Great that there’s active discussion and different perspectives! I would gladly hear more justifications for why Hoiva’s property values would rise (or fall) by x% per year. My own 2% was indeed a cautious guess based on inflation, which I arrived at when sparring with Kasper and Frans. However, there is no deeper analysis behind this.
The fact is, however, that if interest rates do not fall from that level, then the appreciation of the property portfolio is the component that determines the success of the current Titanium. If property appreciation were 0%, then selling Hoiva would indeed be almost impossible (mere rental cash flow is not enough). Conversely, if that appreciation were +3%, then Hoiva would certainly start selling very well again, once this sentiment eases a bit.
My mother is in full-time care in a care home operated by Attendo. The building was constructed in 2008, making it 17 years old. I asked, and based on the answer I received, no major renovations have been done to the building. However, the building does not have loose rusty sheet metal, peeling window frames, dented interior walls, etc. The pattern of the bathroom linoleum might be a bit old-fashioned, but otherwise, a visitor would not notice any structural flaws. It doesn’t shame new buildings.
Therefore, I strongly doubt that there are even slightly dilapidated care homes operated by large players and owned by funds in Finland. And that’s why I would say that stories about 10-year-old worthless empty care homes can be disregarded.
Well, that’s quite wonderful if such a mechanism has been invented, where properties just keep getting better as they age. I myself can give an example to the contrary, concerning a property completely renovated for care use, operated by one of Finland’s largest operators. The care home was closed a couple of years later due to indoor air quality problems, and the property remained empty for several years. Eventually, the property was sold at an 85% loss to a new owner, and the property is still empty.
But you don’t specify which property it is, even though you are clearly very well-informed about the matter, as you know the losses? It lowers the credibility of the story a bit. But even if it were true, surely one “bomb” doesn’t mean that all houses or even the majority of houses are “bombs”.
It seems we might even agree on the matter, but we are talking about different time perspectives. The houses in Titanium’s portfolio were largely built in the 2010s (though there are some older ones, of course). If I understand the repeated reference to “wear and tear” correctly, you are referring to renovation needs that fall under the landlord’s responsibility?
These certainly accumulate, and for example, when properties are 35-45 years old, the landlord will have a considerable need to renovate the houses to find new tenants. Even around 20 years, when the first lease agreements end, there is some need for refurbishment, but still relatively moderate.
Annual repairs and maintenance are carried out in the house at the tenant’s expense, which are monitored annually in a textbook manner, so for the first 20 years, it is indeed the tenant who largely pays for the wear and tear. A repair backlog for major renovations accumulates, but it is not significantly taken into account in the valuation of an 8-year-old building when there are 14 years left on the lease agreement.
It somehow feels like you just want to have a principled opinion on how property valuations should be done, even though you probably know that the common-sense reasoning level of “wear and tear is heavy” and “2% does not compensate for depreciation” is not how property appraisal reports are made?
One doesn’t need to be a psychic to understand that once the worst phase of population aging is clearly over, Titanium’s houses will be “old” and there will only be a fraction of the current users. Giant tenants will scale down their operations as demand wanes. The value of the portfolio will almost certainly start to decline then, assuming the properties are not sold at the peak of the cycle.
So, in my opinion, it is not relevant in care properties to consider very long-term or “from now until eternity” level value development, because a large drop in demand is inevitable. What is relevant, in my opinion, is mainly to consider how long positive (e.g., inflation-level) value development can be expected. As a pure guess, maybe 10-15 more years?
Sorry, but I don’t quite understand the logic behind your thought. Let’s take, for example, a 10m€ property, where the land value is 1m€ and the buildings 9m€. With a 2% annual appreciation, the value of that building will be 16.3m€ after 30 years, and the land value 1.8m€, totaling 18.1m€.
From your writing, I get the impression that it’s correct for a fund to record appreciation for a building for 30 years and then crash the value to zero when major renovations are due. Similar thinking seems to have been present among portfolio managers as well, so it’s not a new thing in that regard.
In that case, you’re either having a really bad day or you’re just mixing up other people’s writings with mine, and they’re getting confused in your head.
Forget the whole thing and let’s continue with other topics sometime.
Edit. if I remember, I’ll come back to this when I dig up a recent appraisal report so we can concretely go through how that wear and tear is accounted for in appraisal reports. How appraisers take it into account is what matters for portfolio development, not how you think it should be taken into account.
In the real estate sector, at least Titanium’s Hoiva, EQ’s real estate fund, and Kojamo carried out larger refinancing operations in 2024. All praised the availability of money and that they got a good deal.
