Country Snapshots Second quarter I 2016 Please click on the appropriate sector to view Economy Offices Retail Industrial About & Contacts
Economic Snapshot The Finnish economy maintained a steady momentum in the first half of 2016, with private consumption the main driver of growth, although gains are being offset by continued weakness in exports and public spending. GDP growth rose 0.6% quarter-on-quarter in Q1, marginally better than the 0.5% growth recorded in the final quarter of 2015. Private consumption ahead of expectations Consumer spending continues to surprise to the upside, despite muted wage growth and still high unemployment. Recent high-frequency economic indicators, such as retail sales and consumer confidence, have been showing steady signs of improvement, while low inflation is helping support real disposable incomes. The unemployment rate has started to gradually decline from the peak level of 9.4% in 2015 to 9.1% in May. Private consumption is now forecast to increase by 1.5% before slowing to 0.9% in 2017. Slow recovery in investment to continue After five consecutive years of contraction, fixed investment activity is forecast to finally start increasing in 2016, led primarily by the construction sector. For the majority of companies, however, large scale capital spending plans are expected to remain on hold, with the domestic and external environment still not strong enough to warrant significant investment. There is little support from the public sector, with investment being hampered by the government s ongoing fiscal adjustment programme. Fixed investment growth is forecast to be 1.2% in 2016, before averaging 2.0% per year between 2017-19. Reforms remain key to achieving stronger growth The economy is expected to grow by 1.3% in 2016, by 0.9% in 2017 and then average around 1.6% a year in 2018-19. While the economic outlook may have improved, Finland lost the last of its triple-a ratings in June, after Moody s downgraded it. This was due to concerns that stronger growth over the medium term will remain elusive until Finland addresses several structural issues, including weak cost competitiveness, poor labour productivity and declining corporate profitability. The government, unions and businesses have recently signed a competitiveness pact, which is an important step in the right direction to address these issues. GDP: Inflation: Interest rate: Employment: Economic Summary Steady improvement in 2016, but several domestic and external challenges remain. Price pressures are gradually building and inflation is expected to turn positive this year. The ECB continues to pursue ultra-loose monetary policy and may cut interest rates further. Weak but stabilising. Job creation is still very subdued in many industries amid limited investment. ECONOMIC INDICATORS 2013 2014 2015 E 2016 F 2017 F GDP Growth -0.8-0.7 0.7 1.3 0.9 Consumer Spending -0.5 0.6 1.4 1.5 0.9 Industrial Production -3.2-1.9-1.1-0.3 2.3 Investment -4.9-2.6-1.1 1.2 1.8 Unemployment rate (ILO%) 8.1 8.7 9.3 9.1 9.1 Inflation 1.5 1.0-0.2 0.4 1.8 USD/EUR (average) 1.33 1.33 1.11 1.10 1.06 USD/EUR (end-period) 1.32 1.38 1.21 1.09 1.05 Interest Rates: 3-month (%) 0.3 0.1-0.1-0.3-0.2 Interest Rates: 10-year (%) 2.1 0.8 0.9 0.9 1.4 NOTE: *annual % growth rate unless otherwise indicated. E estimate F forecast Source: Oxford Economics Ltd. and Consensus Economics Inc Economic & Political Breakdown Population 5.5 million (2015) GDP US$ 230.3 billion (2015) Public Sector Balance -2.8% of GDP (2015) Public Sector Debt 63.2% of GDP (2015) Current Account Balance 0.1% of GDP (2015) A coalition of the Centre Party, The Finns and the Parliament National Coalition Party. President Sauli Niinistö Prime Minister Juha Sipilä Election Dates April 2019 (Legislative) February 2018 (Presidential) Economic Activity 10.0 7.5 5.0 2.5 0.0-2.5-5.0-7.5-10.0 GDP GROWTH (annual %) - left INFLATION (annual %) - right 2006 2008 2010 2012 2014 2016 F 5.0 2.5 0.0-2.5-5.0
Office Market Snapshot GDP growth forecasts for Finland have recently been revised upwards to 1.3%, however conditions remain challenging with unemployment relatively high, albeit declining slowly and this has dented business confidence. Occupier focus Occupier demand is showing signs of strengthening as 2016 progresses but the overall vacancy remains high and is currently between 13%-14%. Active requirements for modern buildings in good locations is strong but supply at this end of the market is declining and there are now clear signs that the demand for good quality secondary office properties has increased. In Q2 only 25,000 sq.m of new office space completed in the Helsinki Metropolitan Area and there is an estimated 54,000 sq.m due to complete in 2017. These current market conditions will support positive rental growth at the quality end of the market. The ongoing investments in transport infrastructure will go someway in reshaping the office market landscape in Helsinki, although this will take time