RED – Danish Investment Atlas 2023 – English

VOLUME & INVESTORS 2022

WELCOME

Dear reader,

Welcome to ”RED – Danish Investment Atlas 2023”.

The past year was surprising in many ways. The year started strongly with a high tenant and investment activity. However, in the second half of 2022, the war in Ukraine, high inflation and significant interest rate increases created uncertainty across the Danish real estate market, which limited the investment activity.

On the following pages, you can get a detailed insight into the Danish commercial real estate market in the past year, as well as RED’s forecast on how we expect the market to develop in the coming year.

The report is structured as an easily accessible reference work, where you can either get a quick overview of a single segment or immerse yourself in all the details segment by segment.

Data for this year’s report is made in collaboration with ReData, which collects and validates data on the individual transactions on the Danish real estate market.

Enjoy the report,

Nicholas Thurø, Managing Partner Cushman & Wakefield | RED

RED assisted Danica with the letting of a total of 5,249 m² to Maersk, Lloyd’s Register and Viva Payment Services Denmark in Harbor House II in Nordhavn.

EXECUTIVE SUMMARY

SURPRISINGLY HIGH TRANSACTION VOLUME

2022 became a year that few had expected. The year started strongly with recordhigh activity on both the occupier and the investment market, but market uncertainties caused by the war in Ukraine, significant interest rate increases, and double-digit inflation rates slowed activity in the second half of the year.

Despite the macroeconomic uncertainties, the total transaction volume reached DKK 92.0bn, only surpassed by the record year in 2021.

THE YIELD CURVE TURNED

For a number of years, we have seen significant yield compression in the most secure property segments, including prime residentials, offices, and logistics. Although most investors still demand these assets, the high interest rate levels challenged the historically low yield requirements that we witnessed at the beginning of the year. This led to an upward pressure on the yield levels at the end of the year.

THE RESIDENTIAL SEGMENT WON ONCE AGAIN

Investments in residential properties reached DKK 39.1bn corresponding to approximately half of the total volume on the Danish market. Thus, residential properties continued to be the investors’ most preferred property segment, where the high level of activity was driven by investor demand for more or less all types of residential assets located throughout the country.

RETAIL VOLUME WAS DRIVEN BY USER PURCHASES

The retail segment took place as the second largest property segment, with a total volume of DKK 18.3bn. However, the investment activity in the segment was, among others, driven by users who completed billionkroner transactions.

Capital continued to seek the less cyclical retail assets, and the demand for both high street properties and regional shopping centres remained limited.

DANISH CAPITAL DOMINATED THE OFFICE SEGMENT

The transaction volume in the office segment decreased to DKK 13.6bn in 2022, which implied that the segment had to settle for a third place among the most traded properties and thus lost its historical position as the second largest segment in Denmark.

This year’s office transactions were primarily traded between Danish investors. The trend with Danish investors’ dominance is largely due to the fact that foreign investors primarily demand prime office properties, whose yield levels were particularly challenged by increasing interest rates in 2022.

CONTINUED STRONG APPETITE FOR LOGISTICS PROPERTIES

In contrast to the office segment, it was foreign capital that dominated the logistics segment, where particularly the larger industrial and logistics portfolios were acquired by foreign investors.

Although interest in the logistics segment remains high, and investors continue to see potential in the Danish market, there was a volume decrease to DKK 13.5bn in 2022. The decrease is particularly due to a weak second half, where sellers and buyers had difficulty meeting each other’s price expectations.

LIMITED ACTIVITY IN THE HOTEL SEGMENT

Investment activity in the hotel segment has historically been characterised by a few large deals, and 2022 was no exception. The volume in the hotel segment reached DKK 1.4bn, which was almost solely driven by Arp-Hansen Hotel’s purchase of The Square located on Rådhuspladsen and Union Investment Real Estate’s purchase of the 25Hours hotel project on Papirøen.

AN EXCITING 2023

At what level the yield requirements will stabilise depends greatly on the interest rates. However, investors continue to have longterm confidence in the Danish market as well as a lot of capital that needs to be invested.

Therefore, as inflation comes under control and interest rates stabilise, we expect to see a shorter distance between the buyers and the sellers and that the activity on the investment market will resume – especially in the second half of 2023.

THE YEAR IN REVIEW

The Danish commercial real estate market was, in many was, characterised by great uncertainty in 2022. Increasing interest rates, high inflation, the war in Ukraine and political interventions are just a few of the events that created debate. In this section, RED has summarised some of the trends that were defining for the market in the previous year.

AN INVESTMENT MARKET THAT TURNED AROUND

”2022 was a year that surprised. While the year started strong with a great investor appetite, a record high volume and historically low yield levels, a number of economic and geopolitical uncertainties led to a slowdown in the activity in the second half of the year. In 2023, we, therefore, have a market where buyers and sellers have different price expectations, which will result in a low transaction volume and continued uncertainty about the price level.”

POLITICAL STABILITY IS CRUCIAL

”Denmark has for many years been regarded as a “safe haven” for investments in troubled times, which cannot only be attributed to pure economic rationales but also, to a great extent, the political stability that usually characterises our small kingdom. But in recent years, a series of political interventions have changed this perception and created significantly greater uncertainty among both Danish and foreign investors. This is, of course, undesirable for a number of reasons, including that resources and focus are used on opaque regulations and bureaucracy rather than investments in the ESG agenda, efficiencies and modernisation. We, therefore, hope that 2023 will again be characterised by political stability, where rationality again prevails, and the industry focuses on more value-creating challenges rather than managing new legislation.”