Kojamo’s interest-bearing loans and interest expenses for 2014 are known and easily available from the company’s financial statements. Using the average debt capital calculated from the debt capital at the beginning and end of the financial year, Kojamo’s cost of debt in 2024 was 3.2%.
Someone asked Titanium’s Santanen a few years ago about Hoiva’s interest rate hedges. (It might even have been Sauli? ) Santanen replied that they are not guessing future interest rates in Hoiva. The answer was, if I recall correctly, interpretable as meaning that the loans were relatively well interest-rate hedged.
That’s why it was a minor surprise to me that Hoiva rearranged its loans last June. Only a year/year and a half after interest rates had risen. If loans in the real estate sector are interest-rate hedged, I would assume they are not renewed annually or even every five years. But rather in ten-year or even longer cycles. And not all at once.
However, since Hoiva rearranged all its loans last June, I believe there are two options. Either Titanium failed to some extent in its loan allocations. Or Titanium had the opportunity to make a better deal than the old loan deal.
Considering also that the company does not exactly lack understanding of financial markets, I would consider it more likely that Hoiva made a good and purposeful loan deal last summer. As the company itself stated.
I do not consider it impossible that Hoiva’s interest rate level is around 5%. But it could also be a couple of notches lower. As it is with Kojamo.
If the bank takes 3% from the debt capital, i.e., 4 MEUR less, and assuming property values increase by 1.5% per year, then Hoiva yields 20 MEUR + 10 MEUR = 30 MEUR for its shareholders. And in percentages, 30/479 = 6.2%
It should also be noted that Euribor is still expected to fall to a range of 1.5% - 2% in the near future. This may lower Hoiva’s interest costs. As well as yield requirements, which in turn would create pressure for property values to rise.
The valuation of care fund properties is usually carried out by an independent expert and is based on several different valuation methods. The most common methods are:
Income Approach (Tuottoarvomenetelmä): The value of the property is calculated based on its net income, using an appropriate capitalization or discount rate. In care properties, lease agreements are usually long-term, so the predictability of future cash flows significantly affects the value.
Market Value Approach (Markkina-arvomenetelmä): The value of the property is determined by comparing it to similar care properties that have recently been sold. This involves using, for example, square meter prices or yield requirements based on market data.
Cost Approach (Kustannusarvomenetelmä): This estimates how much it would cost to rebuild a similar property at present, taking into account wear and tear and depreciation. This method is often used as a supporting method.
1. Principles of Valuation and Ethical Guidelines
Transparency and Objectivity: The valuation must be based on independent and impartial analysis.
Professional Competence: The valuer must be qualified and adhere to industry best practices.
Compliance with Legislation and Regulation: The valuation must take into account local laws and regulations.
2. Valuation Methods
Market-based method (comparable sales method)
Income approach (discounted cash flow and capitalized income)
Cost approach (reconstruction costs and depreciation)
3. Scope and Documentation of Valuation
Content of the Valuation Report: The report must include, for example, basic information about the property, valuation methods, assumptions, and market data used.
Verification of Assumptions and Input Data: It must be ensured that the data used is up-to-date and reliable.
Sources Used and Market Data: It must be documented where the information was obtained and how it affects the valuation.
4. Special Valuation Cases
Long-term Lease Agreements: In care properties, the tenant’s solvency and the duration of the agreements significantly affect the value.
Liquidity Effects: Since care properties are often specialized properties, their selling time can be longer, which can affect the valuation.
Valuation standards ensure that the valuation of care fund properties is comparable, reliable, and consistent with market practices.
In addition to traditional calculation methods, the valuation of care properties also uses other factors that can significantly affect the property’s value. These include, for example, adaptability, location, demographics, market situation, and financing aspects.
1. Adaptability and Alternative Use
Flexibility of Use: If the building can be easily converted into, for example, apartments, office spaces, or other uses, it can increase its value.
Technical Adaptability: The modifiability of structures, room arrangements, and building services affects the long-term value of the property.
Regulation and Zoning: If zoning allows for alternative use without significant changes, it can improve the property’s value.
2. Location and Regional Demand
Population Development and Need for Services: In growth centers, the value of care properties is higher because the population is aging and the need for services is growing.
Transport Connections and Accessibility: Good transport links and accessibility to public transport can increase the property’s attractiveness.
Competitive Situation: If there are many similar care properties in the area, rent levels and yield requirements may remain lower.
3. Demographics and Market Situation
Age Structure and Need for Care Services: The aging population and demand for care places affect long-term value.
Regulation and Support Schemes in the Care Sector: Public sector subsidies and changes in legislation can affect the profitability of care properties.
