Real estate market outlook 2025

 

Declining interest rates and improved liquidity create favourable conditions for the recovery of the real estate market in Finland and other Nordic countries in 2025.

Jaakko Onali, Portfolio Manager, UB Nordic Property Fund (AIF)

Polarization Accelerates Value Changes Despite Interest Rate Cuts

The real estate markets in Finland and other Nordic countries are expected to recover in 2025, with declining interest rates improving liquidity in the market. Traditionally, the market turnaround happens first in Sweden, and the trend began shifting there during 2024 – first in the bond market and gradually in the real estate market as well. Finland typically recovers more slowly than other Nordic markets, so there may still be good buying opportunities in 2025.

Polarization in real estate markets refers to the division into several different development trends, which is particularly prominent between regions and property types. In large cities and growth centres such as Helsinki, Stockholm, and Oslo, real estate markets will remain active, and property valuations are expected to develop positively. Meanwhile, in smaller cities or regions experiencing population decline, market dynamics will be weaker. This is reflected in property valuations, rental yields, and occupancy rates.

High-demand residential and commercial properties, such as new energy-efficient buildings, logistics spaces, and big-box retail properties, will retain their value better and attract investors. At the same time, older and less-maintained properties in more remote areas will receive less attention from the market, leading to a decrease in their value.

Polarization means that those operating in real estate markets will need to be more strategic in their investment decisions. Investments in growth centres and well-maintained properties will continue to offer stability and returns, while risks increase in smaller and less-developed markets. This phenomenon will intensify as economic and demographic disparities between regions grow.

 

In our view, 2025 will be a good year for real estate investments, especially from a buying perspective, while keeping in mind the typical investment horizon for real estate, which should be at least five years.

Perttu Hokkanen, Portfolio Manager

Construction Costs Provide Support in the Long Term

Construction costs have been a harsh reality over the past three years. Cumulatively, construction costs in the Nordic countries have risen by 17–32%. However, in Finland, there has been a moderation in this trend. According to Statistics Finland, the construction cost index decreased by 0.1% in October 2024 compared to the previous year, but significant declines in construction costs are not expected due to wage pressures and material shortages. Additionally, it is hoped that reconstruction in Ukraine will begin in the near future, which would consume a significant portion of resources. Construction costs remain at high levels, which supports positive value development in existing buildings.

The impact of high construction costs will be particularly noticeable in the rental housing market but also in the commercial property sector. Since the costs of new construction remain high, rents must rise in order to maintain returns at previous levels. This has led to a slowdown in construction, which in turn increases demand for space, particularly in growing towns, thereby reducing current vacancy rates. In the near future, the limited supply of new construction will push up rents for both new and older buildings, which will also increase the value of these properties.

The rental housing stock in the existing real estate portfolio also benefits from the indirect effects of rising construction costs. For example, investors and property owners see the current housing stock as an attractive alternative because it does not face the same cost risks as new buildings. This increases the value and stability of the existing property portfolio in the market.

High construction costs have a significant impact on the market by making existing rental properties more attractive compared to new buildings. This dynamic creates stability in the real estate market and strengthens the position of the existing housing stock in the long term. Market forecasts indicate that sales of old apartments in Finland will grow by 8–10%, and prices are expected to increase by an average of 2.5–3.5% compared to the previous year.

In other Nordic countries, such as Norway and Denmark, house prices are also expected to rise this year. The Norwegian central bank forecasts that house prices will rise slowly starting from early 2025, while in Denmark, house prices are expected to rise by 2.9% in 2025.

In summary, declining interest rates and improved liquidity create favourable conditions for the recovery of the real estate market in Finland and other Nordic countries in 2025. The moderate development of construction costs supports this recovery, even though regional differences may still exist. In our view, 2025 will be a good year for real estate investments, especially from a buying perspective, while keeping in mind the typical investment horizon for real estate, which should be at least five years.

United Bankers' real estate fund:

UB Nordic Property Fund »

The fund aims to invest as broadly as possible in Nordic commercial real estate. The fund's investments include retail and logistics properties as well as public sector real estate and offices.

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The information presented is based on UB’s own estimates and sources considered reliable by UB. The information on which the conclusions are based may change quickly and UB Group may revise its market view without prior notice. No information obtained through this presentation should be construed as a solicitation to invest. When making investment decisions, readers should base their decisions on their own assessment of the investment and the risks involved, and to consider their personal goals and financial situation.

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