Kim Søberg Petersen, Partner, Capital Markets

Nicholas Thurø, Managing Partner, Capital Markets

THE OFFICE MARKET CONTINUED AT A HIGH PACE

”The office market started off at the highest pace, and the combination of limited supply and continued high demand meant that almost everything that was offered on the market in central Copenhagen was taken in no time. Although the activity in recent months has slowed down a bit, there is still good activity. Therefore, we expect that prime rent levels will remain stable despite concerns about an impending recession. We also continue to believe that tenants will be uncompromising in their demands for well-located offices which can deliver on social experiences that create value for both the company and the people who work there, making the offices a destination and not just a place filled with desks.”

Anders Krogh Partner, Office Letting

A POSITIVE DEVELOPMENT ON THE HIGH STREETS

”2022 was finally the year where there again was a preponderance of positive stories to tell about the high streets of Copenhagen. Customers flocked back, and despite the continued reduced foreign tourism, the number of visitors was higher than in the year before the pandemic. At the same time, both well-known and new brands opened stores on the high streets, which reduced the vacancy rate on all of the primary high streets, except for Frederiksberggade, which remains the black sheep of the high streets. In January 2023, the promising trends from 2022 continued, and we hope that the positive trends will continue in the coming months.”

Kristian Vinggaard Partner, Retail

NORMALISED TRAVEL PATTERNS IN THE HOTEL MARKET

”After some challenging years in the hotel market, we witnessed more normalised travel patterns and strong international brands such as Scandic and NH Collections showing confidence in the market by opening new hotels in 2022. Bankruptcies have been avoided, and occupancy rates are approaching pre-covid-19 levels. At the same time, we see a slowdown in the planning of new hotels, which may indicate that the market has reached a balance between supply and demand. Combined with the fact that hotels are typically leased to strong tenants on long-term leases and that investors can currently achieve a relatively high risk-adjusted return compared to other segments, it will be interesting to see if investors will direct their attention towards the hotel segment in 2023.”

Lior Koren, Partner, Capital Markets

THE RESIDENTIAL MARKET SHOWS ITS JUSTIFICATION

”We have said it before, and we will probably say it again – in uncertain times, residential properties justify their value and why they always stand high on investors’ shopping lists. While the occupier demand for both the retail, logistics, and office properties decreases during recessions, occupier demand for rental housing is more constant, as people always need a place to live. Furthermore, the demand for rental housing is not geographically conditioned but rather distributed across the entire country, so in the pursuit of returns, it may be wise to seek outside the country’s largest cities. However, trees do not grow to the sky, and the upper limit of tenants’ willingness to pay as well as an expectation of declining prices on owner- occupied housing imply that we do not expect to see increasing residential rent levels.”

Kjeld Pedersen Partner, Capital Markets

RED assisted Peek & Cloppenburg with the acquisition of four Magasin properties located in Lyngby, Odense, Aarhus and on Kongens Nytorv in Copenhagen.

On behalf of Petunia, RED assisted with the sale of a modern office property located on Hørmarken in Farum.

ANNUAL REVIEW

The Investment Market

Volume & Investors

Interview: Will Interest Rate Fluctuations Affect the Pension Funds?

Interview: Sustainability Is the Future’s ’License to Operate’ Highlight: Are Properties Inflation-hedged Assets?

THE INVESTMENT MARKET

A year that few predicted

The high investment activity we witnessed in the record year 2021 continued into the first half of 2022, but a number of economic and geopolitical uncertainties led to a nervous and waiting market in the second half. Therefore, the volume in the third and fourth quarter of the year, which has historically been the largest, was extremely limited.

THE UPTURN ENDED IN 2022

For many years, capital has sought the safest assets on the safest locations, and particularly the prime residential, logistics and office segments have undergone a significant yield compression. This yield compression was challenged in 2022, as the year proved challenging in many ways with skyrocketing energy prices, double-digit inflation rates, record-high construction costs, and significant interest rate increases.

Especially the latter caused a slowdown in activity, where investors ended up in a decision-making vacuum, had to withdraw from transactions (as the use of foreign capital suddenly affected their business cases negatively) and generally reconsider their

investment strategies. Thus, the market’s year-long upturn ended in the second half of the year, which resulted in an upward pressure on the yield levels on completed transactions at the end of 2022.

THE MARKET HAS BECOME MORE INTERNATIONALISED

The record-breaking start of the year ensured that the total transaction volume reached DKK 92.0bn in 2022, which is the second-highest volume ever measured on the Danish market ( figure 2).

The volume in 2022 was particularly driven by foreign investors, who dominated the Danish market for the first time. While more than half of the acquisitions (measured by

volume) were made by foreign investors, it was mainly Danish players who sold off properties ( figure 1). The Danish commercial real estate market has thus become increasingly internationalised.

