7 September 2016, Finland | Corporate Finance | News
The investment market has recovered from the Brexit shock surprisingly quickly, supported by the central banks' preparedness for stimulus measures and the companies' reasonably good performance. The interest decision by the Bank of England in August indicates strong stimulus preparedness, adjusting the key interest rate lower than ever before in the bank's 300-year history.
With the prolonged weak economic growth, the investment market and real economy have partly diverged. Low interest rates increase net asset values although the reason behind these rates is the non-growing economy. However, net asset values should be based on economic growth. As interest rates are predicted to remain low for years, the same forecast applies to economic growth.
However, two long-term trends affect the real estate investment market and override the weak economic growth: an enormous increase in liquidity and dramatic urbanisation. These phenomena affect both Finland and Europe. In Finland, urbanisation is felt even more as we are a bit behind in this regard. As for the increase in liquidity, it results from central banks’ actions and movement of assets from zero interest rate instruments to the real estate market.
Together, these supertrends have created a situation with rapidly increasing demand for housing portfolios and only slowly increasing supply. Another consequence is the record-breaking increase in retail construction. Nearly 80,000 sq.m. of retail space has been completed in the Helsinki Metropolitan Area this year, with 150,000 sq.m. shopping centre projects under way.
For the first time, housing portfolios have now become the highest-volume real estate investment category in Finland. Previously, the real estate market has been dominated either by office space or by retail space. The prime yield requirement for housing portfolios has declined to clearly below 4 %, whereas for offices in the Helsinki CBD, it is now 4.7 %.
The Nordic countries became a stable and interesting investment market
The significance of the Nordic region as a stable investment environment has clearly grown as political uncertainty has increased in other Western countries. Many investors have increased the region’s weight in investment allocation. This also applies to investors within the region: Of the Finnish transaction volume last year, EUR 1.5 billion originated from other Nordic countries, especially from Sweden. Interest by Swedish investors is boosted by the significant difference in yield requirements: In Helsinki, the prime yield is now more than one percentage point higher than in Stockholm. In a low-yield investment environment, this means 30 % higher net cash flow.
Investors are now ready to accept low yield if uncertainty can be reduced by a long lease. As uncertainty has increased, the impact of a long lease on a property’s yield requirement has grown strongly and may be more than -0.5 %. However, investors also react critically to long leases: if the tenant is weak or if the post-lease situation is difficult to manage, investors are hard to find unless pricing becomes opportunistic.
There are no significant changes in intensive population growth in cities, high liquidity and historically low inter- est rates on the horizon in the next few years. The situation seems exceptionally easy to forecast, regardless of economic uncertainty – or perhaps because of it. The chips of the investment market are on the table.
The relative attractiveness of properties when compared to investment instruments is now perhaps higher than ever before. At the beginning of the autumn, this year’s transaction volume was already EUR 5 billion, and we predict that the EUR 6 billion volume record of 2007 will be broken clearly.
