Real estate investments held by Finnish earnings-related pension providers are valued “largely in line with current market conditions”, according to a thematic review by the Finnish Financial Supervisory Authority (FIN-FSA).

Despite an overall positive picture, FIN-FSA said some pension insurers lacked a reliable estimate of the fair value of individual properties for 2023.

In its assessment, FIN-FSA looked at the fair values of 22 pension insurers’ real estate investments at the end of 2023. The fair value measurement of the real estate was compared with FIN-FSA’s Regulations and Guidelines No 14/2012 (occupational pension insurance companies) and 15/2012 (pension funds and pension foundations).

It found that their value fell by around 6 per cent during 2023 to €23.5bn, equivalent to around 10 per cent of total investments at year-end. Pension insurers' real estate assets are mainly domestic (70 per cent), with offices remaining the largest category within real estate (28 per cent).

The thematic assessment asked pension insurers for information on individual directly owned real estate and portfolio-level information on indirectly owned real estate investments (real estate funds, private equity investments and other indirectly owned real estate).

Of the €23.5bn in real estate holdings of pension savers, 63 per cent were directly owned and 37 per cent were indirectly owned.

In addition, FIN-FSA found that almost all properties were valued by an independent external valuer and only 3 per cent had used an internal valuation. However, an internal valuation method is permitted if the valuer has sufficient expertise to produce a reliable valuation.

The use of internal valuations was mainly limited to residential properties, individual property development projects and other real estate investments such as parking garages.

The most common valuation method used for property valuations was yield value (80 per cent) and a combination of yield and transaction value (15 per cent). FIN-FSA found, however, that the use of transaction value for property valuation, a method based on completed transactions, has decreased from 8 per cent to 3 per cent since 2020.

In addition to property-specific data, the fair value of a property must take into account the general market situation and the yield requirement. FIN-FSA found that the fair values of real estate investments by pension insurers mainly took into account the deteriorating situation in the real estate market.

Commenting on the assessment, Finnish Pension Alliance chief economist, Mikko Mäkinen, said: “It is good that the Financial Supervisory Authority, as the supervisor of occupational pension insurers, carries out these thematic assessments. They increase confidence in the occupational pension system.”

“The most important observation is that the real estate investments of occupational pension insurers are mostly valued in a timely manner and the valuations take into account the weakened market situation. A few specific areas for development were also highlighted and it is good that these are being addressed directly with operators.”

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