Business Environment 31 December, 2012

Generally speaking, 2012 was a year of financial uncertainty, although positive developments were observed in the form of a growth in the retail trade in Citycon’s operating markets. Uncertainty increased during the year due to the worsening Eurozone debt crisis.

Retail sales growth and the inflation rate are key drivers for Citycon's business and have a direct impact on rents from business premises. Almost all of the company’s leases are tied to the consumer price index. A significant number of leases also feature a turnover-linked component. Consumer prices continued to rise during the year in all of Citycon’s operating countries. In December, the annual inflation rate was 2.4 per cent in Finland, -0.1 per cent in Sweden, 3.9 per cent in Estonia and 2.8 per cent in Lithuania.

(Sources: Statistics Finland, Statistics Sweden, Statistics Estonia, Statistic Lithuania)

Consumer confidence in their own financial situation was positive in the Nordic countries, but negative during the whole year in the Baltic region. The economic uncertainty and general weak news affected consumer confidence in each of the Nordic countries, where the positive trend turned in the summer and confidence declined in the final months of the year. In December, consumer confidence was restored in Finland and Denmark to the positive figures of the start of the year, but fell close to zero in Sweden. (Eurostat)

Retail sales growth and the inflation rate are key drivers for Citycon’s business, having an impact on rents from business premises. Retail sales grew in both Finland and Sweden. The total retail sales growth rate in 2012 was 4.4 per cent in Finland and 2.3 per cent in Sweden compared to 2011. In January – November 2012 compared to the previous year’s corresponding period retail sales grew by 7.0 per cent in Estonia and 4.8 per cent in Lithuania. (Statistics Finland, Statistics Sweden, Statistics Estonia, Statistics Lithuania)

Unemployment adjusted for seasonal variation was below the EU average (10.7%) in Finland, Sweden and Denmark: at the end of December, seasonally adjusted unemployment was 7.7 per cent in Finland, 8.1 per cent in Sweden and 7.9 per cent in Denmark. Unemployment remained high in Estonia and Lithuania but, in contrast to the Nordic region, was falling, being 9.5 per cent in Estonia and 12.5 per cent in Lithuania at the end of October. (Eurostat)

The Europe-wide instability of the financial market continued to affect the availability and cost of funding.

Property market

Demand for investment has remained stable in the Finnish property investment market but the scant supply of prime assets has limited transactional activities. During 2012 retail investment volume exceeded low levels of 2011 ending up to EUR 400 million. The forecast for 2013 does not indicate any big changes in the market. Shopping centre prime yields have remained stable but the secondary yields are facing upward pressure. As a consequence of relatively strong development in retail sales, retail rents have also kept rising, although such increases have been concentrated in the very best locations only.

In Sweden the retail property transaction volume (SEK 13.4 billion) for the year 2012 was clearly lower than in the previous year (SEK 16.1 billion). Investors’ interest is strong for retail properties which have a good location, strong tenants and low vacancy rates. However, retail properties which do not meet some or all of these criteria will be more difficult to sell. Prime yields for shopping centres have generally remained stable since mid-2011 but prime yields for retail warehouse parks increased in the last quarter of 2012.

In Estonia retail sales development has been strong which encourages demand for retail space, especially in Tallinn downtown areas and professionally managed modern shopping centres. Vacancy rates in shopping centres are close to zero and rents have increased along with inflation. Also the retail property investment market has picked up and retail yields have dropped below 8 per cent. Also in Lithuania retail investment market is recovering and investor demand is forecasted to decrease yield requirements.

(Source: Jones Lang LaSalle Finland Oy)