Property Times Helsinki Q Business Parks Dominating the Office Market

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1 Property Times Helsinki Q Business Parks Dominating the Office Market 17 October 2013 Contents Economic Overview 2 Investment market 4 Office market 7 Business Park Market 8 Major Transactions and office buildings under construction 10 Definitions 12 Author Ville Suominen Analyst (0) ville.suominen@dtz.com Contacts Magali Marton Head of CEMEA Research + 33 (0) magali.marton@dtz.com The transaction volume has been 1 billion in 2013 so far, which is 35 % decrease from -Q The transaction volume for Q is expected to be high and a 2 billion transaction volume for the whole year is still achievable. Transaction volume in residential and healthcare sectors has increased significantly. Approximately 21 % of the transactions in 2013 so far were completed with an international purchaser. Swedish investors have been the most active foreign investors in the Finnish property market. Typically investments by foreign investors are made to the office and industrial sector. The CBD office prime rent has increased strongly since 2010 and is now at 32/sq m/mo. Prime rents in other main office areas have remained at the same level or decreased slightly. Office prime yield remained at 5.25 %. Yield level is expected to stay at the current level until the end of Currently Helsinki offers the highest prime yields in the Nordic capitals. Office vacancies in the Helsinki Metropolitan Area continued to increase, reaching over 1 million sq m. However, vacancies are expected to remain steady or modestly decrease, since the development of office space has slowed down. Proportion of business parks in the HMA prime office market is significant. Modern business parks have attracted especially foreign investors. Approximately two thirds of business parks are owned by international investors. Business parks represent the prime offices in all of the main office areas except in the CBD. Hans Vrensen Global Head of Research + 44 (0) hans.vrensen@dtz.com Figure 1 Prime Office and Business Park Rents, /sq m/month DTZ Research

2 Economic Overview Future Growth from Increasing Exports The Finnish GDP decreased approximately 0.5 % in As a result of weak private investments and private consumption, the GDP is expected to continue decreasing by 0.5 % in Exports and private investments are estimated to increase in 2014; hence GDP is estimated to grow by 1.4 % in 2014 and by 2.0 % in The inflation rate was 2.9 % in 2012, but it has been estimated to decrease to 1.8 % in The inflation rate is expected to increase slightly to 1.9 % in 2014 and further to 2.1 % in It is estimated that interest rates will remain at a low level to the end of However, interest rates are estimated to slightly increase during 2014 and 2015, due to expected future market conditions. Average unemployment rate was 7.7 % in The unemployment rate is estimated to increase to 8.3 % in 2013 and remain at the same level in It is estimated that in 2015 unemployment rate will decrease to 7.9 %. Private spending grew approximately 0.9 % in In 2013 and 2014 the private spending is estimated to grow on a modest phase, only 0.1 % and 0.8 % respectively. This is mostly caused by the slightly decreasing consumer purchasing power, which is due to increase in value added taxes in In 2015 private spending is estimated to grow by 1.6 %. In 2012 the consumer confidence index in Finland bottomed out, however still being fairly better than in Euro area on average. In 2013 consumer confidence has risen. Nevertheless, consumer confidence is still rather low when comparing to the all time average. The Finnish economy is export driven since 40 % of the GDP consist of exports. The Finnish economy is expected to grow as the most important export countries, e.g. Sweden, Germany, and USA, are expected to grow. Figure 2 Main Economic Indicators 10 % 8 % 6 % 4 % 2 % -1 % -3 % -5 % -7 % -9 % Source: Bank of Finland, Danske Bank, Nordea, and Handelsbanken Figure 3 Consumer Confidence in Finland and Euro Area, Yearly Averages Source: Bank of Finland Figure E2013 E2014 E2015 Unemployment Inflation GDP Private spending Finland Euro Area Finnish Exports by Country in % 10 % 8 % 6 % 4 % 2 % 0 % Source: Statistics Finland Property Times 2

3 Economic Development through Population Growth For the past seven years population growth in Helsinki has been clearly over the national growth. Future estimates by Statistics Finland further indicate that the population growth in Helsinki is clearly higher than the growth on a national level. Rather high population growth in Helsinki can be seen as a crucial factor for the economic development of the Helsinki region. Helsinki region is one of the fastest growing areas in the Europe, which will ensure the attraction of the region. Figure 5 Population Growth 2,0 % 1,5 % 1,0 % 0,5 % 0,0 % ,5 % Finland Helsinki Source: Statistics Finland Property Times 3

