Finnish property market produced a total return of 5.6% (FI)

The Finnish property market produced a total return of 5.6% in 2004. The income return remained at a stable level of ca. 7%. Capital growth was negative for the third year in a row. Despite the decrease of market values, the Finnish property market attracts both domestic and foreign capital. Most Finnish institutions would be even willing to increase their allocations to property.

High vacancies create pressures on returns on offices
Total return on office investments was 4.2% in 2004, which was â€" again -significantly less than in the previous year. The decreasing office demand created downward pressures on income return, which was 6.5%. For the third consequent year, the capital growth of offices was negative; -2.2%. Because of the dominating position of offices in KTI Index â€" 57% in 2004 - the bad performance of office sector was reflected in the total returns of the whole market.

Retail was the best performing sector
There is practically no vacant space in the Finnish retail property market, and rental levels have been increasing steadily in best locations. High occupancy rates have maintained the performance of retail sector. The lowering income tax rates and consumers’ strong confidence on their purchasing power maintain private consumption.

Returns on residential property increased
Residential properties produced a competitive total return of 6.8% in 2004. Income return was significantly higher compared to the previous year â€" 5.6%, and capital growth was positive as well. Despite the increased attractiveness of home-ownership, the future of rental residential market looks rather positive: rents and rental values have been increasing, occupancy rates remain high and yields are decreasing.

Transaction activity maintained by both domestic and foreign investors
Transaction volumes have been increasing in the Finnish property market in recent years. This increase has been partly caused by the market entry of foreign investors, whose share of all major transactions has been almost 50% in both 2003 and 2004. The Finnish market attracts foreign capital because of the strength of the national economy and the property market’s positive return expectations. Recently, foreign investors have become increasingly interested even in the properties outside the Helsinki Region. Also the origins and investment styles of the foreign players have become more varied.

Finnish institutions start investing abroad
Finnish pension and life funds are increasingly interested in international property investments through non-listed funds. International diversification is seen as necessary both because of institutions’ dominance in the domestic market, increased competition for investment product and the need to diversify market risk. So far, the volume of foreign investments has been rather low, but the institutions’ outspoken objectives anticipate an increasing outflow of capital.

Source: KTI

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