RESIDENTIAL WON, BUT RETAIL OVERTOOK BOTH OFFICE AND LOGISTICS

With a share of 43% of the total volume in 2022, residential segment continued to be the investors’ most preferred property segment. The office segment has, historically, been the second largest segment, but in 2022, user purchases in the billion-kroner range implied that the retail segment took the place as the second-largest segment, thereby pushing the office- and logistics down to be the third- and fourth-largest segments, respectively.

INVESTOR APPETITE IN ALL AREAS OF DENMARK

Demand for different types of properties led to the transaction volume being distributed geographically widely around the country ( figure 3). While the volume in Copenhagen and Aarhus was particularly driven by investor appetite for prime properties, the significant volume outside the largest cities was driven by an increasing investor appetite for both industrial and logistics properties, all types of residential properties as well as grocery stores.

VENDORS

Figure 1: Origin of the investors & transaction structure 2022

Figure 2: Transaction volume 2012-2022

Figure 3: Geographic breakdown of transaction volume 2020-2022

VOLUME & INVESTORS

THE HISTORICALLY LARGEST INVESTORS MAINTAINED THEIR POSITION

In recent years, the commercial real estate market in Denmark has been characterised by the fact that many new investors have entered the market. Nevertheless, the investors who have historically invested the most capital in Danish commercial properties have remained the same. Investors such as Heimstaden, Niam, Koncenton, NREP and Patrizia, thus, continue to constitute the historically largest investors ( figure 6).

NEW INVESTORS AT THE TOP IN 2022

Although these investors have historically placed a lot of capital in Denmark, they were reluctant to invest in 2022, which is why new investors came to the podium ( figure 5).

Orange Capital Partners took the spot as the largest investor with their acquisition of larger residential portfolios primarily located in the country’s largest cities. Both the second and third largest investors of the year were new investors in the market. While the

owner of Magasin, Peek & Cloppenburg, acquired four of the department stores they operate Magasin in, Xior Student Housing invested in a billion-kroner student housing portfolio.

FOREIGN INVESTORS COMPLETED THE LARGEST TRANSACTIONS

In 2022, the volume distribution between Danish and foreign investors was close to equal, with a slight preponderance to foreign investors.

However, when looking at the number of transactions, the distribution was significantly more skewed, as Danish investors accounted for almost 90% of the total number of transactions.

The investment market was, thus, once again characterised by the fact that Danish investors were behind the majority of the smaller transactions, whereas foreign investors were behind the majority of the larger transactions.

MORE TRANSACTIONS BUT LOWER VOLUME

Surprisingly, more transactions were completed in 2022 than in 2021, despite the significant drop in transaction volume ( figure 4).

Looking more closely at the development in the number of transactions within the different price ranges, it is noteworthy that there was a volume decrease and reduction in the number of transactions in all price ranges, with the exception of the range including transactions with a volume of up to DKK 20 million, where there was an increase in the number of transactions but still a decrease in volume. The number of very large transactions (+ DKK 500 million) was almost halved. As a result of this development, the average volume per transaction decreased by 33% from 2021 to 2022.

Figure 4: Breakdown in price ranges 2021 & 2022

Source: ReData

Figure 5: Top 10 investors 2022

Figure 6: Top 10 investors 2012-2022

(…) we are very aware of the pricing/yield since we have to “compete” with other asset classes where the yield has increased.”

The interest rate is of no importance to us, as we, except for one project, equity-finance (…)”

17% NO YES

83%

Flemming Bæk Engelhardt CEO, Nordea Pension Ejendomme

Michael Nielsen CEO, Danica Ejendomme

Figure 7: How much should real estate make up of your total assets?

Figure 8: Have the interest rate increases in 2022 meant that your allocation in real estate has changed?

WILL INTEREST RATE FLUCTUATIONS AFFECT THE PENSION FUNDS?

Significant interest rate increases led to several ongoing transaction processes either being put on hold or cancelled in the summer of 2022. The investors’ benefits from using debt capital were significantly reduced or disappeared, which increased yield requirements.

This caused market players to question how the interest rate increases would affect the pension funds. Did the significant interest rate increases constitute a competitive advantage for Danish pension funds, as they are primarily equity-financed and could, therefore, once again become the highest bidders? Or would the increased returns for alternative more liquid investments simply result in a changed allocation of the pension funds’ capital?

To shed light on the subject, we have asked a number of the country’s largest pension funds how their investment strategy is affected by the interest rate fluctuations.

INTEREST RATE MOVEMENTS DO NOT RESULT IN A CHANGED ALLOCATION

The conclusion is quite clear – five out of six pension funds state that the increasing interest rate has not resulted in a change in their allocation strategy and that commercial real estate should continue to make up 5-14% of their total assets ( figure 7 & 8). However, several of the pension funds state that their yield requirements for commercial real estate have changed due to the interest rate increases.

INCREASING YIELD REQUIREMENTS FROM PENSION FUNDS

Head of Real Estate, AkademikerPension

Even though Danish pension funds are primarily equity-financed and therefore not directly affected by interest rate

fluctuations, the higher interest rates lead to increasing yield requirements from their side due to the increased return on alternative investments, including bonds.

Therefore, assuming that the risk-adjusted yield is competitive, the allocation and appetite for commercial real estate is unchanged among Danish pension funds. The question of what yield level reflects the risk is currently the market’s biggest challenge, resulting in a certain distance between the buyers and sellers and, thus, in an investment market with low activity.

