This article is part of Kvarn X’s series on alternative investments. The series covers a range of alternative asset classes: real estate, private equity, private credit, hedge funds, structured products and crypto assets.
For Finnish investors, real estate is one of the most familiar alternative asset classes. It is tangible, the logic of its cash flow is intuitive, and it is often financed with debt. That is exactly why it is also an asset class where expectations and realised net returns can differ substantially.
This article looks at where the return on a real estate investment actually comes from, why the Finnish rental-flat trend turned, and what anyone investing in a real estate fund needs to understand before putting money into it.
Where the return comes from, and what often goes uncounted
The return on a real estate investment comes mainly from net rental cash flow and the change in the value of the property. Rent growth affects both, and leverage changes the return on equity as well as the risk. No single metric tells the whole story.
The most common mistake is to look at just one number: the gross rental yield. It is the annual rent divided by the purchase price. It tells you less than you might think.
An example: a studio costs 160 000 euros and the rent is 750 euros a month. The gross rental yield is 5,6 %. But an investor does not own the gross rent. They own the net cash flow. That is what is left after the maintenance charge, insurance, empty months and repairs. Once those operating costs are taken out, the net rental yield ends up below the gross figure; financing costs and taxes are looked at separately.
That does not make the investment a bad one. It means that if a 5,6 % gross yield looks attractive, it is more honest to acknowledge that what actually remains from the rental cash flow can be considerably lower.
Leverage magnifies both gains and losses
For a real estate investor, leverage is a central financing tool and a significant risk at the same time. It can increase the return on equity when the property yields more than the debt costs, but it also magnifies losses when the value or the cash flow deteriorates.
An example: a flat costs 200 000 euros and there is 150 000 euros of debt against it. If the value of the flat rises 10 %, equity grows from 50 000 euros to 70 000 euros, a return of 40 %. If the value instead falls 10 %, equity shrinks from 50 000 euros to 30 000 euros, a loss of 40 %. Leverage does not only work upwards.
Figure 2. Leverage cuts both ways: a 10 per cent move in the value of the property is a 40 per cent move in equity.
Why the Finnish rental-flat boom happened – and why it ended
The maths of zero rates
Between 2015 and 2021, conditions for rental flats were exceptionally favourable because rates were low. The logic was simple: reference rates were close to zero or negative, in many properties the rental yield exceeded financing costs, and leverage could lift the return on equity well above the unlevered yield of the property. Tilastokeskus estimated in 2021 that more than half of new dwellings in housing companies had gone into rental use. Construction accelerated, more investors came in and prices rose. The low rate environment supported the model powerfully.
Three things changed the picture
Rates rose. In Suomen Pankki’s June 2026 technical rate assumption, the 3-month Euribor averages 2,4 % in 2026, 2,8 % in 2027 and 2,7 % in 2028. When the rate on a loan rises from 0,8 per cent to three per cent, the annual interest on a 150 000 euro loan grows from 1 200 euros to 4 500 euros. That is 275 euros of additional cost every month — straight out of cash flow. A rate shift like this can turn a leveraged rental flat from cash-flow positive to cash-flow negative.
Figure 3. A rise from 0,8 per cent to three per cent adds 3 300 euros a year, or 275 euros a month, to the interest on a 150 000 euro loan.
An oversupply of small flats. Investor demand was heavily concentrated in studios and one-bedroom flats, and new construction added to the supply of small units. That growth in supply sharpened the competition for tenants and raised the risk of vacancies, particularly in markets where demand was not keeping pace.
Prices turned down. Tilastokeskus’s price index stood around 13 % below its peak in the second quarter of 2022 by early 2025, and prices continued to fall through the latter part of 2025. The number of second-hand flats in blocks of flats listed for sale grew from roughly 12 000 to more than 19 000 between early 2022 and the end of 2025. A rental flat bought in 2020–2021 may still be worth less than what was paid for it, even if the rent has developed exactly as planned.
Figure 4. Prices and transaction volumes tell different stories. Sources: Tilastokeskus and KVKL Hintaseurantapalvelu.
Where the market stands now
The market is still split in two. In KVKL’s Hintaseurantapalvelu, the number of housing transactions grew 10,7 % in 2025 from the year before. In the first half of 2026 the picture weakened again: according to KVKL, volume came in around 13 % below the previous year, and according to Tilastokeskus the prices of old dwellings in housing companies fell 3,9 % year on year in the second quarter. Current market pricing does not point to a return to zero rates in the next few years. Real estate investing will work on a different basis from here on than it did in its golden years.
