Insights | February 15, 2023
Reflections from Business Arena Helsinki
At the recent Business Arena event, now held for the third time in Helsinki, experienced real estate professionals from different sectors gathered to discuss burning topics relating to the Finnish and Nordic real estate market. The day was packed with over 20 presentations and panel discussions involving over 60 experts from Finland and abroad. Roschier's real estate, finance and structuring teams attended the day to get updates on the latest market trends and to share insights in the various discussions.
The topics addressed in the insightful panel discussions included changes in tax legislation that may affect foreign investors, transaction market updates and ways to navigate the insecurity of future market conditions, current strategies in real estate financing, ways to interpret long-term macroeconomic trends, and the role of real estate and investors in times of crisis.
Hopeful tone in an era of uncertainty
As the saying goes, it is very difficult to make predictions, especially about the future. Despite the continuing war in Ukraine, high inflation and rising interest rates, the Finnish and Nordic real estate markets continue to attract strong international interest.
Although some investors continue their “wait and see” approach in anticipation of the re-pricing to continue and some may even exit the market, Finland – among the Nordic countries – is still considered an attractive “safe haven”, and the general expectation is for international investor interest to increase or at least remain at the same relatively high level in the near future. Compared to the situation at the end of last year, it was possible to sense growing optimism over many fruitful discussions with different real estate market players at Business Arena.
In terms of transaction volume, the overall expectation is that Finnish transaction activity for 2023 will fall behind that in 2022. However, with a high level of market uncertainty and the counterbalancing effect of a healthy number of interested purchasers and availability of capital to be deployed, the margin of error concerning this forecast is high.
The beginning of 2023 is expected to continue on the same trajectory as the previous year ended, i.e. there will be activity in the market, but the first quarter will kick off somewhat slower than previous years and the second quarter may also come out weaker. However, during the second half of the year, market activity is expected to start to pick up more broadly as the pricing environment gradually stabilizes and the high level of currently undeployed capital gets to work.
Further, although the first half of the year is expected to be more sluggish than previous years, many speakers and commentators agreed that there are also plenty of opportunities around, especially for buyers with a longer investment horizon and access to capital. In this market environment, equity buyers in particular may try to utilize their competitive edge to exchange higher deal security to discount in pricing. Also, many investors are seeking opportunities in distressed situations, although, so far, the market has experienced fewer “fire sales” than some investors may have hoped for.
The Swedish real estate market has been one of the hot topics in the Nordics and even more broadly for quite some time, and Business Arena Helsinki was no exception. The Swedish listed sector and bond market in particular are closely monitored. This is no surprise given the overall weight of the Swedish market relative to the rest of the Nordics (even with the significant drop in Swedish transaction activity in 2022, the transaction volume was still almost three times that of Finland) as well as very high leverage, approaching maturities and currently very volatile share prices of some of the listed companies. The speakers in the seminar were expecting some of the financing instruments used in the Swedish market, such as real estate bonds and debt fund financing, to begin to appear in a broader fashion in the Finnish market as well.
Investors are more picky
In terms of sectors, many of the old favorites seem to retain their appeal. Many of the speakers considered logistics as the most attractive asset type, especially logistics with a good location and quality. On the other hand, the residential sector is considered to have suffered most from the current economic circumstances but remains attractive nonetheless, especially outside the Helsinki metropolitan area in cities like Turku and Tampere, where less residential development has taken place recently than in Greater Helsinki.
The retail sector was regarded as very topical, and the consensus was that it has recovered well since the years of the pandemic. However, the speakers highlighted the importance of consumer demand, which is subject to rapid changes in the current environment. After the pandemic, people have started to return to the office and many firms are currently considering their new office requirements.
The current trend is that firms are focusing on finding offices that are of good quality and in a good location – green offices in particular are attractive. Also, social infrastructure properties were seen as very topical due to, inter alia, several municipalities looking to off-load property risk in connection with the healthcare and social services reform.
Finally, it seems that investors continue to be very selective when choosing acquisition targets. In times of great uncertainty, the flight to quality continues as some investors are shifting their focus to core assets of the highest quality. On the other hand, many investors are seeking higher returns and a competitive edge from value-add properties and development projects, where the current interest rate environment and yield decompression has not had such a dramatic impact. The higher risk level associated with these kinds of investments means that the financial success of the project is less dependent on the applicable interest rate and also the sellers’ price expectations have often not suffered as dramatic a hit as the lower yielding targets.
Diversifying financing options
Interest rates are expected to stabilize during Spring 2023, which, along with the resilience of the economy, maintained by a strong labor market and household savings, has led to signs of better availability of acquisition financing. However, a number of market participants expect banks to continue to be cautious about leverage levels and to primarily concentrate on serving their existing customers, whereby alternative sources of financing may gain ground on the Finnish market, which has traditionally been dominated by equity and bank financing.
These alternative sources may include real estate bonds and hybrid instruments as well as debt fund financing, all of which already play a vital role on the Swedish property market. In addition, depending on deal circumstances, alternative financing structures such as vendor notes and deferred purchase price components could be used to bridge the gap between equity and bank financing.
Increased tax and ESG scrutiny
A topic discussed over the seminar was the new tax legislation that will allow Finland to tax non-residents’ capital gains from the disposal of shares in a holding entity that owns real estate in Finland indirectly. Currently, Finland has no such taxation right under domestic legislation.
The impact of the new legislation, which will enter into force as of 1 March 2023, is mitigated by the fact that many of Finland’s existing tax treaties, such as the treaties concluded with Luxembourg, Belgium and the Netherlands, do not allow Finland to tax such income. Thus, initially, the new legislation will have an impact predominantly on Nordic real estate investors. A possible renegotiation of the tax treaties could broaden the effects of the planned new legislation at a later stage. The panel discussing the new tax legislation concluded that property investment structures in Finland should be reviewed in light of the new legislation, as it will also apply to existing investments that are exited after the new legislation enters into force.
ESG themes were recurring throughout the day, and the fundamental importance of the topic was widely underlined. Out of the three components of ESG (environment, social and governance), environmental considerations in particular were considered critical. Methods included in an investor’s standard toolkit include calculating the carbon footprint, reducing construction emissions, striving for energy class A across the portfolio, and requiring various property certificates such as BREEAM and LEED. Legal requirements on these matters only cover the bare minimum – most market participants and their stakeholders require a substantially higher standard.
Photo by Elias Ljungberg.