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Since we are not overallocated, it is not an investment stop that we are looking at, but because bonds have become cheaper on a relative basis, it is clear that our return expectations for properties also increase when long-term interest rates increase.”

Søren Møller-Larsson

Continued from previous page

In the following interview, Jakob Folkenberg Eriksen gives an insight into how ATP Ejendomme handles the significant interest rate fluctuations.

Q&A WITH ATP EJENDOMME

How do interest rate increases affect your allocation of capital?

ATP’s investment strategy is divided into risk factors rather than asset classes (equity factor, interest factor, inflation factor and other factors). An investment in commercial real estate will contribute to a greater or

lesser extent to all four factors. Having said that, ATP, like most other institutional investors, has experienced that the illiquid part of the portfolio takes up proportionately more than before, simply because the liquid part has had a difficult 2022. In that distinction, the appetite for further allocation in illiquid assets, including commercial real estate, is lower in the short term than previously.

Do you consider it to be a competitive advantage in the current market that you are equity financed?

How have the uncertainties in the market affected your investment strategy within commercial real estate?

As mentioned, our yield requirement has increased – mainly due to the development in interest rates. The distribution between segments and geography in our investment strategy has not changed.

We generally find that we can be competitive in our pricing, and we also find that it can be reassuring for sellers that we are not dependent on external financing commitments.”

Jakob Folkenberg Eriksen

Head of Investment, ATP Ejendomme

In ATP, we have an internal yield requirement for investments in general. This yield requirement has increased in line with the interest rate, which means that our yield requirement for real estate has also increased. However, we generally feel that we can be competitive in our pricing, and we also feel that it can be reassuring for sellers that we are not dependent on external financing commitments.

We are very satisfied with the significant divestments we made within foreign investments and retail in 2022. Our strategic focus remains primarily on increasing exposure within residentials and offices.

JAKOB FOLKENBERG ERIKSEN

Jakob Folkenberg Eriksen is Head of Investment at ATP Ejendomme. Jakob Folkenberg Eriksen is a graduate of Law from the University of Copenhagen and has previously worked at Baunsøe Ejendomme, EY, and DLA Piper.

ATP Ejendomme, which is a subsidiary of the pension fund ATP, owns, operates and develops properties within several segments both nationally and internationally. In Copenhagen, ATP Ejendomme, among others, owns the iconic buildings Axel Towers, Pier47, and the UN City.

On behalf of CASA Nord and CEC Group, RED assisted with the portfolio sale of 84 townhouses located in Lynge, Trekroner, Solrød and Køge.

Johan

is Sustainability Manager at NREP. Johan has a master’s degree in Economics from the University of Copenhagen and has been with NREP for five years.

NREP is a Nordic real estate developer and investor that operates across all real estate segments. NREP has pioneered sustainability in the real estate industry and is currently developing the world’s first large-scale real estate project that is aligned with all 17 of the UN’s Sustainable Development Goals.

JOHAN HALLGREN MADSEN

Hallgren Madsen

SUSTAINABILITY IS THE FUTURE’S ’LICENSE TO OPERATE’

Although sustainability has been on the agenda for several years, we are far from achieving the green transition. It is, therefore, necessary that actors across the industry take responsibility. In the following interview, Sustainability Manager at the Nordic property developer and investor NREP, Johan Hallgren Madsen, explains about the commercial real estate industry’s responsibility and how actors can use sustainability as a competitive parameter that will ensure direct returns in the future.

(…) all parties in the real estate industry must take responsibility for the green transformation if we are to achieve the goal of transforming the industry. That responsibility extends across the entire value chain from tenants to developers, authorities, banks and, not least, investors.”

Johan Hallgren Madsen Sustainability Manager at NREP

What responsibility do you believe investors have in ensuring a more CO 2 -neutral real estate market?

At NREP, we believe that all parties in the real estate industry must take responsibility for the green transistion if we are to achieve the goal of transforming the industry. That responsibility extends across the entire value chain from tenants to developers, authorities, banks and, not least, investors. Investors, in particular, have a unique opportunity to make

demands for sustainability and reduced CO 2 emissions. Many investors already require sustainability certification and energy efficiency, but there is a need for increased focus on measuring and reducing embedded CO 2 through life cycle analyses.

What considerations do you make regarding sustainability when considering potential investment opportunities?

At NREP, we conduct a thorough sustainability due diligence on all investment opportunities. We screen for a wide range of sustainability criteria with a strong focus on CO 2 footprint, both embedded and from operations. We require reductions in CO 2 emissions, and we do not make acquisitions if the building cannot be transformed to meet our criteria for CO 2 reduction. We impose an internal CO 2 tax on our investments to ensure a commercial incentive to reduce CO 2 emissions.

What factors drive your sustainability strategy?

Overall, we believe that our society and, not least, the real estate industry has a

fundamental task in ensuring a green transition. Global warming is the biggest challenge facing our society, but it is also a unique business opportunity.

Sustainable solutions are in demand across the real estate industry’s players, and we see sustainability as one of our most important competitive parameters. Sustainability is the futures’ “license to operate” and, therefore, an integral part of our business strategy. Sustainability is often based on ensuring better resource utilisation, and we see a direct return from reducing our consumption of energy and raw materials.

