stock of unsold dwellings diminished. Additionally, the production of owner-occupied, free market housing started to pick up again. Rental practices Rents for free market rental dwellings were gradually deregulated during the 1990s. Currently, there are no restrictions for rental periods or rental levels. Rental agreements are typically made for a certain period, such as a year, and, afterward, are usually valid for an indefinite period. After the fixed period, the tenant has the right to terminate the contract after an agreed notice period, typically one month. The landlord can only terminate the contract under certain specific conditions. Rents are typically indexed with the cost of living index being the most used. Residential construction activity in Helsinki metropolitan area kem permits starts completions Source: Statistics Finland The residential market in 2010 Residential prices turned towards a decline in the second quarter of 2008 after a long period of constant growth. Between mid-2008 and mid-2009, prices for old residential apartments decreased by 7.2% in the Helsinki metropolitan area. After that, however, as the availability of housing loans eased and consumer confidence strengthened, transactions volumes and prices started to increase again in all major cities. During the last quarter of 2009, for instance, prices for old dwellings in the Helsinki metropolitan area increased by 11.8%, compared with the corresponding period in the previous year. By the end of 2009, the decrease had been more than compensated. Demand for rental housing is still mainly targeted at small apartments in the major cities. However, it seems that the increase in rents even in these market segments is levelling, and stable development or slight increase is expected for next year. Demand for bigger rental units remains moderate, and their rents are even expected to decrease in some areas. Occupancy rates of residential portfolios remain typically high, at levels of 96 98%. Increase in residential rents is levelling From an investment point of view, residential is now considered as a stable property sector, and its relative attractiveness has increased together with the turbulence of commercial property sectors. As in 2008, residential was the best performing sector in the KTI Index in 2009, with a total return of 7.5%. It was the only sector with positive capital growth, amounting to 1.8%.

41 Prices and rents of dwellings, Helsinki metropolitan area Rent EUR/m 2 /month, HMA Rents of non-subsidised rental dwellings, Helsinki Metropolitan Area Prices of Dwellings in Old Blocks of Flats, index 1983=100, Helsinki Metropolitan Area Price 1983=100, HMA Source: Statistics Finland Total returns on residential investments % Total return Income return Capital growth Logistics market a developing property sector Stock Source: KTI The industrial and logistics property stock amounts to some 15 million square metres in major Finnish cities. Of this, the Helsinki metropolitan area accounts for more than 50%. The industrial property market can be divided into various sub-categories with varying market structures and practices, and a heterogeneous investor and customer basis. Large industrial corporations manufacturing properties, light manufacturing properties, and modern warehousing and logistics properties are the main sub-categories in this sector. Of these, the stock of logistics properties especially has been developing rapidly in recent years as a result of both increasing demand and new traffic connections. This relatively late emergence is partly caused by major retail companies sophisticated centralised warehousing systems, which are self-maintained, and have dominated the market previously. Players Owner-occupation is very common in large manufacturing properties especially. In the light manufacturing property market, the ownership structure is more diverse, with occupiers, property companies, pension and insurance companies, individual investors, and municipalities as examples of investors. Owner-occupation has, up until very recently, been relatively common in the logistics market as well, but this situation has changed slightly in recent years. This emerging sector is attracting new investors including domestic institutions, property funds and foreign players. Sponda is the most significant domestic developer and investor currently active in the logistics market. It has an extensive portfolio of logistics and warehousing properties in the Helsinki area. Sponda also acts in this market through two non-listed funds that have domestic institutions as investors. Sponda also is a strong player in the new Vuosaari harbour area, where its PortGate project comprises some 70,000 sqm of logistics and warehouse space. Market practices Because of the heterogeneity of both the available stock and user needs, rental practices vary in the industrial and logistics markets. Rents are typically net or triple-net rents. Traditional Finnish gross leases are only used for smaller premises in multi-tenant buildings. In fixed-term contracts, the period is typically ten or 15 years, and rents are mainly determined according to the rating of the tenant. 41

