Before the outbreak of the conflict in Ukraine in late February, the Finnish GDP was forecasted to grow by approximately 3% in 2022. Private consumption is expected to remain the main driver for growth and to increase by approximately 3.5%. Also, investments and exports are expected to continue supporting economic growth. Inflation started to accelerate in 2021 and is expected to exceed 2.5% in 2022. However, after 2022, the economic growth is expected to return to its long-term moderate level of 1.5-2.0%, as the boost caused by the recovery dilutes and longer-term growth challenges return. The impact of the Ukraine crisis on the Finnish economy is not yet known, but it is likely to come mostly through an increase in overall economic uncertainty. Dependence of the Finnish economy on Russian exports is considerably lower than before.
Brisk growth of the property investment market continues
At the end of 2021, the total property investment universe amounted to €91.5 billion, up from €82.7 billion at the end of 2020. Foreign investors have continued to strengthen their role in the market and they currently account for approximately one third of the invested property market. Of domestic investors, various kinds of property funds and companies have continued to increase their portfolios. The share of institutional investors has decreased as they are weighing their new investments in indirect vehicles and foreign investments.
Residential is the largest sector in the property investment market
Residential properties’ share of the total invested market continued to grow in 2021 and amounted to approximately 34% at the end of the year. The sector’s growth is mainly supported by active new development, but the almost 9% increase in market values also contributed to its growth in 2021. The Finnish residential property investment market also increasingly attracts foreign investors. Of the commercial property sectors, the share of offices remained stable at 25% in 2021, whereas retail properties’ share continued to decrease. The attractiveness of public use properties has increased rapidly, and new specialised players have entered this emerging sector. Public use properties’ share of the total invested universe increased to approximately 9% in 2021.
Transaction volume increased by 15% in 2021
The total transaction volume amounted to €7 billion in 2021, up from €5.6 billion in the previous year. Residential was the most traded sector in 2021 with a total volume of €2.3 billion, which was the second highest volume in this sector ever. Offices accounted for 29% of all transactions. Compared to 2020, the number of transactions increased markedly, whereas the average size remained stable at €21 million
Total return increased to 9.2% in 2021
According to the KTI Property Index, the total return on the Finnish property investment market amounted to 9.2% in 2021, which is the highest annual return since 2007. The total return was boosted by a 4.8% increase in market values, while net income remained stable at 4.3%. Industrial was the best performing sector with a total return of 16.3%, supported by the strong performance of logistics properties in particular. Residential properties continued to produce healthy returns of 12.8%, despite the continuing decrease in net income. After many years, all property sectors showed positive capital growth in 2021, although for office and retail properties, the increase in market values was less than 1%.
Rental outlook differs between property sectors
Residental rents have remained stable in the Helsinki metropolitan area for the past two years, due to the rapid increase in supply as well as the softening of the demand because of the pandemic.Rental growth has been stronger in the Tampere and Turku regions. For 2022, residential rental growth is expected to accelerate again, due to the strengthening economy and increase in demand as the restrictions are being removed. In the office market, demand remains limited as occupiers postpone the implementation of their hybrid working models. However, the scarce rental demand is targeted at the very best premises, and, in the Helsinki CBD, rents increased by approximately 5% in 2021. The rental outlook for prime offices remains positive, whereas vacancy challenges continue and are even highlighted in secondary areas and properties. In the retail market, vacancy rates remain very low, but its rental outlook is negative. For logistics properties, the rental outlook is positive and strong investment demand boosts new development.