We impose an internal CO 2 tax on our investments to ensure a commercial incentive to reduce CO 2 emissions.”

Johan Hallgren Madsen Sustainability Manager at NREP

ARE PROPERTIES INFLATION-HEDGED ASSETS?

Historically, commercial real estate has been considered as inflation-hedged assets, as the rental income can continuously be regulated with the net price index. But has the rent developed in line with the inflation over time, and does an inflation of 10% imply that the market rent increases by 10%, and is the investors’ yield requirements unaffected by the inflation?

THE RENT INCREASES IN LINE WITH INFLATION – BUT WHAT ABOUT THE MARKET RENT?

In both the Residential and Commercial Tenancy Act, there are legal bases to agree that the rent for residential and commercial leases is regulated annually with the development in the net price index (inflation), which means that the income generated from commercial real estate should generally be inflation-hedged. However, the market rent is not the result of inflation development but rather the result of the relationship

between supply and demand. In the real estate market, the total building stock (supply) is constant in the short term, as it takes 18-24 months to increase the building stock with new properties, and a reduction of the building stock requires demolition or a change of use, which is also time-consuming.

THE RELATIONSHIP BETWEEN SUPPLY AND DEMAND IS DECISIVE

During times of recession, when companies reduce their space needs, the supply of vacant space will increase, creating a

downward pressure on the market rent. Even though the landlords can regulate the rent the market rent will, in a period of recession, be under pressure and tenants will explore the market for alternative leases at a lower rent or discuss a market rent regulation with the landlords. High rent regulations can, therefore, result in a higher tenant turnover and, thus, unwanted fluctuations in cash flow due to vacancy and reletting costs, as well as the risk of the leases not being relet at the new higher rent levels, putting a downward pressure on the market rent

Figure 9: Prime office rent in Copenhagen 2008-2022

levels. Hence, an oversupply means that the landlords cannot realise the rent adjustment as market rent does not follow inflation.

The market rent is thus not defined by the inflation level but rather by the relationship between supply and demand. When there is a balance between supply and demand, market rent will generally follow inflation, and, consequently, the cash flow will be inflation-hedged. Conversely, market rent will be unchanged or decrease when there is an oversupply, and the cash flow will then not be inflation-hedged.

THE OFFICE MARKET HAS NOT BEEN HEDGED AGAINST INFLATION

When looking at the development of the rent level for prime office properties in Copenhagen over the last 14 years, the rent has not kept up with inflation ( figure 9). Even though the inflation rate during 20082015 was, on average, 1.8%, the prime rent level remained unchanged throughout the period. This was due to the fact that the Copen hagen office market was characterised by a significant supply of centrally located building sites, which kept the market rent down. From 2016 to the first half of 2022, the combination of strong tenant demand and a more limited construction opportunities meant that prime rent levels increased by an average of 4.2%, even though the average inflation was only at 1.3%.

In the second half of 2022, the uncertainties in the market (including especially expectations of an upcoming recession) led to a more limited demand for office leases, which is why the prime rent level remained stable, despite inflation averaging at 9.4%.

As a result of the continued uncertainties in the market, prime rent levels are, at best, expected to remain unchanged in the coming months, although inflation is expected to remain relatively high.

YIELD REQUIREMENTS ARE INDIRECTLY AFFECTED BY INFLATION

The investors’ yield requirements are the sum of a risk-free rate and a risk premium. While the risk-free rate is often defined as

the effective rate on government bonds, the risk premium depends on both market risks, illiquidity risks, lease agreement risks, and reletting risks ( figure 10).

Inflation does not affect investors’ yield requirements directly, however, when inflation is high, central banks (as we also saw in 2022) will usually raise interest rates to dampen the economy and keep inflation under control. When interest rates are raised, bonds give a higher return, thus increasing the risk-free rate.

HIGHER INTEREST RATES INCREASES THE INVESTORS’ RISKS

Moreover, interest rate increases make it more expensive to finance investments in commercial real estate, which reduces the return on equity. At the same time, investors’ opportunities for leverage decrease as a result of the Financial Supervisory Authority’s so-called “critical rent” calculation, which increases the equity requirement.

A higher interest rate, therefore, slows down investment activity and can also lead to investors allocating a larger share of their capital to bonds rather than commercial real estate. This increases the investors’ illiquidity risks.

The combination of inflation and the subsequent interest rate increases also hits both households and businesses hard, which increases investors’ lease agreement risks,

as there is a greater risk of tenants not paying their rent and commercial tenants going bankrupt.

A HIGH INTEREST RATE ENSURES DEMAND FOR RESIDENTIAL RENTAL HOUSING

How investors’ reletting risks are affected by interest rate increases depends on the asset type. While the tenant demand for rental housing is positively affected by interest rate increases, occupier demand for commercial leases is negatively affected.

This is because the interest rate increases imply that the housing burden for owneroccupied housing rises significantly, thereby increasing demand for rental housing. In contrast, interest rate increases lead to both higher financial costs and greater uncertainty among commercial tenants, which reduces the occupier demand.

REAL ESTATE IS NOT INFLATIONHEDGED WHEN INTEREST RATES RISE

Commercial real estate will, therefore, not be inflation-hedged assets when high inflation leads to interest rate increases, as both the risk-free rate and risk premium, and thus investors’ yield requirements, will increase. This reduces the market value of properties and, hence the return that can be generated in the event of a sale.

