Ilmarinen, Finland’s largest private earnings-related pension insurance company, strives to secure the financing of current and future pensions by investing shared pension assets. One of these investment targets is the real estate and construction sector.
Ilmarinen’s Chief Investment Officer, Mikko Mursula, sheds light on how the construction sector currently appears from an investor’s perspective.
Real Estate Market Was a Weak Point in Ilmarinen’s Investment Portfolio in 2023
The year 2023 was a recovery year for investors following a challenging previous year, and it turned out to be very good for Ilmarinen: listed stocks around the world performed well, interest rates did not rise further, but the coupon yields of the bond portfolio did rise significantly. However, there were two weak points within the investment portfolio: and one of them is the real estate market.
The construction sector is critical for society as a whole. In Finland alone, it has produced 83 per cent of property and national wealth, with 500 billion euros tied up in buildings, not to mention its employment effects.
Yet, productivity growth in the sector has been negligible. Rising costs have led to bankruptcies and failures around Europe.
The Construction Sector Has Not Been a Good Investment for Investors
Ilmarinen invests in several companies in the construction sector, but Mursula notes that from an owner’s perspective, the sector has not been a particularly good investment.
“Of course, we discuss with industry professionals what the root causes are that have led to this. To me, it has appeared as a sector where growth is sought at the expense of profitability.”
However, there is now a visible change in the sector: gradually, the focus is shifting to improving productivity and profitability. Instead of just growth, there is active consideration on ensuring a certain level of profitability and shortening the lead time.
Investor Pressure Forces Construction Companies to Invest in Technology
Traditionally, the construction sector has changed due to external pressure, such as various regulations. Pressure from investors is also expected to increase in the coming years.
“At some point, even our, the investors’, tolerance will come to an end. Through this, change will surely come and we will see technological innovations,” Mursula points out.
“But I somehow hope that the seeds and ideas for development would not come entirely from pushing, but rather from innovating within the industry, because that’s where the greatest expertise resides. Of course, actors like Ilmarinen can create pressure by shouting and repeating that this sector needs to become investment-worthy. And it will become investment-worthy if productivity and profitability improve.”
Digitalisation and industrialisation of the sector are key solutions here. So far, construction has been very person-dependent and manual—even in areas where technology could be beneficial.
“Data-driven management works as a concept for most sectors. I see no reason why it wouldn’t work for the construction sector as well. As the amount of site-specific data and its real-time availability increases, we can better direct the workflow at the construction site and thus shorten the construction throughput time. These are all things that, when you hear more and more such stories from an investor’s perspective, faith in the investment potential of xyz increases.”
Instead of resource efficiency, the construction sector should focus on flow efficiency. With Sitedrive, site resolution can be brought to a finer level and production can be directed effectively through precise schedules, spaces, tasks, workers, and conditions. This helps to standardise operating methods, and produce important data for corporate management and investors.
💡 Read more here about the kind of data that should lead a construction site
Quality Data Helps Direct Production and Increase the Investment Worthiness of Construction Companies
Data is abundantly available, and this has been recognised at Ilmarinen as well. But collecting it in the right form and place and especially utilising it are real challenges. The demands for data quality and diversity are continuously increasing.
For example, at Ilmarinen, the board has set a carbon neutrality target for the investment portfolio by the year 2035. For this purpose, climate roadmaps have been created for each asset class, detailing what needs to be done from this moment until 2035 to achieve the target. This goal also applies to real estate investing and construction.
“From an investor’s perspective, construction is perhaps the sector most immersed in the carbon neutrality target. When we start developing a project, we consider where it is located, how well it is served by public transport, what building materials are used, and what the carbon footprint of the building is calculated to be over its entire lifecycle. This impacts many aspects from the perspective of investing in construction.”
This means that in the future, construction companies will need to be able to produce data that is valuable to investors from their own processes.
“Such requirements coming from Ilmarinen and other major investors related to responsibility and carbon neutrality are quite strict and concrete. There are certainly players who will not be able to respond to this call. It may be that from the perspective of development, our partner pool will look very different in five, six, or seven years than it has in the past. Responsiveness is one criterion that is already used when we choose partners,” summarises Mursula.
Although the requirements may sound strict, they are necessary. Especially from the perspective that the construction sector cannot remain the only un-digitalised industry in the world.
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