In the current environment, it is worth looking at how well an investment holds up against interest rates, not just at the price per square metre. Before buying, three questions are worth asking: What happens if the flat sits empty for two months? What happens if financing costs rise by another percentage point? What happens if the housing company votes for a major renovation next year? These questions let an investor judge how well the cash flow and the risks hold up.
Same correction, different pace: Finland in a global comparison
Finland’s property market is not an outlier. The same rate environment punished real estate investors across Europe between 2022 and 2024. The meaningful difference lies in how quickly the rate change reached the market. One key factor is whether the debt carries a variable or a fixed rate; debt levels, refinancing needs, supply and income growth also matter.
Sweden is comparable to Finland: most mortgages carry variable rates, so rate hikes hit cash flows quickly.
Swedish house prices fell around 15 % from their March 2022 peak to the end of 2022, according to Valueguard’s HOX index. The Nordic corrections did, however, differ from one another in both timing and severity. Riksbank began cutting in May 2024 and lowered the policy rate by a total of 1,5 percentage points over the year, from 4,0 per cent to 2,5 per cent. Transaction activity in the Swedish property market showed signs of recovery in 2024–2025: Castellum reported property purchases of 1,7 billion kronor in early 2025, against just 52 million kronor a year earlier. Listed property companies react quickly to rate expectations, through financing costs, valuation multiples and refinancing expectations among other channels.
In Germany and elsewhere in Central Europe the mechanism is different. German mortgage rates are typically fixed for long periods, so ECB rate hikes fed through to the cost of the existing loan book only slowly. The market correction came all the same: German house prices fell 8,4 % on average in 2023 from the previous year, according to Destatis. That was the largest annual decline in a series going back to 2000 and the first fall since 2007. The recovery has been modest — the house price index rose 3,2 % year on year in the second quarter of 2025, the third consecutive annual increase. According to data used by Aberdeen, European investment volume grew 15 % in 2024, and in the same data the change in property capital values turned positive in late 2024, led by the residential and logistics sectors.
In the United States the rate cycle is structurally different too. Mortgages there are typically fixed for 30 years, so a rate hike does not directly change the rate on an existing fixed loan. It does, however, make it harder for first-time buyers to get into the market as new loans become more expensive. In the commercial property sector the problems run deeper: offices are suffering both from high rates and from the structural shift to remote work.
For a Finnish investor, the comparison teaches one concrete thing: variable-rate debt means that the property market reacts to rate changes faster than in many other countries. That is a risk in a rising market, but also an advantage in a falling one, when rates turn down.
Three ways to invest in real estate – what each one means in practice
Figure 6. The route does not change the underlying asset, but it does change liquidity, valuation and workload.
Direct ownership
Direct ownership is the clearest structure: the investor buys the property, rents it out and carries everything themselves. Control over the investment is at its maximum, and so is responsibility. Renovation decisions by the housing company, tenant turnover and changes in financing costs all reach the investor directly, with no buffer in between.
Tax treatment is straightforward: rental income is capital income (30 % / 34 % on annual capital income above 30 000 euros), and any gain on sale is taxed as a capital gain. Transfer tax on shares in a housing company is 1,5 %, calculated on the purchase price plus any share of the company’s debt — in practice, on the debt-free price. In a sale handled by an estate agent, the tax must be paid no later than when the deed of sale is signed; without an agent the deadline is two months from the transfer agreement. Either way, the tax falls due before a single euro of rent has come in.
Direct ownership is not an entirely passive investment. It requires hands-on management, and the decisions the investor makes affect the return and the risk they end up with.
Real estate fund
A real estate fund brings diversification and professional management. A single investment can give exposure to dozens or hundreds of properties, and often to segments a private investor cannot reach directly, such as logistics properties, service properties or large rental-housing portfolios.
The next section covers this in more detail. The essential point, though, is this: a fund does not change the illiquidity of the underlying asset.
Listed property company
A listed property company is the most liquid route: the investor buys shares in a listed company that can be traded during market hours. Shares in an individual listed property company can also be held in an equity savings account, unlike a flat or a real estate fund.
The drawback is that a listed property company behaves more like a share than like a physical property. The share price responds to general market sentiment more readily than the value of the underlying properties moves. It offers exposure to real estate, but the diversification benefit depends on the company’s debt levels, its portfolio and the structure of the rest of your holdings.
Real estate funds below the surface: what an investor needs to understand before subscribing
Open-ended versus closed-ended
There are two main types of real estate fund, and the difference between them is decisive.