CONCLUSION: INFLATION IS GOOD IN TIMES OF ECONOMIC STABILITY

This development in cash flows and the investors’ yield requirement implies that we must say goodbye to the general perception that high inflation is always good for the commercial real estate market, as properties are not always inflation-hedged assets.

However, properties will be inflation-hedged assets in times of stable inflation and when there is a balance between supply and demand (market rent follows inflation).

Commercial real estate, therefore, continues to be an attractive alternative to stocks and bonds, whose value will always be eroded in line with inflation.

Figure 10: Investors yield requirement

EXPECTATIONS FOR 2023

At the beginning of 2022, no one could have predicted that a year later, the market would be where we stand today, with a market at a standstill. In 2023, we expect that buyers and sellers will continue to have different price expectations, where, in particular, the development in the interest rates will be decisive for the development in the yield requirements and the investment activity.

RED’S EXPECTATIONS

ACTIVITY WILL DECREASE IN 2023

2022 was in many ways a surprising year that started with a record-high investor appetite, which was replaced by economic uncertainty in the second half of the year. We expect that the slowdown we saw in investment activity in the second half of 2022 will continue into 2023, where investors, particularly in the first half of the year, are expected to be reluctant and await the development of the interest rates.

The expectation of lower investment activity and reluctancy among investors is supported by our investor survey, which shows that the share of investors who expect to buy more than they will sell has decreased by almost 30 percentage points compared to a year ago – ie., before the significant interest rate increases became a reality ( figure 11).

Despite this development, half of the surveyed investors still expect to make more purchases than sales in their portfolio. This testifies to a continued confidence in the Danish commercial real estate market, whose economy continues to be one of the most stable and solid in Europe, guaranteeing investors low risk when investing in Denmark compared to other countries.

THE ETERNALLY DESIRED RESIDENTIAL PROPERTIES

The continued uncertain times and the expectation of an upcoming recession will affect the segments very differently. As Danes always need a home, residential properties are only affected to a small degree, whereas both the retail, logistics, and office segments will be significantly more challenged. Sales in the retail properties will decrease, resulting in fewer goods that need to be distributed from logistics properties, and ultimately, a decrease in employment will result in a lower need for office

space. Our investor survey shows that investors see the same challenges, as more than half of investors expect the residential segment to perform best in the coming months ( figure 12).

SUSTAINABILITY IS BECOMING MORE IMPORTANT

In addition to a continued appetite for residential properties, we expect to see an increased focus on sustainability among investors in 2023. This expectation is based on the fact that we have seen that both tenants and owners are increasingly demanding sustainability across asset classes. The expectation is also supported by the fact that our investor survey shows that investors are increasingly formalising their requirements to achieve sustainability classification when investing in commercial real estate ( figure 13).

Continued on next page

We expect that the slowdown we saw in investment activity in the second half of 2022 will continue into 2023, where investors, particularly in the first half of the year, are expected to be reluctant and await the development of the interest rates.”

Bo Stevnss Partner, Capital Markets, RED

What is your objective with regard to the size of your portfolio in terms of acquisition/disposal during the coming six months?

Increase – more acquisition the disposal Stable – as much disposal as acquisition

Decrease – more disposal than acquisition

Which segment do you consider to have the best potential to perform well during the coming six months?

Do you consider sustainability classification when investing in real estate?

Yes, it is part of our formalised investor prerequisite

Yes, but we do not have a formal approach to it

Yes, but not of importance

No

Figure 11: Investor Confidence Index – Portfolio size

Figure 12: Investor Confidence Index – Segment with best potential

Figure 13: Investor Confidence Index – Sustainability classification

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EXPECTATIONS OF INCREASING YIELD REQUIREMENTS

The current uncertainty in the market is expected to result in increasing yield requirements in 2023, where the high interest rate levels are particularly expected to challenge the historically low yield requirements, which we witnessed at the beginning of 2022 in the prime office, housing and logistics segments. For particularly low-yielding assets, we expect that the buyers’ and sellers’ price expectations will have difficulty meeting and that more investors will keep their properties rather than accept to sell at higher yield levels.

The expectation of higher yield requirements is supported by our investor survey showing that investors in early 2023 have become more pessimistic in terms of how they expect their portfolio’s value to develop during the next six months

( figure 14). While approximately half of the investors expect a decrease in their portfolio value, only 8% expect value increases. Investors expect that the primary causes of the decreases in their portfolio value will be increasing yield requirements and worsened financing conditions.

THE WILLINGNESS TO LEND WILL SLOW DOWN ACTIVITY

High interest rates, high inflation and a more limited willingness to lend from financial institutions are the new reality which will limit the investors’ access to debt capital and thus reduce investment activity until the macroeconomic environment once again comes under control.

When asked about the investors’ expectations for their future financing conditions, the investors are significantly more pessimistic than previously ( figure 15). While

over half of the investors expect worsened financing conditions during the next six months, only 5% expect improved conditions. However, investors have become slightly more optimistic compared to the third quarter of 2022.

The development of interest rates will, therefore, be decisive for when the investment activity will return. In the following interview, Danske Bank’s chief economist, Las Olsen, gives his take on how the interest rate will develop in 2023 and how it will affect the real estate market.

