Editorial: Reflationary monetary policy supports the property market

The reflationary monetary policy introduced by the European Central Bank – and low interest rates in particular – strongly support part of the property market. Last year, the Finnish transaction volume exceeded EUR 4 billion, compared to the more or less EUR 2 billion in the previous five years.

However, there is a reason behind the ECB’s reflationary monetary policy: weak economic growth in Europe. Finland’s economy is facing the fourth year of recession in a row. The ECB’s reflationary actions are necessary, but cannot turn the real economy around on their own. 

Besides the low interest rate, also the collapse in oil prices stimulates the global economy. The massive weakening of the euro also strengthens the real economy in export-led countries like Finland. 

Still, there is a similar message behind the weakening euro: the real economy is facing difficulties. Many factors also have a two-sided effect on Finland: for example the oil price reduction not only stimulates the economy, but has a negative impact on export to Russia.

Economy lowers rents, but lifts up prime properties

It is interesting to see that the weak economy creates pressure to lower rents, but at the same time there is strong demand for high quality premises. Prime yields of the best office areas in the Helsinki Metropolitan Area have continued to decline. With an uncertain economy, investment features that are considered safe add to the appeal of properties. Safe features – or the lack of them – are overemphasised.

Common denominators for property transactions taking place last year include prime location, grocery stores, residential or nursing homes or longterm leases. There are logical  reasons for valuing these features in an uncertain economic environment.

Prime yields in the Helsinki CBD have continued to decline all throughout 2014 – while the amount of vacant office space in the Helsinki Metropolitan Area has risen to an all-time high, close to 1.1 million square metres. This is exceptional, since the last times that prime yields in Helsinki were unusually low, were during the economic booms of 1989 and 2007.

Safe features are now key: premises that lack those, remain outside the demand boom. In a  weak economy, a property’s alternative purpose of use after the current lease runs out, is what counts. Local investors that are familiar with the market as well as optional purposes of use, play a significant role in the acquisition of smaller properties.

The amount of vacant retail space in the Helsinki Metropolitan Area grew by a third last year. The prime yield of retail space in the Helsinki CBD exceeds that of offices for the first time in years. Sales expectations of the retail sector continue to be considerably low this year.

Year 2015: record amount of capital looking for return

According to Catella’s study, the amount of capital looking for European investment properties has doubled since 2007 and has reached record figures. Despite the economic risks, Europe appeals to Asian, Chinese, and American investors. Due to the strong increase in available money and the scarcity of prime properties, the market has already turned to secondary objects. Consequently, the volume boom goes beyond safe properties, which, unlike Finland, is already visible in Sweden. Last year, Sweden reached an all-time record transaction volume of EUR 17 billion.

We predict the Finnish transaction volume in 2015 to rise again above EUR 3 billion and prime yields to continue declining – at the same time the amount of vacant office, retail, industrial and warehouse space will grow.

Ahead lies an interesting year with an exceptionally large amount of investment capital looking for investment properties – and return!