An open-ended fund can take in new investors at the subscription dates set by its rules and offers redemption opportunities on a regular basis. That creates a structural tension: the underlying properties are illiquid, yet the investor is promised some degree of liquidity. In Finland this tension became concrete particularly in 2023–2025.
Finanssivalvonta noted in 2025 that open-ended real estate funds have been thinning out their redemption windows since 2023, and in the situation it reported on 2 April 2025, a total of ten funds had limited or suspended redemptions as their liquidity position weakened. Properties generally cannot be sold quickly without affecting the price, so the fund manager may have to resort to redemption restrictions or other liquidity management tools.
A closed-ended fund locks capital up for a set period, often several years. The investor generally has no continuous right of redemption through the fund during the investment period, although the scope for transferring units depends on the fund’s terms. In that case the liquidity of the structure matches the liquidity of the underlying assets more closely. An investor may demand a higher expected return for illiquidity, but a closed-ended structure does not in itself guarantee a higher return.
Before subscribing, it is worth asking: is this an open-ended or a closed-ended fund? If it is open-ended, on what terms do redemptions work, and what happens if many investors want out at the same time?
Valuation arrives with a lag
The value of a listed company updates every day with the market price. For a real estate-focused non-UCITS fund, the unit value must as a rule be calculated and published monthly. Individual properties are measured at fair value, and an independent external appraiser’s estimate must as a rule be obtained; valuations based on those estimates can react to market changes with a lag.
This means that a fund’s value can look stable even when the underlying properties have already lost value in the market. Changes in value do not necessarily show up in the fund’s value as quickly as they do in listed markets, and that can become more pronounced when redemption pressure builds.
Costs are not hidden, but they are not always obvious
Real estate funds typically charge an annual management fee, whose level and basis vary from fund to fund, and some also charge a performance fee above a certain return threshold. Over a long holding period these have a significant effect on net returns. The euro impact of a fee depends on the fee basis and how the fund’s value develops; it cannot simply be worked out by multiplying an annual percentage by the number of years invested.
The comparison with direct ownership is revealing: with direct ownership there is no fund management fee, but the investor may face costs such as letting agent fees, property management or outsourced administration — and their own time is an economic cost too.
Tax treatment through a fund
The tax treatment of investments made through a real estate fund varies with the fund’s legal structure. The return may be realised as a distribution or as a capital gain, and it is taxed as capital income. The fund’s country of registration matters too. A Finnish non-UCITS fund and a foreign alternative investment fund (AIF) structure can behave differently. It is worth checking the exact tax treatment in the fund prospectus or with a tax adviser before investing.
Real estate as part of a wider alternative allocation
The role of real estate in a diversified portfolio depends on what the investor expects from it and how its risks sit alongside the rest of the portfolio.
It offers rental cash flow and can offer partial protection against inflation, as well as diversification relative to equity markets. But the diversification benefit is not automatic: the redemption restrictions of 2023–2025 showed that a real estate fund and the equity market can both be in trouble at the same time — even if the reasons differ.
The right way to implement a real estate allocation depends on the investor’s total wealth, liquidity needs, risk tolerance, investment horizon and expertise. A listed property company offers a liquid way to take real estate exposure through the stock market, but its market risk resembles equity investing.
A real estate fund can offer diversification and professional management, but before investing it is essential to understand the fund’s liquidity terms, leverage, fees and valuation method. A suitable allocation percentage cannot be set in general terms without knowing the rest of the investor’s portfolio and risk profile.
Closed-ended funds and direct property investments may suit an investor who can tie up capital for a long time and assess property and structure risks. Classification as a professional client is not based on the size of an investment portfolio alone: MiFID II sets out several criteria, and the investment firm must make a separate assessment.
Three things a real estate investor understands, and one that is often forgotten
The return comes from net rental cash flow and the change in value. Rent growth affects both, and leverage changes the return on equity as well as the risk. The gross rental yield on its own tells you little.
The fund wrapper does not change the nature of the underlying asset. An illiquid property stays illiquid even when it is packaged into an open-ended fund with a quarterly window.
Rates changed the game. The rental-flat boom drew significant support from exceptionally low rates. Current market pricing does not point to a return to zero rates in the next few years. Real estate investing now demands a different set of calculations than it did five years ago.
And the thing that is often forgotten: the prices of direct and appraisal-based unlisted real estate investments often react to market changes with a lag. A market shift may therefore not show up in valuations right away, and liquidity pressure can intensify in situations where a lot of redemptions or sales arrive at once.
Sources
Market data and statistics
Regulation and official material
