The Property Market in Finland

1
The Property Market in Finland

• 1.10.2007
• Hanna Kaleva
• KTI Finland

2
KTI Finland

• KTI, the Institute for Real Estate Economics
• founded in 1993
• by Turku School of Economics and Business
  Administration, the Finnish Real Estate
  Federation, and RAKLI - the Finnish Association
  of Building Owners and Construction Clients
• non-profit research organization
• KTI Property Information Ltd
• founded in 1999
• provides research, analysis and information
  services
• founded by KTI, RAKLI, Finnish Real Estate
  Federation management

3
KTI Information, research and analysis services
for the Finnish real estate industry

• Benchmarking services
• KTI Index / portfolio analysis
• Rental benchmarking
• Operational cost benchmarking
• Occupiers Club
• Customer satisfaction benchmarking

• Market information and analysis
• Market information service
• Transactions follow-up
• Market information analysis
• Market reports

• Research services
• -Research projects
• -Service development projects
• Joint development projects
• Company specific services

4
Agenda

• Today
• The Finnish economy - the Finnish property market
• Market practices and structure
• Property sectors market review and future
• A second lecture in November Real estate
  investment and finance in Finland
• The structure of the Finnish real estate
  investment market
• Measuring property investment performance
• Trends in the Finnish real estate investment
  market in 2007
• The development of new financial instruments
• The future?

5
The Finnish economy - the Finnish property market
6
Dynamics of commercial property markets
capital market
space demand
PROPERTY INVESTMENT MARKET
SPACE MARKET
RENTS
PRICEgt COST
SUPPLY
NEW DEVELOPMENT
PROPERTY STOCK
CONSTRUCTION
Lähde DiPasqual Wheaton
7
The Finnish Economy

• Small economy, dependent on foreign trade
• One of the strongest economies in Euro area
• Driven by both exporting industries and private
  consumption
• Growth expected to continue lower but still
  relatively strong
• Strong competitiveness
• Emergence of electrotechnical industries,
  diversification of economic base
• Macroeconomic balance

8
GDP GrowthFinland, Euro Area, USA and Japan
06/2007
Source Statistics Finland, Ministry of Finance
9
Unemployment Rate Finland Euro Area
08/2007
Source Eurostat, Bank of Finland and Statistics
Finland
10
Industrial Confidence Indicator
08/2007
Source EK (The Confederation of Finnish
Industries) / European Commission
11
Consumer Confidence Indicator
08/2007
Source Statistics Finland / European Commission
12
Property market practices and structure
13
BASIC FEATURES OF THE FINNISH COMMERCIAL PROPERTY
MARKET market size

• Market size
• increasing number of participants
• dominance of domestic institutions (pension
  funds) decreasing
• Increased liquidity but still limited
• availability of investment grade properties
  increasing gradually
• outsourcing of corporate property
• Outsourcing of public sector property (?)
• New development
• Size of the investment market ca. EUR 30
  billion

14
BASIC FEATURES OF THE FINNISH COMMERCIAL PROPERTY
MARKET regulation and market practices

• two forms of property ownership
• real property (direct)
• housing or real estate company
• rental legislation liberal
• varied rental practices
• short leases, until further notice clauses
  typical especially in the office market
• typical office lease term 3-5 years
• retail leases 5 years and upwards
• Turnover based leases getting more popular in
  retail market
• indexation to CPI very common
• gross rents used typically in multi-tenant
  buildings

15
BASIC FEATURES OF THE FINNISH COMMERCIAL PROPERTY
MARKET Players

• dominant role of institutional investors
• relatively high percentage of owner/occupiers
  thus decreasing
• small listed sector
• increasing importance of non-listed funds
• increasing number of international players
• clearer roles for players evolving
• service sector developing
• outsourcing of assets from users to investors
• investors professionalism has increased rapidly
• more differentiated strategies

16
Trends in the Finnish property investment market

• Internationalisation
• Expansion of the market
• New instruments
• New players entering the market
• Foreign investors
• Domestic funds
• Service companies
• Increased liquidity
• Increased professionalism

17
Transactions Volume in the Finnish Commercial
Property Market
26/9/2007
18
Characteristics of Finnish Marketin comparison
with other European MarketsSpring 2007
05/2007
1 rates with the least attractive markets 5
rates with the most attractive markets
Source KTI (Finnish Property Barometer)
19
Property investors in Finland

• 1) Domestic institutions
• Pension funds
• Life funds
• Insurance companies
• 2) International investors
• 3) Property companies
• 4) Domestic (non-listed) funds
• 5) Private investors
• 6) Owner-occupiers
• corporations
• Public sector

20
Property Holdings of the Biggest Property
Investors in Finland (fair values of the
properties at the end of 2006, EUR billions)
03/2007
Transaction price Q32006 Book value
January 2007
Source Annual Reports, Query for Investors,
Press Releases
21
Portfolio structure of the Finnish Pension funds
30.6.2007
08/2007
Lähde Tela Työeläkevakuuttajat
22
FINNISH REAL ESTATE INVESTMENT MARKETS -
different regional markets
23
FINNISH REAL ESTATE INVESTMENT MARKETS -
different markets

• Broadly three groups
• 1) Helsinki Metropolitan Area
• 2) Growth cities
• 3) Rest of Finland

24
DIFFERENT MARKETS

• 1) Helsinki region dominates the market
• core market, well recognised by international
  players
• sound demand for prime properties in all sectors
• domestic and international players
• 2) Growth cities
• market size is a problem for some investors
• economic base risky in some cities, for most of
  them relatively sound
• begins to attract international capital
• domestic, local and international players
• value added markets
• 3) Rest of Finland
• varying group of regions
• dominated by local players
• some niches and areas interesting for more
  opportunistic investors, especially retail sector

25
RETURN
OPPORTUNISTIC

• Information scarce
• inefficient cap markets
• undercapitalized markets

GROWTH/VALUE ADDED

• active management
• rising markets
• leasing and repositioning

• BALANCED/CORE
• fully leased
• plentiful information
• efficient capital markets

RISK
26
Risk Return in Real Estate financing effect
RETURN
Opportunity funds
Highly geared property
Speculative development
Growth/value added property
Moderately geared institutional property
RISK
27
Prime Office Yields in Finnish Cities
05/2007
Source KTIs barometre survey
28
FUTURE TRENDS property investment market

• foreign investments continue to increase
• different strategies in terms of property types
  and location
• First exits carried out in 2007
• New investors entering the market
• growth of indirect vehicles
• Finnish investors investing abroad
• Institutions indirectly
• Property companies funds direct investments
• Russian and Baltic markets
• property derivatives?
• Increased complexity of the investment markets

29
Thank you!

• KTI Finland
• Eerikinkatu 28, 7th floor
• 00180 HELSINKI
• FINLAND
• tel. [phone]
• firstname.lastname_at_kti.fi
• www.kti.fi