42 The industrial/logistics market in 2010 Vacancy rates for modern industrial and logistics properties have been relatively low in recent years. Rents have remained fairly stable or have increased slightly in recent years. Logistics and industrial properties maintained their relative attractiveness also in the quiet investment market in They accounted for some 27% of the year s total investment volume. The biggest transactions in this sector included some sale-and-leaseback deals with domestic institutions and funds as buyers, and domestic corporations, such as Finnair, Panostaja, Nurminen Logistics, and Nokia Siemens Network as sellers. In the Helsinki metropolitan area, major new logistics projects are currently carried out by owner-occupiers. The biggest ongoing project is the development of the 75,000 sqm logistics centre of the S Group in Sipoo, located northeast of Helsinki, which will be completed in spring Also, another retailer, Anttila, is developing a 19,000 sqm logistics centre in Kerava. Elsewhere in Finland, there are some ongoing logistics development projects in, for example, the Turku and Lahti areas. Industrial / warehouse properties produced a total return of 4.5% in This comprised a capital growth of -3.2% and income return of 7.9%. Total returns on industrial property investments % Total return Income return Capital growth Source: KTI 42

43 6. Property markets in different regions outlook for 2010 The prime commercial property market areas in Finland are located in the Helsinki metropolitan area, which consists of the capital city of Helsinki and the immediate neighbouring cities of Espoo, Kauniainen and Vantaa. Because of its volume and liquidity, the Helsinki metropolitan area is the most significant investment region for domestic and international investors. The second-tier markets typically the regional growth centres of Tampere, Turku, Oulu and Jyväskylä are traditionally popular among domestic institutions, but have also attracted some international capital recently. In these cities, there are some local players that operate only in these market areas. Many large investors define the Helsinki area and these growth centres as their target markets in their investment strategy, and have thus sold their assets located in other regions. Property markets in smaller city regions have traditionally been mainly dominated by local investors and owneroccupiers. 6.1 Helsinki metropolitan area: the dominant property market area in Finland The relative importance of the Helsinki commercial property market is significant within the Finnish context. This can be explained by the dominant position that Helsinki has in Finland, as there are no other large city regions. Thus, nearly all major company headquarters, as well as many government agencies, are located in the Helsinki metropolitan area. Strong internal migration from other parts of the country continues to strengthen the economic base of the Helsinki metropolitan area. Population: Helsinki: 583,000 Espoo: 244,000 Vantaa: 198,000 Helsinki region: 1,300,000 Economic base: Professional services, high-tech industries, public sector services The Helsinki metropolitan area, which consists of the cities of Helsinki, Espoo and Vantaa, has a dominant position in the Finnish commercial property market. Within this area, the Helsinki CBD has an undisputable position as a prime office market area. Other prime office sub-markets in the Helsinki region include Ruoholahti in Helsinki, Keilaniemi in Espoo and airport area in Vantaa. Demand for offices in Helsinki increased steadily during the economic upturn. During 2008, the demand started to decline, and towards the end of the year, the increased cautiousness started to affect rents and take up. Prime rents, however, have decreased only slightly starting from late According to Catella, vacancy rate for offices in Helsinki increased to ca. 11.4% by Q4/2009. In the entire Helsinki metropolitan area, the vacancy rate stood at 12.3%. The Helsinki metropolitan area also accommodates the prime retail areas of Finland. The main retail submarkets include the Helsinki CBD, regional centres of Tapiola in Espoo and Tikkurila in Vantaa, as well as various major shopping centres located adjacent to prime traffic connections. Other locations mainly accommodate supermarket and hypermarket properties. Office rents are decreasing prime offices suffering the least 43 The structure of the economy, Percentage of jobs, 2008 Services 42,6% Agriculture and forestry 0,6% HELSINKI REGION 2008 WHOLE COUNTRY 2008 Retail 15,1% Public sector 25,0% Manufacturing 16,7% Services 31,4% Agriculture and forestry 4,7% Retail 12,4% Public sector 26,5% Manufacturing 25,0% Source: Helsinki Chamber of Commerce

