In early January 2025, it became public knowledge that KanAm’s open-ended real estate fund, Leading Cities Invest, had sold the Fabianinkatu 9 office building in Helsinki’s city center to Colony. KanAm initially purchased the property in summer 2022, at a time when prime office yields in Helsinki were slightly above 3%. Following this recent transaction, brokers have significantly revised upward their yield expectations, with JLL reporting current prime office yields at approximately 5.25%. Market rumors suggest the initial yield for Fabianinkatu 9 even surpassed this new benchmark. The motivation behind this sale was substantial investor redemption requests within KanAm’s fund, compelling the liquidation of assets.
This transaction is especially relevant given Finland’s historically low office transaction volume, totaling only EUR 150 million in 2024. This scarcity complicates determining fair market yields, increasing reliance on the few available transactions as benchmarks. However, each transaction is unique, and broad conclusions should not be based on a single deal. If additional sales confirm these elevated yield levels, it could signify a lasting shift to higher market yields.
The Role of German Investors
German investors have traditionally played a crucial role in Helsinki’s office market, significantly influencing the strategies of value-add investors. Currently, the inactivity of German core office investors in Finland is complicating value-add investment strategies, as clear exit options become scarce. Historically, the Helsinki core office market has relied considerably on German investors.
The Helsinki metropolitan area has some 40 office properties funded primarily by German or Swiss capital, managed by 17 fund managers.
German Real Estate Fund Structures and Liquidity Pressures
German real estate funds are broadly categorized into public open-ended funds (Publikumsfonds) and institutional-focused special funds (Spezialfonds). At the end of 2024, German public open-ended real estate funds had net assets of EUR 123 billion but faced heavy net redemptions amounting to EUR 5.9 billion. This sector is navigating one of its most challenging periods in recent years, with severe redemption pressure, liquidity concerns, and valuation adjustments affecting investor confidence. Some funds have even suspended redemptions entirely, leaving investors unable to access their capital.
In contrast, Spezialfonds aimed at institutional investors showed stronger performance, with net assets totaling EUR 161 billion and net inflows of EUR 7.1 billion. Institutional investors are increasing their allocations to real estate, while smaller investors are withdrawing equity due to ongoing market uncertainties.
For perspective, Finland’s total real estate investment market size stands at approximately EUR 96 billion.
German open-ended property funds typically enforce long redemption notice periods, often exceeding 12 months for larger withdrawals, to maintain liquidity and asset values. Regulatory requirements mandate liquidity reserves between 5% and 49%, with maximum loan-to-value (LTV) ratios legally capped at 30%. Asset sales during liquidity crises often occur at discounts between 5% and 15% below recent appraised values, reflecting traditionally slow adjustments in German real estate valuations.
Potential Exit in Finland – Impact at fund level
There have been concerns that discounted sales in Helsinki could negatively impact the broader portfolios of German funds. However, this risk appears overstated.
For instance, Union Investment’s UniImmo: Germany fund’s Finnish assets, such as the Aleksanterinkatu 19 and Alvar Aallonkatu 1 properties, represent 2.1% (EUR 290 million) of the fund’s EUR 14.6 billion portfolio.
Additionally, Union Investment has investments in other open-ended funds in Finland. The office investments are following:
- UniImmo Europa owns properties at Työpajankatu 8 (City of Helsinki’s Urban Environment House) and Alvar Aallonkatu 5 (Ex EY building)
- UniInstitutional European Real Estate owns properties at Välimerenkatu 1 (Pacific building) and Eteläesplanadi 12.
- Union Investment also maintains Specialfonds investments in Finland, owning Ilmalankuja 3 (Ilmalan Aura) and Lapinlahdenkatu 3 (formerly Martta building).
Overall, these Finnish investments still represent a minor portion of Union Investment’s extensive portfolio, indicating that sales in Finland would likely not substantially influence the overall figures of these large funds. While a disposal in one Union Investment fund could theoretically impact the valuation of assets in its other funds, in practice, each fund is likely making independent decisions without heavily considering the impact on other funds.
Single-Asset Funds Likely Sellers in Finland?
Funds holding a single asset in Finland, such as Sonar’s Kasarminkatu 25, AFIAA’s Eteläesplanadi 20, and REAL I.S.’s Dagmarinkatu 6, are more likely sellers in times of global liquidity pressures. Due to their limited exposure and lack of portfolio diversification in Finland, these funds face higher risks and could opt to divest their isolated properties more readily compared to funds with broader portfolios.
Geopolitical Risks and Market Preferences for Primary vs. Secondary Markets
Geopolitical factors, amplified by Russia’s ongoing war against Ukraine, have renewed risk perceptions regarding Finland, primarily due to Helsinki’s geographical proximity to Russia—just over 200 kilometers away. Although NATO membership mitigates some geopolitical risks, Finland’s proximity still positions it as riskier compared to markets like Paris, located approximately 1,500 kilometers from Russia.
Consequently, German investors might prefer primary markets closer to home, such as Germany or Central Europe, during uncertain times. It’s also important to note that Finland is viewed as a secondary market relative to Germany and other Central European markets, which are considered primary. In periods of uncertainty, international investors typically prioritize and consolidate their investments in their primary markets, potentially leading to reduced exposure in secondary markets like Finland.
Furthermore, it remains possible that German investors could include Helsinki properties in broader Pan-European portfolio sales. This scenario occurred in 2018 when Union Investment sold a seven-property portfolio, including Helsinki office buildings, to Ares Management.
In conclusion, further sales by German investors in Helsinki seem likely, driven by liquidity pressures, geopolitical uncertainties, and a shift towards prioritizing primary markets. However, each decision will ultimately depend on individual fund strategies, asset-specific conditions, and the broader market environment.