Transforming the Real Estate Stock in the Context of Societal Shifts

A Case of Transformation in Helsinki

During the first workshop of the working group “A Marshall Plan for the City of the Future: Towards a Low-Carbon Urban Model,” co-led by Edmond de Rothschild Asset Management and held on January 15, experts discussed a concrete example of successful urban transformation. The project involved a building located in the Katajanokka district of Helsinki, one of the most attractive areas in the city.

Acquired in 2018 by Edmond de Rothschild Real Estate Investment Management for €13 million (€1,600 per square meter), the building, approximately 8,000 m², had already undergone several transformations. “Originally, it housed a rope factory before being converted into office space in the 1980s. The municipality, eager to revitalize the area, supported a change of use, provided that a commercial activity remained predominant,” explained Pierre Jacquot, CEO of Edmond de Rothschild REIM.

To meet these requirements, the management company adopted a mixed-use approach, combining both residential (traditional and managed) and commercial spaces. “The ground floor of the building, about 2,000 m², was converted into a grocery store, a local supermarket, and fast-casual dining spaces. Additionally, the roof was transformed to include a sauna and a green rooftop offering panoramic views of Helsinki’s harbor,” he continued.

Enhancing Existing Stock

The extensive renovation work carried out on the building brought it up to the highest environmental standards. “Initially, we aimed for a LEED Gold certification, but the building ultimately received LEED Platinum certification,” Pierre Jacquot added. “Upon completion, it was the largest residential building renovation certified LEED Platinum in Europe.” The works included improving insulation, installing the largest photovoltaic system in Helsinki’s city center on the roof, and creating amenities supporting sustainable mobility: 168 bike parking spaces, some equipped with charging points for electric bikes, and electric vehicle charging stations.

“Working on the existing stock is a fundamental belief,” stated Pierre Jacquot. “Building a new building involves a limited resource: land. Reusing existing buildings allows us to bypass this constraint while adding value to structures, even when major renovations are needed.” This approach also involves considering how the building integrates into its urban environment. “As investors, it is crucial to think in terms of a neighborhood rather than viewing a building as an isolated entity. We must always put ourselves in the user’s shoes and consider their expectations for services, comfort, and proximity,” he added.

“We strongly believe in the mixed-use approach, combining residential and commercial spaces, as it allows for the provision of numerous services within the same property. It is about combining the concepts of ‘living spaces’ and the ’15-minute city,’ where service proximity and sustainable mobility are key. Today, developing such highly connected spaces makes a lot of sense,” commented Xavier Pelton, Director of Real Estate Investment at the AG2R LA MONDIALE Group.

Obstacles to Overcome

After three years of work, the building was sold in October 2022, generating an IRR of over 20% and a net multiple of 1.66. Despite this success, several obstacles currently limit the replicability of such projects. “One might think that simply transforming offices into housing could solve the crisis, but the buildings must be suitable for it. Not all buildings are technically transformable,” explained Pierre Jacquot.

The financial viability of such operations also represents a major challenge. “For this to work, the purchase price must allow for economic balance after renovation. However, many operations today fail because the initial valuations make a viable model impossible,” Pierre Jacquot explained. Furthermore, factors such as rent controls can deter long-term investors. “In the current economic context, profitability concerns may slow down investments in residential real estate,” noted Xavier Pelton.

Administrative constraints can also pose a challenge. “Dialogue with municipalities is key, and it is important for us to understand any biases they may have. Some municipalities may prefer maintaining office spaces, while others may prioritize increasing the number of housing units. In all cases, and this is one of the key success factors for any operation of this scale, we must engage in a collaborative process with public authorities that is flexible, pragmatic, and centered on user needs.”

“Administrative obstacles, initial asset valuation, political will, and financial feasibility are all critical factors to consider before embarking on such a project,” Pierre Jacquot emphasized, noting that the Helsinki project perfectly illustrates this reality: “Its success relied on a combination of favorable conditions: a very low acquisition price, construction permits obtained under good conditions, smooth execution of works, and ideal timing for resale. Without any one of these elements, the operation would not have been possible.”

“It is often difficult to align all the necessary parameters to make these multifaceted projects feasible, but we would love to replicate such operations,” Pierre Jacquot shared. “Today, opportunities remain limited due to an accumulation of constraints, but the good news is that we have the capital, the will, and the interest from our clients for such investments,” concluded Nathalie Wallace, Chief Sustainability Officer at Edmond de Rothschild Group.

Content written by Max Morgene.

---