44 The Helsinki Central Business District The Helsinki CBD is the most important single property sub-market in Finland. This geographically small area is the most attractive office location, and also the undisputed centre of retail trade in Finland. It also accommodates the most important public sector administrative functions, as well as several cultural buildings. Office users in the city centre are mostly companies offering business-to-business services business consultancies, law firms, investment banks, etc together with public-sector organisations. The majority of the office stock in the CBD was built in the early 1900s. Despite the lack of new supply, the stock is mostly well maintained and refurbished, and responds well to the needs of occupiers. The supply of modern office stock has been increasing rapidly in other areas in the Helsinki area. Nonetheless, the Helsinki CBD has maintained its attractiveness and remains the most preferred office location in the region. It also seems to suffer the least from the market downturn in terms of the development of both rents and vacancy rates. Prime office rents in Helsinki CBD decreased only slightly in 2009 The KTI rental index for the Helsinki CBD decreased by 1.1% in The vacancy rate has increased slightly, but stand still at a low level of ca. 5%. However, the rental activity decreased significantly in 2009 in terms of both number and volume of new agreements. In 2009, new office rental agreements comprised some 37,000 sqm of leasable space, whereas in the previous year, the figure was some 61,000 sqm. Within the CBD, the Kamppi area has strengthened its position in recent years thanks to new and refurbished office and retail supply. Shopping Centres Kamppi and Forum, which are very near to each other, are the largest shopping centres in the CBD. Other, although smaller, shopping centres in the city centre include Kämp Galleria and Kluuvi in the Kluuvi area. New retail space will also be created in the CBD by the Sponda s CityCentre redevelopment project, as well as by the 10,000 sqm extension of Stockmann s department store. These projects will be completed in The rents for prime retail space in the city centre increased steadily until late Since that the development has been stable, even though the very best premises are still being let for very high prices. The premises in the CBD are almost fully occupied. Prime retail rents are expected to remain stable or decrease very slightly within the next year. Even though the potential for new development in CBD is limited due to limited supply of land, there are some major projects and plans that will impact the CBD s profile. Around the Töölönlahti Bay area, a concentration of cultural and administrative buildings will be extended with the development of the new Music Centre to be completed in Also, other cultural and office buildings are planned in the area. Ruoholahti Ruoholahti is a modern office area near the CBD at the starting point of a major western radial route, which was built starting in the 1990s. Ruoholahti has attracted a variety of office users, such as IT/high-tech and business consultancy companies, as well as many other industries. The area has consistently attracted tenants, rents have increased steadily and vacancy levels have remained low. Office rents per square metre are typically slightly below the level of the CBD, despite in the new stock, where the rents are relatively 44 Office rent index and vacancy rate in Helsinki Vacancy rate % Vacancy rate (Helsinki) Rental index (Helsinki, CBD), 1993=100 Rental index Source: KTI, Catella Property

45 high. Of the major office submarkets, Ruoholahti seems to have suffered the least from the downturn, to date. The Ruoholahti office market remains healthy despite the downturn In recent years, the new development in Ruoholahti has concentrated in the adjacent Salmisaari area. The recently completed major office projects in the area include those carried out by Varma, Ahlström Capital and Technopolis, among others. Pension insurance company Varma, Sampo Bank and construction company Lemminkäinen have recently moved their head offices to Salmisaari. Currently, there is a leisure property development project carried out, to be completed in There are still potential for new office development, but the planned projects have not been started due to low space demand. Pasila Sörnäinen Vallila Other traditional office areas situated somewhat out of the city centre include Pasila, Sörnäinen and Vallila. These areas are characterised by a multifaceted office supply. There are significant differences in rental levels between the new and old property stock in these areas. As these areas are typically considered as secondary locations, compared to the CBD and Ruoholahti, they have also suffered more from the economic downturn. Tenants bargaining power is typically strong in these areas in new lettings. There is also some development potential in these areas. In Pasila, together with the adjacent Ilmala area, major new office projects have been built and planned. One ongoing project