4 Investment market Decreased Investment Activity The transaction volume of the published deals in -Q has been 1 billion, which is 35 % lower than in -Q The transaction volume for Q4 is expected to be significantly higher than in other quarters in Therefore, a 2 billion transaction volume for the whole year is still achievable. The share of international purchasers continued to decrease. In 2013 nearly 21 % of the transactions were completed with an international purchaser. In -Q the share of foreign buyers was almost 35 % (24 % for the full year). Corresponding figures for the -Q was 39 % (32 % for the full year). Swedish investors have been the most active foreign investors in the Finnish property market in Typical sectors where international purchasers have invested in 2013 are office and industrial sectors. Investments by foreign purchasers have occurred mostly in the HMA. Two of the biggest deals by international purchasers were by W.P Carey (USA) and Union Investement Real Estate GmbH (Germany). W.P Carey purchased Cargotec Technology and Competence Center from Cargotec Oyj for 38.5 million. This office/industrial property has a BREEAM certificate and covers 25,000 sq m of the total lettable area. Union Investment Real Estate GmbH bought the Finnish headquarters of Skanska and the site from the City of Helsinki. The total price of the investment was over 37 million. The total lettable area of the building is 9,000 sq m, which is fully let to Skanska. Another property related deal was made in September when AEW Europe bought back a senior loan backed by a 225 property portfolio of Finnish supermarkets in a joint venture with Tristan Capital Partners from Switzerland s bad bank. The m majority stake of the outstanding 135m UBS senior loan was bought back for 95m, financed with a same amount senior loan from Starwood Capital, reflecting a 19.1 % discount. The remaining minority 13 % is held by HSN Nordbank. The portfolio was last valued at the end of last year at around 155m, on which basis the senior loan is at 61.3% LTV. Figure 6 Transaction volume, bn Figure Q3 Domestic purchaser International purchaser 2013 Transactions by Investor Group, Volume ( ) Private Property Company 6 % Quoted Investor 10 % Corporate 15 % Other 10 % Institution 21 % Private Property Vehicle 38 % One main reason for the low transaction volume in -Q was the difficulty to obtain financing. Furthermore, the limited supply of prime properties and a lack of demand of secondary properties have also influenced the transaction activity. The lack of demand for secondary properties is expected to remain until the availability of financing is clearly improving. Property Times 4

5 Growth in Residential and Healthcare Sector Transactions The largest decrease in transactions have been in the retail and industrial (incl. warehouses) sectors. The office sector is still the largest sector in the transaction volume even though it has suffered a nearly 15 % decrease when compared to -Q Transactions in the residential and healthcare sectors have significantly increased. The residential and healthcare sectors are second and third largest sectors measured by volume in 2013 so far. Typically office and retail sectors have been the most active in the Finnish property market, followed by the residential and industrial sectors. The reason behind the increased activity in the residential and healthcare sector is that the number of investors has been increasing. An example of a new investor type in the residential sector is the Ålandsbanken s housing fund. In September the fund purchased 87 apartments from YIT for over 20 million. The Helsinki Metropolitan Area is the most important property investment market. Over 50 % of the transactions completed so far in 2013 have occurred in the HMA. Prime Yields Remain Rather Stable The prime office and retail yields have remained at the level of 5.25 % since the last dropdown in The prime logistics yield slightly increased to 7.25 %. Yield levels are expected to stay at the current level until the end of The gap between prime and secondary markets yields remains wide. The spread between Finnish government bonds and the prime office yield decreased from 3.6 % in Q to 3.20 % in Q Last time the spread was below 3.5 % was in Figure 8 Transactions by Property Sector in -Q3 2013, Volume ( ) Figure 9 Helsinki Metropolitan Area (HMA) prime yields 9% 8% 7% 6% 5% 4% 3% 2006 Figure Industrial 4 % Retail 12 % Other 11 % Healthcare 17 % Office 33 % Residential 23 % Office Retail Logistics HMA Prime Office Yield and Interest Rates 7% 6% 5% 4% 3% 2% 1% 0% Office Euribor 3 month 10 Yr.Gov.Bond and Bank of Finland Property Times 5

6 Helsinki Offers Low Volatility Yields For the past seven years Helsinki has been the least volatile market, when comparing Helsinki with Stockholm, Copenhagen, and Oslo. Prime yields have moved during 2006 and 2013 only 100 basis points. However, the prime yields in Helsinki are one of the highest among these four cities. Only Oslo has had higher prime yields. Since 2012 Helsinki prime yield has been only 25 basis points from its lowest in Prime yield in Helsinki is expected to remain at 5.25 % to the end of Yield volatility in Helsinki is forecasted to stay stable in the future as well. Figure 11 Prime Office Yields in Q and Changes % 6 % 5 % 4 % Helsinki Stockholm Copenhagen Oslo Property Times 6

