An Introduction to Real Estate market and topical issues in Finland

Record low transaction volumes in the Finnish Real Estate Market following high interest rates

Following the trend of a slowing Finnish real estate market amid rising interest rates in the latter half of 2022, 2023 saw record-breaking lows in property transaction volumes. According to the KTI statistics, the Finnish property transaction volume dropped to EUR 2.6 billion in 2023, the lowest number since 2013. In comparison, the property transaction volume exceeded EUR 7 billion in 2021 and 2022 consecutively. Foreign investors remained active in all property sectors accounting for more than half of the total property transaction volume. Anticipated decreases to interest rates as well as the reductions to the Finnish transfer tax, discussed in further detail below, may be predicted to stimulate the Finnish real estate market in 2024, however.

Changes regarding transfer tax

As of 1 January 2024, Finland levies 1.5% transfer tax (previously 2%) on shares in mutual real estate companies and 3% (previously 4%) on direct real estate transfers. Transfer tax is paid by the purchaser. The change represents a 25% reduction in the amount of tax targeting to enhance the real estate market.

In addition to agreed sales price, the tax base of transfer tax continues to include any payment of debt for the benefit of the seller in connection to sale of shares in a mutual real estate company. In connection to transfer of shares in non-mutual real estate companies and certain real estate holding companies, it was previously possible (as approved in case law) to minimize the tax by purchasing receivables from the seller in connection to a share transaction. Such sale of receivables was not deemed subject to transfer tax. As of 1 January 2024, this possibility ended as sales of receivables in connection to a share transaction is regarded subject to transfer tax.

New Finnish building act to combat Climate Change and to smoothen building processes

The Finnish Parliament adopted a new Building Act on 1 March 2023 to enter into force as of 1 January 2025. The reform includes climate change mitigating measures, as well as measures aimed to smoothen building processes, boost a circular economy along with digitalisation and to improve the quality of building.

As a part of promoting the aforementioned objectives, the reform streamlines the process of deviating from the purpose of use appointed in the city plan. The purpose of use of a building is ultimately stipulated by the building permit which, however, is governed by the city plan. The municipality may, due to special cause, within certain framework grant a permit to deviate inter alia from the city plan provided that such deviation, for instance altering the purpose of use, may not disturb the city plan or the implementation thereof.

The new Building Act establishes supporting circular economy and low carbon impact as a “special cause” required for a municipality to grant a deviation permit for altering the purpose of use of a building to housing purposes or other such purposes that do not cause environmental disturbance. Further, according to the new Building Act the aforementioned alteration in the purpose of use shall not be deemed to disturb the city plan or the implementation thereof.

Accordingly, by the reform the permitting authority to alter the purpose of use of a building is to a certain extent delegated from a relatively extensive city plan alteration process to a more flexible deviation permit granting process. In practice this simplifies, for instance, the process of developing low utilization rate office space into housing purposes.

New Requirements for Automation and Control Systems in Existing Buildings

The Finnish Act on the Provision of Electric Vehicle Charging Stations and Charging Readiness as well as the Automation and Control Systems in Buildings came into force in late 2020. Section 3 of the Act concerns automation and control systems in buildings.

According to the Act, the building owner of an existing building must ensure that any building other than a residential building, whose heating system, air conditioning system or combined heating and ventilation system has a capacity exceeding 290 kilowatts, is equipped with a building automation and control system no later than 31 December 2024. According to the government proposal for the Act, when calculating the nominal cooling capacity of the combined air conditioning and ventilation system, the nominal cooling capacities of the devices within the system are summed. Industrial processes’ heating systems, where waste heat is utilized for building heating, would not be considered as heating systems.

Requirements for the building automation and control system are that it must be capable of (a) continuously monitoring, recording, and analyzing energy usage, and enabling adaptive usage adjustments; (b) conducting comparative analyses of the building’s energy efficiency, detecting decreases in the efficiency of technical systems, and notifying the person responsible for the building’s technical management of opportunities to enhance energy efficiency; and (c) facilitating communication among interconnected technical systems within the building and other internal devices, as well as ensuring interoperability between the building’s technical systems, regardless of different manufacturer-specific technologies, devices, and manufacturers.

The provisions concerning such parties do not apply if (a) the installation of the building’s automation and control system is not technically or economically feasible; (b) the building’s heating or ventilation system is not one that can be controlled by automation; or (c) the aforementioned requirements for a building automation and control system can be fulfilled by a combination of multiple systems, which may also be related to several buildings.

New EU legislation emphasises the importance of energy performance indicators

As of 2024, the national implementation of corporate sustainability reporting directive enters into force. The regulation aims to develop the EU into a modern, resource-efficient and competitive economy that has eliminated greenhouse gas emissions by 2050. Thus, the regulation promotes the allocation of capital flows into sustainable targets by requiring large companies and listed small and medium-sized companies to include a sustainability report in their financial statements. Such report would include information on the environmental impacts of the business the standards for which are set out in detail by the European Commission. It should be noted that the EU regulation only sets out the minimum standards for reporting and Finland has extended the reporting obligation to large and listed cooperatives and other large pension institutions than pension insurance companies, in addition to which all financial statements are to be delivered also in digital form to the Finnish Patent and Registration Office.

Furthermore, a proposal on the revision of the energy performance of buildings directive was made in 2023. The proposal aims to reduce greenhouse gas emissions in the EU by 55% by 2030 compared to the 1990 level and achieve a zero-emission building stock by 2050. Thus, all new buildings should be zero-emission buildings by 2030, new buildings of public authorities should be zero-emission buildings as of 2028, and existing building stock should be transformed into zero-emission buildings by 2050. The member states need to ensure that in 2030 all non-residential buildings will be above the 16% worst performing and by 2033 above 26% and the residential building stock will reduce the average energy consumption by 16% in 2030 and a range between 20–22% in 2035. Monitoring would only take place on the national level and certain building categories may be exempted from the obligations.

The importance of the energy performance indicators will thus increase. The information provided in Energy Performance Certificates is widely used to indicate the environmental aspects of the sustainability level of a property which impacts the available financing and price of a real estate transaction. Given the detailedness of the reporting requirements and the plethora of certificates, the companies will need to focus on the quantity and quality of certificates to be acquired. As the environmental impacts of a property are reviewed from a lifecycle perspective, certificates in which the development potential of the property are covered will be needed to secure a successful transaction.

The article is also published on the HPP firm pages in Chambers and Partners

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