in the area is Pension Fennia s Visio Business Center, the second phase of which is under construction. Another major business park concept is Forum Virium, which is a joint project between Sponda and the Finnish broadcasting company YLE s pension fund. Retail and residential buildings are being planned closer to the Pasila railway station. Next to Pasila is the developing Ruskeasuo office area. Recent development projects in the area include the business parks developed by NCC, as well as the new headquarters of the residential investment company VVO. Also, Skanska has major development plans in the area, including its own head office project, which will be started in early Another developing area in the vicinity of the city centre is Kalasatama, adjacent to Sörnäinen, where the land was released when the harbour moved its operations to Vuosaari. The first new office building in the area was completed in early 2010, with several others being planned. Other areas in Helsinki Pitäjänmäki, situated seven kilometres north of the city centre, is an old industrial area that has been converted into mainly office use in s, comprising both multitenant office buildings, some head-office type properties, as well as some modern business parks. Pitäjänmäki is one of the areas in Helsinki that has suffered from fluctuating demand, which has caused volatility in rents and vacancies. Because of the heterogeneous space supply, rental levels vary markedly within the area. Investors have attracted tenants to older buildings by relatively low rents, whereas in the modern stock, rents are relatively high. Vacant space has increased markedly since the start of the economic downturn. Herttoniemi is an area five kilometres east of the CBD, adjacent to both the eastern radial route and the metro line. Herttoniemi is an old warehousing area, which is undergoing a slow transition to a more diversified area with office and retail supply. The office vacancy rate has increased recently in the area, currently standing at some 25%, although the amount of vacant space measured by floor area is not as significant because of the relatively small office stock. New projects in the area are being on hold due to low demand. Further east is Itäkeskus located at the junction of Ring Road I and the eastern radial route. The Itäkeskus shopping mall is one of the largest shopping centres in northern Europe with a leasable area of 112,000 square metres. In the immediate vicinity of the shopping centre, a 14,000 square metre hypermarket building for S-Group was completed in early Photo: Sini Pennanen

46 Several major urban development areas in Helsinki There are major plans for development in several parts of the city. In the next coming decades, these plans will affect significantly both commercial and residential property markets. City of Helsinki, which is the major landowner in these areas, is an active promoter of the development of these areas. From a commercial property market point of view, the most interesting developing sub-markets include Pasila, Kalasatama and Jätkäsaari. Pasila the key area for commercial property development in Helsinki As it stands, Pasila is already one of the main office areas in Helsinki. It is a major railway hub, the position of which will be further strengthened through a new railway connection to the airport. Altogether, plans for the Pasila area comprise some 1,000,000 sqm of new office and retail space to be built during the next two decades. The Pasila area can be divided into six or seven sub-markets with slightly different profiles. Areas east and west of the railway (Itä- and Länsi-Pasila) are existing office areas, with the eastern side accommodating both public and private sector property users. In the western side, there is mainly head-office type, single-user office buildings. The areas under the most significant development include central Pasila, Ilmala, the old machinery area, and northern Pasila. The central Pasila area, surrounding the railway station, will undergo a major change in the coming years with some 100,000 sqm of new space being planned. Of this, ca. 10% would be for residential use, and the rest for mainly private sector office and retail use. In this area, the Finnish State is the biggest landowner. In the central Pasila area, some exceptionally high buildings (for the Finnish context) are being planned. The development of the area is planned to start in Ilmala area, next to western Pasila, is a developing area known for media companies, in particular, including the Finnish National Broadcasting Company YLE and MTV Media. New construction in the area started in To date, among others, the headquarters of insurance company Fennia has been completed so far. Forum Virium is a new business park concept planned in the area, targeted for companies representing digital media and modern technologies. Altogether, the gross area of the planned four phases of the centre will comprise some 36,000 sqm. Visio Business Center is another