7 Office market Office Remains as a Dominating Sector Traditionally the office sector has been the leading sector in the Finnish property market. Offices account for approximately 35 % of the whole property stock. The Helsinki Metropolitan Area is the largest office market in Finland with 8.6m sq m, representing some 45 % of the office stock in the country. During 2013, over 45 % of the transactions have been made in the office sector. However, in -Q the share of office transactions in the HMA was nearly two thirds. Hence, the share of office transactions decreased in Slight Change in Prime Rents The CBD prime rent has increased steadily since 2010 and is now at 32/sq m/mo. Some main office areas have faced minor decrease in prime rental levels, for instance prime rents in Ruoholahti and Keilaniemi/Otaniemi decreased to 24/sq m/mo. Rents in the secondary office market are decreasing, due to minor decline in the demand for secondary premises. Development Slowing Down In Q there were less than 80,000 sq m of lettable office space under construction in the HMA. In Q the corresponding volume was almost 150,000 sq m. Hence, it is obvious that the development of new offices has slowed down. One reason for slowed development of new office premises is already the rather high vacancy rate, combined with subdued demand. Figure 12 Prime office rent in Helsinki CBD, / sq m/month Q Q Q Q Q Q Figure 13 Office vacancy, Q % 14 % 12 % 10 % 8 % 6 % 4 % 2 % 0 % Amount of Vacant Space Reaches 1 Million sq m Vacancies in the HMA office market continued to increase. The average vacancy rate in HMA reached 12 % in Q3, which leads to an amount of over 1 million sq m of vacant space. The vacancy rate rose slightly to 7 % in the CBD. Leppävaara was the only area, where vacancies slightly decreased. In Ruoholahti and Keilaniemi/Otaniemi vacancies have remained at the same level since High amount of completed office space in 2012 can be seen as a reason for increased vacancies in the HMA. Also, companies are cautious about hiring new employees, which decreases the need for space. However, vacancies are expected to remain steady or modestly decrease, since the development of office space has slowed down. Property Times 7

8 Business Park Market Supply of Business Parks Slowing Down The proportion of business parks in the HMA prime office market is significant. There are eight main office areas in the HMA, which also represent the main business park areas. Four of these areas are located in Helsinki, three in Espoo and one in Vantaa. Modern business parks have attracted especially foreign investors. Approximately two thirds of business parks are owned by international investors. Typical business parks in Finland comprised of 3 to 5 buildings. One building typically offers 6,000 sq m of lettable space. Business parks are usually located close to traffic hubs. Most often a business park is located next to a highway and is accessible by train and/or bus. Business parks attract tenants by offering various services. Lease agreements usually include reception, security, cleaning, postal, restaurant, and catering services. Also, business parks often offer leisure facilities. A business park lease agreement typically includes an additional service charge based on the cost of different services used by the tenant. The amount of business parks in the HMA has increased rather rapidly during the last few years. Recently a total of 90,000 sq m lettable business park space has been completed. Business parks have been completed especially in Espoo and Vantaa. In Q there was 70,000 sq m of lettable business park space under construction in the HMA. Figure 14 shows the price office and business park rents in the main office areas in the HMA. Business parks represent the prime offices in all of the areas except in the CBD. As mentioned earlier, office prime rents have increased in the CBD, but in some areas the prime rents have declined. Green Building Certificates are Seen Important Nearly all of the recently completed business parks have acquired green building certificates. Certification has become a key investment criterion among investors. Demand for green building certificates has set certain standards for the developers of the business parks. LEED and BREEAM certificates are the most commonly used in business parks in the HMA. Furthermore, mainly the highest levels of certificates are acquired. The importance of energy efficiency and good public transportation to the building is growing. Green building certifications are considered to become a standard that both tenants and investors are asking for. Figure 14 Prime Office and Business Park Rents, /sq m/month Trend towards More Flexible and Efficient Space The working culture has changed, which has been setting new requirements for office premises. Tenants are increasingly looking for more flexible and efficient office space. This trend has become common during recent years and is expected to continue. The strong demand for modern premises has changed the type of supply of office space. These new requirements have especially boosted the construction of business parks in the HMA. Property Times 8

