Economic uncertainty has led to fewer investment transactions in Finland, but local investors are still upbeat. Pirkko Juntunen reports

The international perception of Finland is that the financial woes of its communications giant Nokia – once a shining star for the country – is having a knock-on effect on confidence in general and is one of the reasons for a slowing real estate market. However, domestic investors argue, Finland remains an AAA-rated country with a relatively strong economy and Nokia’s size on the stock exchange has never had any real impact on the country’s GDP. Large domestic real estate investors are not in a hurry to sell.

Hanna Kaleva, CEO of KTI, a Finnish property information and analysis firm, believes the challenges in the Finnish market are the size and lack of liquidity. “Compared to the heights of 2005-08, there is much less activity. Also, due to the significant slowdown in market volumes, international fund investors find it hard to realise their investments,” she says.

According to KTI numbers, only 12% of investors in the Finnish market are international with domestic pension and insurance companies making up almost 40% of the market. Most large domestic institutions invest directly or via funds. Most favour direct or unlisted investments; only a few have stepped into the listed sector.

The uncertain macro-economic outlook has had a negative effect on transaction and investment flows. “The tighter financing climate will affect fund investors in particular as they use leverage, whereas pension and insurance companies use their own assets and are less affected,” Kaleva says. “There is still financing available but mainly to existing and well regarded clients.”

There are still interested buyers but few sellers in the Finnish market. “It is hard to see the pricing in the market at the moment as nothing is happening.” Says Stefan Wundrak, director of property research at Henderson Global Investors.

There are properties available, but they tend to be at the riskier end of the spectrum and where financing is even scarcer. “It is difficult to move to secondary markets in Finland, as well as Sweden, because of declining population in the north and rural areas,” Wundrak says.

Kaleva says the sectors that are still performing are residential and retail, while performance in offices has suffered as values have fallen.

One of the largest Finnish property investors is pension insurance company LocalTapiola Pension (formerly Eläke Tapiola). Some 13% of LocalTapiola’s assets of €9bn are invested in real estate, a proportion that has been increasing.

LocalTapiola mainly invests in the domestic real estate market but has a 10-15% allocation to international markets via funds with a broad range of strategies, diversified across Europe. “We have not invested in the US because of the disadvantageous taxation,” says Karita Meling, head of real estate and private equity fund investments at LocalTapiola Pension.

In Finland, LocalTapiola invests in the capital region and growth areas of the country’s largest and medium-sized cities. “We prefer retail space and there are still opportunities in the capital city region, whereas office space is less attractive because of over-capacity,” she says.

LocalTapiola’s real estate portfolio returned 6% in 2011 and Meling expects it to continue along those lines. “Our rental contracts run over several years so we can predict income for some time and it is nothing that changes over night. Valuations can be subject to changes but at the moment we are not expecting any major ones.”

Meling agrees with Kaleva in that financing is tougher, but says it will affect fund investors more than domestic pension and insurance companies.

Wundrak says: “It looks like there is a long queue of investors wanting to get in but there is no activity as the domestic investors are not selling the types of properties in the type of locations that international investors would like to buy.”

One of the more unusual Finnish property investors is Valtion Eläkerahasto (VER), the state pension fund of Finland, which does not invest directly in Finland at all and has the majority of its real estate investments abroad, also via funds.

The €14.3bn fund currently invests €400m in real estate with a further €600m committed. The fund is now invested in 26 European real estate funds and three Asian funds, as well as some Finnish ones. The allocation to Finland is 17% of the total real estate portfolio.

Timo Löyttyniemi, CEO of VER, says the strategy is pretty unusual in Finland as the fund prefers private equity or limited liability-type structures to direct investments. “Over the past few years, we have increased our allocation to Asia and Northern Europe with a focus on attractive risk-return ratio,” he notes.

VER invests 31% in the retail sector, 29% in office space, 26% in residential properties and 14% in logistics. The fund’s real estate portfolio returned 5.8% in 2011 and has had stable returns over time.