business park concept in the area, the second phase of which will be completed in In the old machinery area of VR Group (the national rail company), new and old buildings will be developed in parallel, and the area will comprise both office and residential properties. Northern Pasila is another area combining working and living where there are plans to increase the number of jobs from 2,000 to 7,000 within the next decade or so. Thanks to good traffic connections by both road and rail, the area is suitable for logistics operations, and it currently accommodates, among others, Itella, the governmental mail, information and logistics service company. Kalasatama combining working and living Kalasatama, a 135 hectare area next to Sörnäinen, used to accommodate Helsinki harbour operations, as well as some industrial companies. When the harbour was moved to Vuosaari in 2008, this area opened for new development. In the future, the area will comprise more than 500,000 sqm of commercial property and will accommodate some 10,000 jobs. The accessibility of the area was improved through the completion of a new metro station in The first office project in the area, the 11,800 sqm Rantatie Business Park, developed by Lindström Invest, was completed in early Other players with office development plans in the area include SRV, pension insurance company Varma, and Cargotec. There are also major plans for developing new retail space close to the metro station, as well as premises for public services. In total, these premises, called Kalasataman portti (Gate of Kalasatama), will comprise some 100,000 sqm of retail and office space. Next to this central area, some 16-floor residential buildings are planned. Jätkäsaari Jätkäsaari, located in the southern point of the city, is another area freed for new use after the completion of the new Vuosaari harbour. All goods traffic operations moved to the new harbour in 2008, and currently only a passenger terminal remains in this western harbour in the Jätkäsaari area. The bridge connecting Ruoholahti and Jätkäsaari will be completed in By 2020, the area is expected to host some 16,000 residents and 6,000 jobs. The area has both residential and commercial space. New office space, totalling some 36,000 sqm, will emerge both through the redevelopment of some old harbour-area buildings and new construction. Retail space will be developed mainly in the lower floors of residential buildings. The area will also accommodate at least one hotel building. Source: City of Helsinki / 46

47 Espoo a city with several regional property market areas Espoo has a multifaceted property stock scattered in several regional submarkets. Areas around the western radial route include Keilaniemi, Otaniemi, Tapiola, Niittykumpu and Matinkylä. These areas are expected to get a boost from a west-bound metro line to be completed by Further along the Ring Road I is the Leppävaara area, which has significant and diversified office stock, the modern shopping centre Sello, a traditional shopping centre Galleria and also abundant residential supply. West of Tapiola, a new Suurpelto area is currently being developed, with a vision of housing some 7,000 residents and numerous companies. The divergence of the property stock of Espoo can be seen in varied rental levels in the office market, in particular. Due to increasing supply, vacancy rate of offices has increased markedly, and is currently over 16.5%, according to Catella. Vacant space can be found in both older and modern office stock. The areas of Keilaniemi, Tapiola, Otaniemi and southern Leppävaara create an increasingly important converging office market area in Espoo. The Keilaniemi area houses several major headquarters including Nokia, KONE, Fortum and Neste Oil. Several new business park projects have been completed in recent years, including the High Tech Center and Swing Life Science Center. In the best premises, the rents are close to the levels of Ruoholahti. However, due to the increased supply, there is also a lot of vacant space in the Otaniemi-Keilaniemi area. The vacancy rate has increased dramatically due to the completion of the new projects, standing currently close to 20%. Espoo s office vacancy rate is the highest among major Finnish cities Espoo s biggest individual office building is currently being built in Tapiola. This building, which has a gross area of some 71,000 sqm and leasable area of ca. 33,000 sqm, will accommodate the headquarters of Tapiola Group. This is the only new office project under construction in the entire city. The Tapiola area is also undergoing a major facelift through the redevelopment and extension of the Heikintori shopping centre. The area is also expected to get a boost from the new metro station, which will be located under the traditional Tapiola retail centre. The west metro will be continued from Ruoholahti to Matinkylä The Helsinki University of Technology, now part of the new Aalto University, is situated in Otaniemi, located in the immediate