From one of Finland’s first property investment funds to a property development fund, and onward to reasonably-priced ARA rental property construction. From 2009, the property investment funds created by Premico have been successful. So what are we doing differently?
“The last ten years of Premico’s success is closely bound with the development of property equity funds in Finland. We’ve been pioneering in the field, and plan on always staying a step ahead of the competition. We manage our funds through joint ventures with partners who are trusted and known in the market.
Returns from property equity funds are usually moderate and stable; however, we have been able to offer investors annual returns of up to 28%. Now, our next venture will focus on the construction of reasonably-priced ARA rental housing, which entails a regulated maximum return. Why?
Let’s start at the beginning.
At the end of 2007, we noticed that we had a lot of clients who wanted to invest in rental housing, but didn’t want to have to deal with the management that is often associated with investing in rentals. The market was overheated and it was difficult to find properties at sensible prices without a volume discount – something that was only available to large institutional investors.
2008 was also the year of the banking crisis and the collapse of Lehman Brothers. Funding for any property investments was practically speaking unavailable, and construction stalled. As a part of the Finnish government’s stimulus package, the law on subsidised interest rates for rental construction was passed. The law included not only subsidised interest rates, but also a government-backed deficiency guarantee; this made it possible to get high-leverage funding from banks. We decided to seize the opportunity, and chose Taaleri as our partner. They were just starting out back then; now, they’re listed on the Helsinki stock exchange.
The role of Taaleri was to take care of equity collection and the management of the fund. We on the other hand were responsible for finding properties, handling business and funding negotiations, construction as well as the rental and building management. We built 311 rental units in the Helsinki area, and the return on investment was 13% per annum.
So what did we do differently?
We aim to keep our tenants happy – for real – and take care of the apartments as if they were our own.
This is unheard of in the business, and I dare to claim that our tenancy management processes are the best in the country. Our company was founded in 1963, so we’ve had decades of practise to get it right.
The starting point of all of our operations has to be that we’re doing things first and keeping the industry moving. I remember thinking in 2010 that we have two years at most before others copy our operational model. And that’s exactly what happened: today, all financial service companies have their own property investment funds – the big guys following the small ones. The market became saturated by 2013, and we had to think of something else again.
So, in the spring of 2015, we put together a property development fund together with Taaleri. This fund has a higher target return, but it also has a different risk profile when compared to to rental property funds.
Rental property funds are currently acquiring approximately 45% of all new construction in the Helsinki area. This is unsustainable, and there are too many over-priced new construction rental apartments in the market.
The shortage of reasonably-priced rental apartments is a barrier to movement of labour – and to the overall growth of the economy.
We were thinking about ways of combining private equity and the construction of rental apartments in a socially responsible way. I’ll admit, at the beginning I was unsure of this idea of combining subsidised rental construction and investment funds. But we conducted initial discussions mostly with institutional investors such as mutual pension insurance companies, trade unions, universities, pension societies and trusts, and it became clear that there was room for an ethical property investment fund to enter the market.
In the autumn of 2015, we chose Auratum as our partner. Together, we’re constructing 1,600 reasonably-priced rental apartments in growing Finnish cities by 2019. The investment period is long and the target return rate is moderate, but the investors hold social responsibility to be a more important criteria for investment. This is unique.
Over the past five years, we’ve constructed over 1,500 apartments, and we have over 2,000 more in the pipeline for the next three years. And our journey is just beginning; we’ll be sharing some more private equity fund news in the spring of 2017.”
Janne Vaula is the CEO of Premico Group Oy.