Soaring land rents threaten older apartment blocks with shutdowns

Soaring land rents and costly major renovations are putting older apartment blocks under pressure, with more housing companies expected to shut down when residents can no longer afford rising costs, Yle reports.

The pressure is particularly severe in apartment suburbs built in the 1960s and 1970s, where land lease agreements are expiring or have recently expired. Municipalities have justified rent increases of up to tenfold by saying rents have fallen behind general market price developments. Property values in the suburbs, however, have not risen at the same rate and have instead tended to decline.

These suburbs account for about one-third of Finland’s building stock and are home to around 1.5 million people. An estimated half of the buildings were constructed on leased land.

The rent increases are affecting buildings that have exceeded their technical service life and require extensive renovations. Apartment owners may therefore have to pay for heating, plumbing, ventilation, electrical, facade and roof renovations at the same time as they face a sharply higher land rent.

That combination could exceed residents’ ability to pay, according to Juho Järvinen, an economic and tax expert at the Finnish Real Estate Federation. He predicts that significantly more housing companies will be forced to shut down because they cannot secure financing for necessary repairs and residents cannot afford the costs.

Kuopio land rents set to increase sixfold

In Kuopio, disputes over land rent increases reached the Supreme Administrative Court. In one recent case, the city’s annual land rent is set to rise from just under 6,000 euros to more than 36,000 euros after a transition period.

Kuopio has decided to stagger the largest increases over a period of no more than seven years.

Sami Mörsky, a property manager at the Kuopio-based property management company Talokeskus, said the timing of the increases was poorly considered. He said the situation could be particularly difficult when major renovations are taking place at the same time.

Major renovations are typically paid through a financing charge, while land rent forms part of the maintenance charge. Both costs are therefore placing pressure on residents. Prices for older apartments in Finland have also remained stagnant for some time.

New land lease agreements have caused confusion among housing company boards and at shareholder meetings, Mörsky said.

Index-linked increases could add to pressure

Land rents are typically tied to the cost-of-living index. When rents for older apartment buildings are low, the effect of index increases has been relatively small in euro terms.

With land rents reaching tens of thousands of euros, index-linked increases will be more visible. If the cost-of-living index rises as sharply in the future as it did in the early 2020s, a land rent of 50,000 euros would increase to more than 60,000 euros.

Järvinen said the biggest challenge is facing housing companies that have delayed major renovations. Housing companies on land they own are also struggling with the same repair costs, but higher land rents make the situation significantly worse.

A land rent increase can raise a home’s maintenance charge by one euro per square metre each month, Järvinen said. When extensive renovation loans are added, housing costs can rise by hundreds of euros a month.

Selling an apartment may not solve the problem because buyers can be difficult to find when maintenance charges are too high, Järvinen said.

The problem is expected to hit hardest in areas where apartment values are already low.