neighbourhood of Keilaniemi. The offices in Otaniemi mainly have technology companies as tenants. New office space was completed in Falcon Business Park, the third phase of which was completed in In Leppävaara, office supply increased in 2009 through the completions of Polaris Business Park s second phase, as well as Quartetto Business Campus. Both business park concepts have further units in the planning phase, but those are currently on hold. In addition to the centre of Tapiola, retail space in Espoo is concentrated in the Iso Omena (Big Apple) shopping centre close to the western radial route. Some 1-2 km west of Iso Omena, in Suomenoja area, an increasing concentration of big-box type retail units can be found, with several major stores for e.g. furniture, home electronics, and gardening. Also Leppävaara area accommodates plenty of retail space, with the Sello shopping centre as the most important unit. Another retail area is Espoo Centrum, where the Espoontori shopping centre and train and bus terminal are being extended. A new 16,500 square metre shopping and service centre Entresse was completed in late

48 Vantaa: developing airport area is the most active submarket The Aviapolis area around the Helsinki-Vantaa Airport has developed rapidly during the past few years. The main players in the area include the City of Vantaa, Finavia, main property developers as well as property companies Sponda, Technopolis and Julius Tallberg Kiinteistöt. There are currently some 16,000 inhabitants in the area, and number is expected to increase to more than 20,000. The area currently hosts some 35,000 jobs. Traffic connections to the airport will be improved through the development of the Ring Rail Line, scheduled to be completed in 2014, thus linking the airport area with the city centre. Also the Ring Road III is planned to be upgraded in order to find solutions to the increased traffic to and from the Vuosaari Harbour. At the airport itself, a new international terminal was opened in Terminals are also being refurbished and extended, partly due to the construction of the train station. Total returns in Finnish cities % Helsinki Espoo Vantaa Tampere Turku Jyväskylä Kuopio Lahti Oulu Source: KTI 6.2 Other growth centres: Tampere, Turku, Oulu, Kuopio, Lahti and Jyväskylä Aviapolis area is the most active property submarket in Vantaa Tampere Location: 170 km north of Helsinki; the biggest inland city in the Nordic countries Population: Tampere: 211,000 Tampere region in total: 300, Two new office buildings are currently being constructed in Aviapolis practically the only two office projects that were started in the Helsinki area in There are some 15 office projects in the planning phase, amounting to clearly more than 200,000 sqm of gross area in total. Due to the increase in supply and softening demand, the vacancy rate of offices is close to 12% in Vantaa. Because of the modern supply, the rents in the Airport area are relatively high. The 85,000 square metre Jumbo shopping centre is the major retail attraction in the area. In the immediate neighbourhood, the new Flamingo leisure centre comprising hotel, office and leisure premises was completed in late In the vicinity of Aviapolis, Pakkala and Tammisto areas are also important retail areas, favoured by big-box retail units, such as outlets for motor vehicles, furniture and gardening. With the exception of the airport area, Tikkurila is the main office area in Vantaa and the location for most of the city s administration buildings. Because of Vantaa s diversified office stock, rental levels are dispersed. Tampere is the largest inland city in the Nordic countries. Its population exceeded 200,000 in the early 2000s. Tampere is an old industrial city that has recently attracted high-technology businesses as well as service companies. Technology expertise areas in the Tampere region include telecommunication, automation and healthcare technology. The city of Tampere is currently developing active cooperation with the surrounding municipalities of Lempäälä, Pirkkala, Kangasala, Nokia, Ylöjärvi and Vesilahti. Tampere s favourable location and diversified business activities create a strong basis for real estate demand. Tampere is the most active property market area outside the Helsinki region and has attracted both domestic and international real estate investors. However, in 2009, the investment market was quiet and only few transactions were carried out. Of these, the most significant one, the sales of Tulli Business Park s last phase to UBS, was agreed before the downturn. In addition to the city centre, modern office space can be found in the areas of Hatanpää, Tulli and Kauppi. Office supply in the Tulli area has been extended by the construction of the Tulli Business Park, whose last phases were completed in mid UBS has acquired all these buildings. Tampere is also known for its redeveloped industrial properties, both for office and residential use, in the city centre and the immediate vicinity.