The Cushman & Wakefield | RED Investor Confidence Index

The index monitors 112 of the most active investors’ expectations for the Danish commercial real estate market during the coming six months. The broad coverage ensures that the findings are representative reflections of the investors’ confidence in the Danish market. By conducting the survey on a biannual basis, we are also able to track changes in the confidence.

How do you see the value of your portfolio developing during the coming six months?

What is the future outlook for your financing compared with your current financing?

(In terms of the financing of new acquisitions or the refinancing of your existing properties)

Figure 14: Investor Confidence Index – Portfolio value

Figure 15: Investor Confidence Index – Financing conditions

Q&A WITH DANSKE BANK

How do you expect interest rates to develop in 2023?

We definitely expect interest rates to be raised further in 2023. Inflation is far too high, and the European Central Bank has clearly signalled that, in their opinion, more is needed. Exactly how much more is, on the other hand, really difficult to say because we are currently moving far outside the comfort zone of economic models. The bond market already prices in that interest rates will be raised to over three percent in the euro area, which seems very fair, so it is not certain that we will see further increases in longterm interest rates.

How do you expect developments in the financial markets will affect the real estate market?

It is not that there is a one-to-one correlation between higher interest rates and real estate prices, but it is hard to believe that the very large increase in interest rates over the past year and into 2023 will not be negative for the prices. For Danish mortgages, this is more or less the largest interest rate increase in 170 years, apart from a single episode in the 1970s. This time we are also facing an economic slowdown, but it must be emphasised that we do not expect the slowdown to be particularly deep.

LAS OLSEN

Las Olsen is Chief Economist at Danske Bank. Las Olsen has been with Danske Bank since 2007 and has a master’s degree in Economics from the University of Copenhagen.

Danske Bank is a Nordic bank headquartered in Denmark. The bank, which is the largest in Denmark, has customers in ten countries and advises both private and business customers as well as institutional customers.

RED assisted CASA Nord and CEC Group with the turn-key sale of Skovgårdene in Køge.

VOLUME & INVESTORS

SURPRISINGLY HIGH VOLUME IN CHALLENGING TIMES

The residential segment has been the investors’ most preferred property segment for many years and was it also in 2022. The transaction volume reached DKK 39.1bn, equivalent to almost half of the total Danish transaction volume ( figure 18).

Although the volume was significantly lower than in the record year 2021, there was still completed a relatively high number of large dealsm and + DKK 500m deals accounted for almost half of the volume ( figure 17). This resulted in a continued high volume –especially when considering the development in the macroeconomic environment during the year.

ACTIVITY DRIVEN BY A STRONG FIRST HALF

The year started strongly with an insatiable investor appetite, high competition, record low yield levels, and an investment activity in the first half of the year that actually exceeded the activity in the same period of 2021. However, high inflation and increasing

interest rates created uncertainty in the second half of the year, resulting in extremely limited investment activity in both the third and fourth quarter, which otherwise historically have been the largest quarters. The transaction volume for the year was thus solely driven by a strong first half.

THE FOREIGN INVESTORS’ DOMINANCE IS BACK

While Danish investors dominated the residential segment in 2021, foreign investors took back their position as the largest investors in 2022 ( figure 16). Conversely, it is particularly Danish investors who sold residential properties in 2022. Thus, foreign investors own an increasing share of the Danes’ homes.

NEW TOP INVESTORS IN THE SEGMENT

Heimstaden, Koncenton and Niam have been among the top five investors in the residential segment for many years, but in 2022 new investors entered the podium ( figure 19 & 20).

Orange Capital Partners was the largest investor in the segment in 2022, primarily due to their acquisition of NREP’s portfolio, consisting of seven residential properties, which was the year’s largest transaction. In addition, Belgian Xior Student Housing entered the Danish market and became the year’s second-largest residential investor with their acquisition of the BaseCamp student housing portfolio.

Figure 16: Origin of the investors & transaction structure 2022

Figure 17: Breakdown in price ranges 2022

* The stated volumes are for the residential part only, which is why any other uses in mixed properties are not included in the volume.

Figure 18: Residential – Transaction volume 2012-2022

Figure 19: Residential – Top 5 investors 2022

Figure 20: Resid ential – Top 5 investors 2012-2022

GEOGRAPHICAL DISTRIBUTION

KEY FIGURES FOR ASSET TYPES

MARKET RENT

OLD HOUSING STOCK

STUDENT HOUSING

OTHERS

GEOGRAPHICAL DISTRIBUTION

RETURNS MUST BE GENERATED OUTSIDE OF COPENHAGEN AND AARHUS

As a result of a high investor demand for the safest assets, the investors’ yield requirements for residential properties have undergone a significant yield compression in recent years, resulting in record-low yield levels across the country. However, investors still count in a certain location risk when investing in residential properties located outside of the country’s largest cities. The location risk premium in the residential segment is, however, significantly smaller than the location risk premium in the office segment and for speciality stores.

While properties with free rent determination in Copenhagen and Aarhus in 2022 were sold at a weighted average yield of 3.05% and 3.20%, respectively, investors required a risk premium of almost 100 basis points for properties located in Greater Copenhagen and another 100 basis points for “other Jutland and Funen”.

