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Business environment

Source: SRV’s January-March 2024 Interim Report, published on 25 April 2024   

The Finnish economy is in a recession and the Bank of Finland predicts that the economy will contract by 0.5 per cent this year. The economy has been burdened by rising prices and interest rates, coupled with weak export demand. Changing the course of public spending has proved difficult, and the deficit will increase over the next few years.  The employment situation has remained reasonably good. Although the cost level has remained high, a rapid slowdown in inflation has improved household consumption opportunities. However, recovery from the recession will be slow and will not begin until late 2024. The Bank of Finland predicts that the GDP will grow by 1.7 per cent in 2025, and that growth will slow down slightly in 2026. There are risks that trends in the global economy could be less favourable (source: Bank of Finland).

The ECB’s Governing Council implemented several interest rate rises during 2023 in an endeavour to ensure that inflation returns to its two per cent target. The ECB has kept the key interest rate at 4.0 per cent since September. Euribor rates are expected to start declining during 2024, with the first interest rate decrease anticipated in June. Rising interest rates and inflation have posed challenges for consumers, and this has been clearly evident in the marked weakening of demand in the housing market (source: Bank of Finland).

Consumer confidence has remained weak in the first months of the year. According to Statistics Finland, the balance figure for the consumer confidence indicator was -9.4 in March compared to the long-term average of -2.4. Consumers’ assessments of their own finances and the Finnish economy, both at present and in a year’s time, have remained at a very low level. Unemployment forecasts are also gloomy (source: Statistics Finland).  

During 2023, total construction volume decreased by 11 per cent, burdened by housing construction, and construction is expected to contract by 5 per cent this year. Poor demand among both consumers and investors has brought housing start-ups down to an historically low level. The number of residential start-ups slumped to half; in 2023, an estimated 17,500 residential units were started up. Housing sales are forecast to pick up slightly during 2024, but due to the high number of completed residential units, new housing projects are on hold. It is expected that the construction of 16,500 residential units will be started in 2024. The trend in the number of permits issued for business construction has also been weak. On the other hand, the 2024 outlook for public service construction, industrial and warehouse construction, and commercial and office construction is brighter than for other types of construction. Investments in the years ahead will be supported by a slowdown in the rise of construction costs. In addition, urbanisation is maintaining demand for both housing and business construction in Finland, especially in growth centres (source: Confederation of Finnish Construction Industries RT).  

Real estate transactions collapsed to a record low last year. Real estate transactions totalled about EUR 2.6 billion in 2023, which is the lowest volume since 2013. Residential units accounted for almost 30 per cent of the transaction volume. They were followed by industrial properties (22 per cent) and offices (17 per cent). Transactions by foreign investors represented more than fifty per cent of the total volume. Investors are cautious due to the recession, inflation and rising interest rates, and yield requirements have increased in all property segments. Investors expect real estate sales to pick up in late 2024 as interest rates stabilise (source: KTI).  

Based on SRV’s assessment of the prevailing market situation and its impacts on the company’s operations, there have been no significant short-term changes for the better or worse in the general market situation. Near-term demand for new housing will be weak among both consumers and investors. Many unsold completed residential units remain on the market, which contributes to weakening the near-future preconditions for starting up new projects.   On the other hand, construction costs have declined, and as a result it may be possible to start up selected projects in the latter part of the year. However, a more substantial decline in interest rates is necessary for demand to pick up significantly. In business construction, investors have investment capacity in many segments, but the start-up of new projects is challenging due to higher yield requirements and the weaker availability of debt financing for investors. The market is in a wait-and-see mode, focusing especially on the trend in interest rates.

Interim Report January – March 2024, 25 April 2024

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