Tenant Risk: A stable and long-term tenant (e.g., a municipality or a large care company) reduces risk and increases value.
4. Market and Financing Effects
Yield Requirements and Interest Rate Level: A higher interest rate level increases investors’ yield requirements, which can lower property values.
Investor Demand: Care properties can be attractive to institutions and funds, which can drive up prices.
Liquidity and Selling Times: Care properties can be slower to sell than, for example, residential properties, which can affect valuation.
Quite a good discussion here. In my opinion, one thing that has gone unnoticed is the poor geographical distribution of Titanium’s portfolio compared to, for example, the locations listed in the linked news. I would argue that this causes significant uncertainty regarding inflation adjustments flowing directly into values. I would also assume that the fund has other costs than those taken into account here.
The first quarter of 2025 has now passed, but the situation does not seem to have improved for Titanium’s shareholders or for the company’s overwhelmingly most important driver, the Hoiva Fund. Titanium’s share price has fallen by approximately 30% since the beginning of the year, but with a market capitalization still at €75 million, it is still clearly on the expensive side - relative to the company’s high risk regarding profitability in the coming years.
At the end of January, it became public knowledge that the Financial Supervisory Authority (Finanssivalvonta) is conducting inspections into the valuation methods of Titanium’s real estate funds, i.e., whether they have complied with the law and EU regulations. The same applies to real estate funds managed by at least OP and Ålandsbanken. This measure is a very good thing for all parties, that these are being inspected, especially since it has been generally known and a cause for wonder regarding Titanium that there has been only one, and at the same time a very small, real estate appraiser – unlike competitors in the industry. Furthermore, the value development of Hoiva has not been declining at any point during the fluctuating cycle – which has also raised much astonishment considering the surrounding market conditions. Now, of course, a major risk for the company’s shareholders and fund owners is that the Fiva (Finanssivalvonta) inspection reveals a concrete problem and the valuation is completely redone (at the same time, current valuations would significantly decrease). It goes without saying that this scenario would be very detrimental to the company. Or is there any additional information about the status of this inspection that cannot be found in public sources?
Also, the long queue of current investor redemptions related to Hoiva, for which the euro amount is unknown because the redemption possibility was suspended early in the year, poses a clear business risk for the future. It is also important to note the changed circumstances regarding the required rate of return and the associated risks. That is, both the interest rate component and the risk premium when calculating the required rate of return – these often go hand in hand. In Germany, government bond yields have risen rapidly, and the same development has been seen in Finland. In Finland, the 10-year government bond yield has quickly risen from 2.5% to 3.0% (at the turn of 2021/2022, this bond yield was still at zero). General risk premiums are on the rise and are in danger of increasing further. These mentioned factors and the possible continuation of this trend will raise required rates of return, which in turn will decrease real estate valuations across the board. I will be keenly following at what fund pricing Titanium will eventually pay these outstanding redemptions to investors.
The Financial Supervisory Authority stated the end of January - beginning of February as the timeframe for the inspection.
The process is likely already concluded. If anything financially significant had been found, the respective listed company would have announced it. (It is probably not customary to announce, for example, tax audits if they do not affect the company’s result.)
However, if someone still wants to hold their breath waiting for massive Excel money to appear, I can tell you that in October 2018, the value of care properties was 2900 euros/square meter. In December 2024, it was 3260 euros/square meter.
In these considerations, a couple of points should also be taken into account. During this period, properties have also been sold and bought, meaning the building stock has been renewed. During the aforementioned period, construction costs have risen by 18%. The average completion year for care buildings is 2018.
There is a real shitstorm in the markets. As a result, real estate investing, that ugly duckling from a couple of months ago, is turning into a swan.
I assume that quite a few Hoiva share owners are currently following the situation with relief, congratulating themselves.
And what a situation to follow! Regarding Titanium’s Hoiva, for example:
Considering the leverage, Hoiva’s net return % is now clearly at its peak of recent years.
Likewise, the cash flow after management fees and interest.
In the long run, the cautious valuation policy of properties, the sharp rise in construction costs in recent years, and the still continuous /(accelerating) decline in interest rates will enable the rise in property valuation levels in the future.
We are as far away as possible from Trump and Trump’s machinations.
At least based on January-February, the net return percentage is not at its peak in recent years, and since there is no information about the amount of redemptions or their payment date, I wouldn’t be celebrating much as an owner of Hoiva at this stage.
) Santanen replied that they are not guessing future interest rates in Hoiva. The answer was, if I recall correctly, interpretable as meaning that the loans were relatively well interest-rate hedged.