as some have been delayed. For example, the new metro line towards the west from the Helsinki city centre was supposed to start to operate in August 2016 but is now delayed until January 2017 at the earliest, but this could provide opportunity to companies looking to relocate now on a cheaper rent before the area opens up further with the completion of the infrastructure projects. Investment focus Q2 investment in the Finnish office sector totaled 144 million with private property companies the most active, accounting for approximately 45% and international investors taking a market share of around 25%. Demand for office assets is still clearly targeting prime product - this is not expected to change going forward. However, secondary properties have traded and there are clear signs that investor appetite for secondary office properties have increased during 2016 as the lack of quality product forces them to look here for opportunities. Prime Rents: Prime Yields: Supply: Demand: With vacancy still high rents are generally stable, although with some potential uplift for quality stock. Prime yields are expected to stabilise following a sustained period of hardening. Supply is expected to decrease as speculative space falls and demand improves, eroding excess space. A strengthening of demand is apparent but this is from a low base. Prime Office rents June 2016 LOCATION US$ GROWTH % MTH SQ.FT 1 5 CAGR Helsinki (City Centre) 34.00 408 42.1 1.5 3.6 Helsinki (Out of Town) 21.50 258 26.6 0.0 3.1 Turku 16.50 198 20.4 0.0 1.9 Tampere 21.00 252 26.0 0.0 3.1 Oulu 15.00 180 18.6 0.0 n/a Prime Office yields June 2016 LOCATION Helsinki (City Centre) 4.40 4.40 4.50 6.00 4.40 Helsinki (Out of Town) 5.75 5.75 5.90 6.95 5.40 Turku 7.25 7.25 7.25 8.00 5.80 Tampere 6.75 6.75 6.75 7.90 5.80 Oulu 6.75 6.75 6.75 7.90 5.80 With respect to the yield data provided, in light of the changing nature of the market and the costs implicit in any transaction, such as financing, these are very much a guide only to indicate the approximate trend and direction of prime initial yield levels and should not be used as a comparable for any particular property or transaction without regard to the specifics of the property. Recent performance Yields Yield - Country Average Yield - Prime Rental Growth - Prime Rental Growth - Country Average 8.00% 15.0% 7.00% 10.0% 6.00% 5.0% 5.00% 0.0% 4.00% -5.0% 3.00% -10.0% Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Rental growth (y/y) Outlook Prime, well-let assets will remain key for investors although some demand for non-core assets is becoming apparent. The occupational market will continue to suffer from the slow economic momentum but demand should improve slowly.
Retail Market Snapshot With robust economic performance reported in the early part of 2016 growth forecasts for the year have been revised upwards from 0.7% to 1.3%, although this is likely to follow a slower period in 2017 with GDP estimates at 0.9%. According to Statistics Finland, consumer confidence increased from 9.8 in April to 14.9 in June, which is the highest value since May 2015 as consumers expectations concerning the performance of the economy are improving. Occupier focus Prime retail high street and shopping centre locations saw steady occupier demand in Q2 2016 with a continued clear focus on units along the key high streets in Helsinki. Prime rents remain unchanged across all retail segments both in prime and secondary retail locations but there may be some uplift as the year progresses, demand strengthens further for key thoroughfares and the option to take suitable available units declines further. On the supply side there were no new shopping centre openings in Q1 and Q2 2016. However, development activity is expected to improve in H2 2016 and 2017 with more than 170,000 sq.m of new shopping centre space currently under construction. More than 70% of new shopping centre space will be opened in Helsinki, with the 60,000 sq.m Redi shopping centre representing one of the most anticipated openings in 2017. Investment focus Activity in the Finnish retail market was robust yet again in Q2, continuing the trend of rising investor sentiment. Trading volumes reached 253 million in Q2 with activity dominated entirely by Nordic investors. Indeed 55% of the capital invested in the Finnish retail sector originated from Sweden. The most active investor type was private property companies accounting for approximately 60% of the Q2 transaction volume. The most notable deal was AB Sagax s purchase of a retail portfolio for 90 million. Outlook The retail property market is expected to remain relatively stable but with an increasingly positive outlook. Occupational and investors demand will begin to improve but no significant changes in rent and yields are expected before 2017. Prime Rents: Prime Yields: Supply: Demand: Stable rents, although some marginal growth potential in the best prime high streets in Helsinki. Yields anticipated to remain at