International investors flocking to Helsinki's office market are pushing yields down to levels not seen in decades, leading some investors to take the hunt for higher returns into the less familiar territory of smaller Finnish cities, according to local analysts.
Helsinki has attracted international real estate investors over the last year as the Finnish economy has started to make a long-awaited recovery from the 2008 global financial crisis and prime office yields in many other major Nordic and European cities remain tight between 3% and 4%. Last year saw a record level of investment in Finnish real estate, with €10 billion spent, according to the Catella Market Indicator.
Competition for office assets has squeezed prime yields in Helsinki from between 4.40% and 5.75% in 2016 to between 3.80% and 4.80% in the last quarter of 2017, according to data from real estate services firm Cushman & Wakefield. In February, German asset manager Deka Immobilien reportedly paid €190 million for the Töölönlahdenkatu 3 property in Helsinki's central business district, a record price for a single office deal in Finland.
Markku Hietala, senior adviser at Colliers International Finland, said in an interview that in the more than 30 years he has been active in the Finnish office market, he could not remember yields on prime locations dipping below 4%. "But what this means also is that investors are looking a little bit also outside [Helsinki's] districts [at] the main cities in the countryside [where yields are higher]," he noted.
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International investors have acquired property in the Finnish cities of Tampere and Jyväskylä, according to a local equity analyst who declined to be identified as they were not permitted to speak to the media. Prime office yields in Tampere averaged 6.25% in the 2017 fourth quarter, according to Cushman & Wakefield data. Yields during the period in the Finnish cities of Turku and Oulu were at 6.75% and 7.50%, respectively. Figures for Jyväskylä were not available.
"I think those markets will benefit the most from yield compression, and we're going to see some high fair-value exchanges this year," the analyst said, noting that Nordic office landlord Technopolis Plc has significant exposure to many of these markets. "We saw [yield compression there] already last year so I think this year is going to be similar."
However, Finland's office market is far from a sure bet for ballooning returns, according to another equity analyst who could not be identified as he was not permitted to speak to the media. High vacancy levels persist across the market as the country's economy picks itself up from a prolonged battering. Finland's economy, which had become overly reliant on former cellphone kingpin Nokia Corp., was among the most severely hit in the years after the 2008 crash, contracting by 8.3% in 2009 and enduring three consecutive years of recession between 2012 and 2014.
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Vacancy rates are still high enough to make the prospect of imminent rental growth remote, the second analyst said. "Even [Helsinki's central business district] has not experienced any rental growth and is unlikely to experience rental growth until the vacancies start to drop."
The Helsinki market experienced vacancy in the fourth quarter ranging from 5.8% in the city's central business district to 19.0% in the city's Pitäjänmäki area, data from Cushman & Wakefield shows. In Stockholm's office market, a benchmark for Nordic real estate according to the second analyst, third-quarter vacancy rates stood at 3.2% in the central business district and 11.5% in decentralized areas, according to the most recently available data.
But the prospect of further economic growth and higher demand for Finnish office space has enough investors and analysts confident in the potential for growing returns. "The economy was standing still. But now these structural changes in the economy have been [achieved] and [Finland's] in a really good position," Tor Borg, JLL head of research Nordics, said in an interview. "Rents are quite low — they haven't really started to increase yet — so I think there are a lot of possibilities in the Finnish market."