49 Tampere is the most significant property market outside the Helsinki area Hervanta is a developing area in the neighbourhood of the Technical University of Tampere located at some distance from the city centre. Technopolis Hermia was extended in 2009 by another ca. 12,000 square metre office building. Technopolis is also currently developing new space in the university area. Besides the Technopolis projects, there is also one new office project, with over 8,000 sqm of leasable space under construction in the city centre. Tampere is thus regarded as a market with a relatively positive outlook for space demand. Prime office rents increased steadily until early 2009, approaching 20/sqm/ month, and vacancy rates remained well below most other Finnish growth centres. However, the amount of vacant space has increased due to both increase in supply and some major lease terminations. The vacancy rate has now exceeded almost 8.0%, and it is expected to increase further because of softening demand. The most expensive retail space is situated along the main street, Hämeenkatu, and in the Koskikeskus shopping centre next to the main street. In the Ratina area, next to Koskikeskus, Sponda plans to develop a new ca. 55,000 square metre shopping centre, although no final investment decision has been made. The city centre is expected to maintain its attractiveness, and retail rents are forecasted to increase slightly or remain stable. In the retail market, some hypermarket projects were completed in 2009 in Tampere or its vicinity. Also the new 25,000 sqm shopping centre Elo was opened in spring 2009 in Ylöjärvi. Retail development still continues briskly, although all the ongoing projects are being developed by owner-occupiers, including IKEA, S Group, and Kesko. Prime office rents in Finnish cities Prime office yields in Finnish cities eur/m 2 /month 28 Helsinki Espoo Tampere Turku % 10 Helsinki Espoo Tampere Turku Oulu Jyväskylä autumn-2009 (autumn-2010) Source: RAKLI-KTI barometre survey Source: RAKLI-KTI barometre survey

50 50 Turku Location: 160 km west of Helsinki; in south-western corner of Finland Population: Turku: 176,000 Turku region in total: 290,000 Turku s economic strengths are based on its two universities and the competences provided by them. The major industrial sectors comprise electronic industries and the traditional metal industry. The proportion of private services in Turku region is higher than in most other Finnish growth centres. The economic downturn has hit the industrial sectors in Turku, and the unemployment has increased although less than in the Tampere and Oulu regions. The Turku property investment market has interested various types of players recently, with international, domestic and local players having been active in the market. In 2009, the investment market remained very quiet, and the most significant transactions were made by local investors. The most active office market in the Turku area is in Kupittaa, located near the university area and next to the railway station. This area is mainly targeted at high-tech, biotechnology and business-to-business service companies, and consists of office and high quality manufacturing space. Abundant development in the area increased the supply mid- 2000s, and some older buildings of the area have suffered from high vacancies. In modern office space in Kupittaa area, rents are higher than those in the city centre. Since a brisk phase of new development in , no new office space has been developed in the Turku region. There are some plans for new offices in the Kupittaa area, and also for one building by the river, close to the city centre. According to Catella, the office vacancy rate in Turku has decreased to some 7.8%, due to the slightly positive net take-up and stable supply. Office rents have increased slightly, thanks to increasing demand and high quality supply. However, the outlook is more negative, with an expected increase in vacancy rates and decrease in rents due to the economic slowdown and increase in unemployment. According to market professionals, the outlook is, however, slightly more positive than for the Tampere region, for example. The retail market in Turku is concentrated in the city centre and some regional centres outside the city, such as Länsikeskus and the Mylly shopping centre in Raisio. The supply in the vicinity of Mylly, located in the Hauninen area, has been extended through several new buildings in Also, the shopping centre itself was extended by some 3,800 square metres of new space in 2009, with a significantly larger extension being planned. In the Skanssi area, east of Turku, a 37,000 square metre shopping centre Skanssi was opened in spring The other major retail plans in the vicinity of the Skanssi centre, alongside the Helsinki motorway, are currently expecting for the revival of demand. There are currently some significant logistics and light industrial development projects under construction in the Turku region. For instance, a 12,000 sqm logistics and office property is currently under construction in the LogiCity area close to the airport. Oulu: the northernmost growth centre of Finland Location: 600 km north of Helsinki Population: Oulu: 139,000 Oulu region in total: 200,000 The Oulu region has been one of the fastest growing areas in Finland since the mid 1990s. Oulu is a university, science and technology city, the influence of which covers all of northern Finland about one-half of the area of the entire country. The Oulu region is regarded as one of the Finnish centres of information and communication technologies, as well as a centre of the medical science and healthcare industries. Unemployment has increased recently in the Oulu region, with the biggest job-cuts taking place in the manufacturing and construction sectors. Oulu s real estate market is large enough to attract domestic pension funds, whose position in the market has remained quite strong. Listed property company Technopolis, originally founded in Oulu, is an important