current level across all retail segments in 2016. Limited, with some improvement expected in H2 2016 and 2017. Steady demand for prime assets in Helsinki and best retail location in dominant regional cities. Prime Retail Rents - June 2016 HIGH STREET SHOPS US$ GROWTH % MTH SQ.FT 1 5 CAGR Helsinki 130 1,560 161 0.0 0.4 Turku 65 780 81 0.0-0.8 Tampere 70 840 87 0.0-2.6 Oulu 70 840 87 0.0 n/a Prime Retail Yields - June 2016 HIGH STREET SHOPS Helsinki 4.50 4.50 4.60 5.80 4.50 Turku 6.00 6.00 6.15 7.20 5.65 Tampere 5.75 5.75 5.90 6.95 5.40 Oulu* 6.50 6.50 6.65 7.00 6.50 SHOPPING CENTRES Country prime 4.80 4.80 4.80 5.80 4.50 Note: *3yr record. With respect to the yield data provided, in light of the changing nature of the market and the costs implicit in any transaction, such as financing, these are very much a guide only to indicate the approximate trend and direction of prime initial yield levels and should not be used as a comparable for any particular property or transaction without regard to the specifics of the property. Recent performance Yields Yield - Country Average Yield - Prime Rental Growth - Prime Rental Growth - Country Average 7.00% 20.0% 6.00% 15.0% 10.0% 5.00% 5.0% 4.00% 0.0% -5.0% 3.00% -10.0% Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Rental growth (y/y)
Industrial Market Snapshot The Finnish economy this year is expected to outperform 2015, however exports continue to act as drag on growth. In response, the industrial market is facing relatively weak demand levels most of which are consolidation driven. Despite this and given the relatively tight supply levels, rents held firm over the quarter. Investor demand exists, albeit exclusively for prime product, and despite the limited activity in Q2, yields improved by a moderate 10bp across a number of markets. Occupier focus The activity patterns seen in Q1 were largely unchanged over the second quarter, whereby 3PL companies provided the bulk of active requirements as part of their consolidation strategies and they continue to streamline operations to fewer but larger floorplates. Positive absorption of space however remains limited considering the current market environment with a notable decline in expansion driven demand. This has continued to see the vacancy in the Helsinki Metropolitan Area, the most popular destination for logistics occupiers, relatively stable at around 7.0%. New speculative supply has been largely absent due to the recent lack of requirements for new space. Therefore, any new construction a response to a satisfied built-to-suit requirement such as Finnair s 35,000 sq.m cargo terminal. Furthermore, the lower cost of land are seeing the outer parts of HMA, such as Sipoo or Kerava increasingly popular in location strategies. Investment focus Investment activity in the industrial sector was weak in Q2, proliferated by the fact that no deals were completed. Despite this demand remains strong from both domestic and international private property vehicles but with a clear focus on quality, income producing product with is limited. Prime yields currently stand at 6.40% in Helsinki and about 100-150 bps higher in the regional markets. Prime Rents: Prime Yields: Supply: Demand: Low demand facing limited new supply should maintain a relative balance in the market. No significant change expected in the short term as activity volumes remain subdued. Vacancy should remain fairly stable and new supply will be driven by prior commitment. Demand, for both occupiers and investors will concentrate on best in class assets. Prime Industrial Rents June 2016 LOGISTICS LOCATION US$ GROWTH % MTH SQ.FT 1 5 CAGR Helsinki 9.50 114 11.77 0.0-0.5 Turku 7.75 93 9.60 0.0 0.0 Tampere 7.75 93 9.60 0.0 0.0 Oulu 7.00 84 8.67 0.0 0.0 Prime Industrial Yields June 2016 LOGISTICS LOCATION Helsinki 6.40 6.50 6.50 8.00 6.40 Turku 7.40 7.50 7.50 9.40 7.00 Tampere 7.40 7.50 7.50 9.40 7.00 Oulu* 7.90 8.00 8.00 8.75 7.90 Note: * 3yr record With respect to the yield data provided, in light of the changing nature of the market and the costs implicit in any transaction, such as financing, these are very much a guide only to indicate the approximate trend and direction of prime initial yield levels and should not be used as a comparable for any particular property or transaction without regard to the specifics of the property. Recent performance Yields Yield - Country Average Rental Growth - Prime 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% Yield - Prime Rental Growth - Country Average 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Rental growth (y/y) Outlook Challenges in the industrial market are expected to persist until exports regain some momentum. The fundamentals underpinning the industrial real estate sector will remain stable, with further occupier consolidation dominating activity going forward. Indeed volumes are unlikely to pick-up dramatically until the performance of the economy improves.
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