After a 20-year career as a stockbroker, a year and a half ago I moved from the world of listed shares into the realms of alternative investments, more precisely to unlisted real estate. My daily work with international institutional investors entails many of the same elements as before, but at the same time, working with a new and less liquid asset class has given me personally some fresh perspectives on investing. In the following, I will examine the Finnish property investment market from an allocation perspective first, and from a market structure perspective second.

Real estate allocation as part of your portfolio

After starting to work within real estate I have, for obvious reasons, started to pay more attention to the lucrative risk-reward ratio of the asset class. The current exceptionally long upward cycle in equities is fuelling speculation about the exact timing of the next recession of the real economy. Indeed, in late 2018 we got a foretaste on the markets’ readiness for a dramatic reaction, should the global growth prospects or geopolitical risks take a sudden turn for the worse. On the other hand, the chronically low interest rate environment means that expected returns from bonds have fallen to weak or even negative.

Against this background, last year’s total return on the Finnish property market feels tempting: all sectors of the market had an average total return of 6.6% in 2018, consisting of 5.3pp of net income and 1.3pp of capital growth (Source: KTI). Structural change in retail has lowered returns in this particular segment, but in other sectors of the market total returns were above the average.

Our own fund, Trevian Finland Properties I, investing in varied commercial properties around Finland, had a total return of 9.0% after fees last year. Hence it is not surprising that real estate has become a natural part of many private investors’ allocation too, alongside institutional money.

Real estate exposure should help in an economic downturn

At the time of my writing, stock indices in the US are reaching new all-time highs. There are warning signs out there, however, if you choose to see them. Firstly, the US yield curve has inverted repeatedly during 2019, a situation where long-term bond yields fall below those of shorter maturities. Historically, an inverted yield curve has been a very reliable predictor of an upcoming recession. It remains to be seen, whether “this time it’s different”.

Secondly, stock market indices are not the only thing going up. The amount of global debt is also hitting new records. The Institute of International Finance (IIF) warned in January about the global debt-to-GDP ratio nearing the all-time high of 320% in the third quarter of last year. The International Monetary Fund (IMF) keeps reiterating its concern about the enormous amount of global debt, should the interest rates start moving higher. I think it is justified to question the resilience of current asset prices, formed in an unprecedented era of low interest rates and record levels of global debt.

What about the risks in real estate then? The asset class is of course not immune to economic shocks. However, historical evidence suggests that the reaction of real estate is less dramatic and unsynchronised relative to other asset classes. In this less liquid asset class, a significant drop is more likely to happen in transaction volumes, rather than property prices, with the exception of certain clearly overheated segments or geographies.

Transaction volumes remain robust in Finland

After a lull following the financial crisis, the Finnish property market has been very active over the last few years. In the 2017 transaction volume below, Blackstone’s EUR 3.8 billion acquisition of Sponda caused a clear spike, but transaction volume remained at a very high level in 2018 as well.

The Finnish property investment market has witnessed a strong wave of internationalisation. Last year, some two thirds of transactions in Finland were carried out by international players. Until now, the international money has mostly concentrated in Helsinki, but there are signs of foreign investors eyeing on secondary cities and regional growth centres in hunt for higher profits.

Changing market structure

There are three basic ways of investing in real estate: directly (by buying properties), indirectly through publicly listed real estate companies, or indirectly through non-listed vehicles such as real estate funds.

Taking a closer look at the structure of the Finnish property investment market, we can see that the invested amounts of traditional domestic institutions have not changed much during the current decade, as they have been actively restructuring their domestic portfolios and increasing their international holdings. On the contrary, international investors and real estate funds have more than doubled their stakes. As the number of listed alternatives keeps decreasing in Finland, especially open-ended real estate funds have grown rapidly over the recent years.

The selection of stock exchange-listed options is thin in Finland. Blackstone acquired Sponda, and Kildare bought Technopolis. Citycon remains on the stock exchange, but its largest owner holds 48.6% of the shares and the second largest 15.0% (as of 31 March 2019). Listed choices within commercial real estate are thus not abundant, to put it mildly. The IPO of Kojamo, Finland’s largest residential real estate investor, luckily helped to grow the dark blue section of the above chart last year.


Jussipekka Aumo has more than 20 years of experience in the international investment markets. He holds a master’s degree from the Helsinki School of Economics. At Trevian Funds AIFM, he is responsible for fundraising and marketing with international institutional investors. Prior to joining Trevian, Jussipekka worked as an institutional stockbroker for 20 years in Helsinki and London.