player in the office market. The investment market remained very quiet, with the NV Property Fund s acquisition of a 70,000 sqm industrial and office property in the Rusko area as the most significant event in The most important real estate market outside the central area is the Linnanmaa area north of city centre, which accommodates several high-tech companies and Oulu University, with Technopolis as the biggest single privatesector owner in the area. The quality of the stock in the area is dispersed, which affects the rental levels. Vacancy rate has increased slightly recently. Throughout recent years, the vacancy rate of offices has remained at a very low level. However, it has now increased to more than 7%, according to Catella, which is to the result of both new supply and occupiers interest in moving to smaller premises. In the retail market, there has been a constant lack of supply until very recently. Despite the recent development, the vacancy rate for retail premises is still between 1 and 2% only. Office vacancy rate increasing in Oulu

51 New retail projects are currently being carried out by few owner-occupiers. There are abundant plans for new retail development, both in the city centre and in the neighbouring municipalities, but these plans are likely to only come when the economic activity perks up. Rents for modern premises have remained stable or have increased in prime locations. Jyväskylä Location: 270 km north of Helsinki, in the centre of Finland Population: Jyväskylä: 130,000 Jyväskylä region in total: 142,000 Jyväskylä is a dynamic university town that has a strong emphasis on both traditional industries and new technology. The Jyväskylä region s most prominent business areas cover paper manufacturing, metal industries as well as information technology. Like in almost all Finnish city regions, the number of jobs in traditional industries is likely to decrease in the future. New jobs will be created in private and public services. Jyväskylä s location is favourable, as it is in the junction of several important national main road connections. Improved traffic connections in the area are under discussion through a possible bypass road, which will ease traffic through the city centre. The city centre is the most important office market area in the region, although no new stock has been developed recently. Other office areas in the region with modern supply include Tourula, where old industrial properties have been redeveloped into office use, as well as the Mattilanniemi/ Ylästönniemi and Lutakko areas, with more modern supply. In the retail property market, the Jyväskylä city centre is an important regional centre. The major players include local retailers, as well as some national investors. In the city centre, new retail space is currently being developed through extensions of existing buildings. Outside the city centre, there are some major development projects under construction in Palokka and Seppälänkangas. Developers include both owner-occupiers and investors. The only transactions registered in 2009 were made in the retail market, where pension insurance company Varma made two acquisitions. There are also some major new retail projects in the planning phase, including two new shopping centres. New retail space being developed in Jyväskylä Vacancy rates for both offices and retail space are at a low level. The outlook for the market is also relatively good, with rather high-level of activity in the rental markets, even though there is some downward pressure on both office and retail rents. Office rents in the Tourula / Seppälä areas are close to the ones in the city centre, but might decrease more during the downturn. Retail rents are the highest in the pedestrian shopping district in the city centre, and they are expected to remain relatively stable. 51

52 Lahti Location: 104 km north-east of Helsinki Population: Lahti: 101,000 Lahti region in total: 157,000 Lahti is a traditional industrial city with a strong background in furniture and the food industry. Recently, the emphasis on jobs has transferred to professional services. Because of structural changes in the economy, Lahti has suffered from relatively high unemployment compared to the rest of the country. Occupancy rates for both retail and office space have improved in the Lahti region, even though there are increasing pressures in the rental market. Retail construction has been active also in Lahti, both outside and in the city centre. However, the only significant project currently under construction is a 14,500 sqm logistics centre in the Kujala area, which pension insurance company Varma has invested in. Planned retail projects include some redevelopment projects in the city centre and Laune areas, as well as a major shopping centre in Karisto area. The rental markets are relatively stable, even though the market is very quiet. Kuopio Location: 400 km north-east of Helsinki Population: Kuopio: 93,000 Kuopio region in total: 118,000 Kuopio, a university city and the capital of the province of Savo, is situated in eastern Finland. Traditional industry areas are mostly related to wood. As in most major cities at the moment, the service sector is the biggest employer in the area. The property investor base in the Kuopio property market is dominated by domestic players, consisting of both national and local investors. The retail market of Kuopio is concentrated in the city centre around the main market place. Unlike in most other city regions, there are several office projects under construction in the Kuopio area both in the city centre and in the Technopolis technology centre area. Ongoing retail development projects include mainly units for car and furniture sales. Planned retail projects include both extension of existing retail units in the city centre and some retail park type projects in the Leväinen area. In the office market, vacancy remaided at ca. 4%, according to Catella. In the retail market, there is practically no vacant space. 52 Photo: Sato