(Bloomberg) -- The increases in market rents in Finland will only begin to reflect higher costs later in 2024 after two years of fast inflation, according to the chief executives of the Nordic country’s two biggest private residential landlords.

So far, tight competition and an oversupply of new homes have prevented Kojamo Oyj and SATO Oyj from passing on the impact of soaring prices, weighing on profitability. A slump in construction is now set to balance the supply and demand of apartments and, in turn, enable property owners to gradually start raising rents faster.

Rapid increases in borrowing costs after a decade of rates at zero — or below — have hit the real estate industry hard across Europe. While Finland has also seen deal volumes slump amid falling prices, the picture isn’t as bleak as in places such as neighboring Sweden, where landlords that used leverage to grow now struggle to refinance debt.

In Finland, “all landlords have the same agenda,” said Antti Aarnio, SATO’s chief executive officer, in an interview on Monday. “We have not been able to push the increased costs fully into rents.”

For Kojamo, the picture is similar, said CEO Jani Nieminen. Market rent increases have averaged about 2% to 3% a year — compared with inflation that at its peak exceeded 9%. Now market-rent increases could double or triple over the next couple of years, Nieminen said on Monday.

“Hopefully we will be able to pass through all the cost in 2025,” he said.

The prevalence of loans with variable interest rates means the full impact of central bank hikes have fed into the northernmost euro member’s economy. Combined with the impact of inflation that’s hit consumer spending, Finland’s economy slipped into a recession at the end of last year.

Kojamo, with an €8 billion ($8.6 billion) property portfolio, and SATO, which has €4.9 billion in residential real estate, both suspended new investments already in 2022.

Once real estate investors begin to see returns from their rental properties, they can consider new investments again, the CEOs said. 

What needs to happen first is for interest-rate levels to stabilize, Nieminen said. Also, the total cost of the project — meaning the cost of land and construction — needs to come down by 20%, he said. If rent increases stay this modest, the total construction cost needs to drop by 25%.

Tenants’ response to inflation has been to start looking for cheaper homes, typically smaller or further away from the city, SATO’s Aarnio said. He’s expecting that the government’s plans to reduce housing benefits will push even more people to find accommodation at a lower cost. 

A stable home in a cold climate is such a necessity that Finns tends to cut back on other consumption rather than skip paying rent, the executives said. 

Delinquencies are stable at about 0.5%, Markku Honkasalo, chief financial officer at SATO, said.

“Increasing rent levels now will make it possible to invest again, which will keep rents lower in the longer run, provided that the balance stays between supply and demand,” Nieminen said.

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