9 Map 1 Major Office and Business Park Locations in HMA Property Times 9

10 Major Transactions and office buildings under construction Table 1 Office Transactions in 2013 Building City Date Vendor Purchaser Area (sq m) Price m Price / sq m Kyllikinportti 2 Helsinki Q3 DEGI Global Business Fennia Mutual Insurance Company 14,000 n.a. n.a. Moveres Business Park Helsinki Q3 TMW Pramerica Property Investment GmbH SaKa Hallikiinteistöt Oy 10, ,200 Skanska Building Helsinki Q3 Skanska Union Investment Real Estate GmbH 9, ,660 Site for Skanska Building Helsinki Q3 City of Helsinki Union Investment Real Estate GmbH n.a. 5.3 n.a. Koy Bulevardi 12 & Koy Bulevardi 14 Helsinki Q3 Sanoma Oyj n.a. 7,500 n.a. n.a. Business Park Loiste (BREEAM certified) Vantaa NCC Property Development OP-Pohjola Oy 6, ,530 Two Office Properties HMA Ektornet NIAM 14,300 n.a. n.a. Itämerenkatu 5 Helsinki Etera Mutual Pension Insurance Company Fennia Life 8,700 n.a. n.a. and KTI Property Times 10

11 Table 2 Major Office Buildings under Construction in the HMA Estimated completion City Building Lettable area (sq m) Constructor Investor 2013 Q4 Vantaa Avia Line, phase III n.a.; Gross area 4,000 YIT Rakennus Oy IVG Institutional Funds 2013 Q4 Helsinki UPM- Kymmene Oyj HQ, Alvar Aallon katu 1 n.a.; Gross area 17,000 YIT Rakennus Oy UPM-Kymmene Oyj 2013 Q4 Vantaa Airport Plaza 3, Halo 5,500 NCC Rakennus Oy NCC Property Development Oy 2014 Helsinki KPMG Building, Alvar Aallon katu n.a.; Gross area Lemminkäinen Talo Oy Etera 2014 Q2 Helsinki Ernst & Young Building, Alvar Aallon katu 16,150 Lemminkäinen Talo Oy Etera 2014 Q3 Espoo Toimistotalo Eventes Business Garden 14,133 PEAB Oy Union Investment Real Estate GmbH 2014 Q4 Vantaa Toimisto- ja Liikekeskus Dixi 7,500 (office), 7,000 (retail) YIT Rakennus Oy n.a. and KTI Property Times 11

12 Definitions HMA New supply Prime rent Prime yield Vacancy The Helsinki Metropolitan Area comprises the city of Helsinki and three other cities: Espoo, Kauniainen and Vantaa. Approximately 1.1 million people live in the HMA area. Represents the total amount of floor space that has reached practical completion (including major refurbishments) as known on the last day of the quarter, regardless whether the space is occupied or still available on the market. Common areas and service areas are not included. Represents the attainable average prime rent that is expected for an office unit commensurate with demand in each location, highest quality and specification in the best location in a market at the survey date. The rent is given as a gross rent. The rent quoted reflects prime units of over 500 sq m. Represents the initial yield estimated to be achievable for a notional property of highest quality and specification in the best location fully let and immediately income producing in a market at the survey date. Represents the total floor space in existing properties, which is physically vacant, ready for occupation and being actively marketed as known on the last day of the quarter. The vacancy rate represents the total vacant floor space divided by the total stock at the survey date. Property Times 12

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14 DTZ Research DTZ Research Contacts Global Head of Research Hans Vrensen Phone: +44 (0) Global Head of Forecasting Fergus Hicks Phone: +44 (0) Head of CEMEA Research Magali Marton Phone: magali.marton@dtz.com Head of Strategy Research Nigel Almond Phone: +44 (0) nigel.almond@dtz.com DTZ Business Contacts Chief Executive, EMEA John Forrester Phone: +44 (0) john.forrester@dtz.com Valuation Juha Mäki-Lohiluoma Phone: juha.maki-lohiluoma@dtz.com Chief Executive, EMEA John Forrester Phone: +44 (0) john.forrester@dtz.com Valuation Janne Eriksson Phone: janne.eriksson@dtz.com Capital markets Ikka Kujanpää Phone: ikka.kujanpaa@dtz.com Letting & Occupiers services Raul von Denffer Phone: raul.denffer@dtz.com Retail Jari Jäntti Phone: jari.jantti@dtz.com Capital markets Arno Jaulas Phone: arno.jaulas@dtz.com Letting & Occupiers services Hanna Lamadon Phone: hanna.lamadon@dtz.com DISCLAIMER This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ October Property Times 14