Finland’s commercial real-estate market is going through one of its most difficult periods in decades. Much of the coverage has focused on the pain: falling prices, redemption pressures and distressed sales. Far less attention, however, has been paid to the market from the buyer’s perspective. For investors with capital and a long-term horizon, a distressed market can also create opportunities to acquire quality assets at increasingly attractive prices, according to Tommi Kemppainen, CEO of Finnish Helsinki Capital Partners, which runs the real estate-focused HCP Bricks fund.
Echoes of the early 1990s
Kemppainen sees parallels between today’s market and the aftermath of Finland’s banking and economic crisis in the early 1990s, when real estate prices eventually bottomed in 1993. Investors who bought at that point, he notes, subsequently did well. “This seems very similar to the situation we had after the Finnish Depression, which bottomed out in real estate in 1993,” recalls Kemppainen. “Those who purchased real estate in Finland in 1993 did really well.”
“It is not exactly the same situation. Some things are similar, while others are different. But in parts of the Finnish real estate market, what we are seeing today looks like the best entry point since 1993.”
Tommi Kemppainen, CEO of Finnish Helsinki Capital Partners.
He stresses that the two periods are not identical. “It is not exactly the same situation. Some things are similar, while others are different. But in parts of the Finnish real estate market, what we are seeing today looks like the best entry point since 1993,” he argues. One transaction illustrates how far valuations have moved. During the second quarter, Helsinki Capital Partners acquired a stake in Bolero Business Park, around 15 minutes from central Helsinki, for approximately €350 per square meter (price for building C is public). Kemppainen notes that the cost of building a comparable property today would be roughly ten times higher.
A market under pressure
Kemppainen emphasizes that the Finnish real estate market “is not one homogeneous entity,” with commercial real estate among the segments most affected by the downturn. He defines the segment as buildings involved in transactions of more than €1 million where either the buyer or seller is an institutional investor, based on the definition by KTI.
“That subsegment has been especially affected, and it seems to have a lot to do with these assets having been purchased when interest rates were close to zero, with a significant portion financed through borrowing,” Kemppainen explains. As financing costs have risen alongside interest rates, the economics of highly leveraged purchases have changed. “Many investors who purchased at higher prices and with leverage now need to sell,” he notes. “Commercial real estate seems to be where we are seeing the largest price movements this time.”
“That subsegment [commercial real estate]has been especially affected, and it seems to have a lot to do with these assets having been purchased when interest rates were close to zero, with a significant portion financed through borrowing.”
Tommi Kemppainen, CEO of Finnish Helsinki Capital Partners.
The pressure is compounded by structural changes in office demand. Employers and employees are using offices differently than they did before the pandemic, leaving more space underutilized. “In Helsinki, as in other European cities, offices are being used differently than before,” Kemppainen observes. “There is more office space than is currently needed, and it is possible that 25 percent, or even 35 percent, of office space will remain unused in many European cities.”
The combination of higher financing costs, lower demand and changing workplace patterns has created significant selling pressure. Some Finnish open-ended real estate funds have also gated redemptions amid investor concerns, potentially keeping assets coming to market as funds seek liquidity. For investors with capital available to deploy, that creates a growing pool of potential opportunities.
Looking for fundamental value
The key question for Kemppainen is not whether prices have fallen, but whether they have fallen far enough. “This is a price level that is substantially lower than it was before, and the question is whether it is low enough from a fundamental perspective,” he asks. “Within that subsegment, you can already see prices where simple fundamentals provide substantial downside protection.”
Bolero Business Park provides one example. Helsinki Capital Partners bought into the property for around €350 per square meter (C building is public on the price), a level Kemppainen argues is below the cost of the underlying land. “Looking at the data, you are paying less than the underlying land is worth. Being 15 minutes from the center of Helsinki, I am not aware of any logic or statistics that would point in another direction,” he says. “This is the kind of environment in which you should be buying real estate.”
“Within that subsegment, you can already see prices where simple fundamentals provide substantial downside protection.”
Tommi Kemppainen, CEO of Finnish Helsinki Capital Partners.
He sees the relationship between acquisition price, land value and replacement cost as a particularly strong indicator. “The numbers point to this being the best entry point for this subsegment since 1993,” considers Kemppainen. “€350 is less than the cost of the land per square meter. Buying a plot in that area where you are allowed to build would cost more than €500 per square meter.”
The gap becomes even wider when construction costs are considered. “It is also important to consider the replacement cost,” he says. “Building something comparable would have cost roughly ten times as much, or around €3,500 per square meter. Given the inflation we have experienced, the cost would probably be even higher today.”
Cash flow provides another buffer
Replacement cost is only one part of Kemppainen’s investment case. Cash flow provides another. While he acknowledges that the properties being acquired can have substantial vacancies, he argues that sufficiently low acquisition prices can make them cash-flow positive even before occupancy is restored. “When purchasing at these prices, the occupancy rate can be low at around 30 percent, but even at that level of occupancy, the property is already cash-flow positive. That is a strong indicator.”
The argument is that investors do not necessarily need to predict when the broader real estate market will recover. If an asset generates positive cash flow at a heavily discounted acquisition price, the investor can wait for occupancy and valuations to improve rather than relying entirely on market timing.
Prime locations remain different
The repricing is not confined to office properties outside central Helsinki. Helsinki Capital Partners is also invested in Uschakoff House, a prime office asset on Pohjoisesplanadi 19 in the heart of the city, one block from the Presidential Palace and now home to HCP’s headquarters. Kemppainen compares the location with Birger Jarlsgatan and other prime addresses in Stockholm. “The price, including the land, is €3,700 per square meter. From every perspective, that is a very low price level.”
“The best addresses are not affected by remote working in the same way. At the best addresses, there will always be people who want to be there.”
Tommi Kemppainen, CEO of Finnish Helsinki Capital Partners.
The property also illustrates the potential for improving occupancy. When Helsinki Capital Partners acquired it, the building had only one tenant. “One year later, 85 percent of the square meters are already occupied, according to our latest figures,” Kemppainen says. He also sees prime locations as less exposed to the structural shift toward remote work. “The best addresses are not affected by remote working in the same way. At the best addresses, there will always be people who want to be there.”
Time on the buyer’s side
Kemppainen sees scope for similar transactions to emerge over at least the next year as selling pressure continues. Helsinki Capital Partners’ HCP Bricks fund is focused on deploying capital into this environment, with no legacy assets and a portfolio built around properties acquired at significant discounts.
“This is a buyer’s market. Trying to predict when the market will recover is difficult, but buying properties at these price levels makes them quickly cash-flow positive.”
Tommi Kemppainen, CEO of Finnish Helsinki Capital Partners.
“This is a buyer’s market,” concludes Kemppainen. “Trying to predict when the market will recover is difficult, but buying properties at these price levels makes them quickly cash-flow positive. Time is therefore already on our side with the vintage we are.”