DECREASING ACTIVITY IN ALL AREAS OF DENMARK

The decrease in the investment activity in the residential segment is also reflected in the geographical distribution, as there was a decrease in activity in all geographical areas from 2021 to 2022 ( figure 21). However, proportionally, the decrease in activity was significantly lower in Greater Copenhagen and Aarhus than in Copenhagen and “rest of Denmark”, which implies that capital was invested significantly more evenly in 2022 than we have previously seen.

However, the reasons for the decreasing activity in Copenhagen and “rest of Denmark” are to be found in different circumstances. The decrease in Copenhagen is primarily due to prime properties being particularly challenged by rising interest rates, making it difficult (if not impossible) to finance purchases at the recordlow yield levels. This resulted in buyers and sellers not being able to meet each other’s

price expectations and more property owners preferring to keep their properties rather than selling at higher yield levels.

In “rest of Denmark”, it was particularly the absence of transactions with larger residential portfolios, which in recent years have driven a lot of the activity, that led to a more than a halving of the volume.

FOREIGN INVESTORS DEMAND LOW RISK WITH HIGH VOLUME

Despite the more even distribution, the trend of foreign investors’ dominance in the country’s largest cities, as well as the Danish investors’ dominance in “rest of Denmark”, was reinforced in 2022. Thus, we again witnessed that foreign investors have a clear preference for the safest assets with high volume, while Danish investors are more risk-averse and do not have the same volume requirements for the transactions.

Source: ReData Danish Foreign

Figure 21: Residential – Historic geographic breakdown 2020-2022

On behalf of Helsingør Municipality, RED assisted with the sale of Stadiongrunden in Helsingør. The site will be developed into a new urban area with over 200 residentials.

TOP 5 TRANSACTIONS 2022

1. NREP PORTFOLIO

The year’s largest transaction in the residential segment was completed in June when Orange Capital Partners acquired a portfolio with seven properties located in Copenhagen S, Aarhus and Birkerød from NREP. The properties are all built in the period 2018-2022 and include a total of 1,213 residential units, seven commercial leases and 680 parking spaces.

2. BASECAMP PORTFOLIO

In May 2022, the Belgian real estate investor Xior Student Housing bought Basecamp Student and the company’s portfolio with 5,341 student housing units (11 properties) located in several European cities. The portfolio included three Danish properties (one located in Copenhagen and two in Kongens Lyngby) as well as a property under development in Aarhus. The Danish properties comprise a total of 1,657 units.

Photo: NREP

Photo: Titan Awards

3. BLÆKHUS PORTFOLIO

In 2022, Patrizia acquired a portfolio of seven properties with a total of 1,186 student housing units and approx. 3,800 m² of commercial area from Deutsche Finance International (DFI). While six of the properties are located in Copenhagen, the seventh is located in Aarhus. The properties are all newly built or under development and are let out as fully serviced student accommodations with a focus on community, sports facilities, central locations and modern surroundings.

4. AGORAHAVERNE PORTFOLIO

NREP purchased a portfolio with eight senior co-housing communities (Agorahaver) from Tetris in March 2022. While three of the communities have opened (one in Slagelse and two in Næstved), the next two are ready for occupancy in early 2023 (Slagelse and Odense), and the remaining three are still under development (Holbæk, Greve and Kolding). With the sale, Tetris has secured capital to expand the concept and build a new portfolio of Agorahaver.

5. PROJECT FAIRYTALE

In March 2022, the Dutch real estate investor, Orange Capital Partners, acquired a portfolio with four properties and a total of 321 residential units from the American real estate investor Ares Management. The portfolio includes two newly built townhouse properties located in Køge, a mixed retail- and residential property in Hillerød and a newly built property with residential apartments in Risskov.

Photo: Blækhus

Photo: Agorahaverne

Photo: Strandroseparken

INCREASING INTEREST RATES BENEFITS RENTAL HOUSING – IN THE SHORT TERM

High inflation, increasing interest rates, and expectations of decreasing prices on owner-occupied housing made many headlines in 2022. Since residential investments make up approximately half of the transaction volume in Denmark, many investors have speculated on how the rental housing market will react in a market with decreasing owner-occupied housing prices. The conclusion is a higher demand for rental housing, but will this also lead to higher rent levels?

OWNER-OCCUPIED HOUSING IS SENSITIVE TO INTEREST RATES

Rising interest rates affect the real estate market in several ways. While it becomes more expensive for individuals to finance their home purchase (especially for firsttime buyers who have not been part of the boom), it becomes more expensive for existing property owners with variable interest rates to repay their loans. The increased housing burden will thus result in a lower demand, which will affect the owneroccupied housing prices negatively.

MINOR INTEREST RATE FLUCTUATIONS DO NOT AFFECT OWNER-OCCUPIED HOUSING PRICES

In the period 2006-2009 apartment prices in Copenhagen fell significantly as a result of substantial and prolonged increases in the interest rates and the housing burden ( figure 23). However, looking historically, short-term interest rate fluctuations (such as in the second quarter of 2011 and the third quarter of 2015) have surprisingly not had any notable effects on owner-occupied apartment prices.

Conversely, we see a rapid slowdown in the number of completed sales when the

Figure 22: Calculation of net costs 2020 vs. 2023 (based on a 100 m² owner-occupied apartment in Carlsbergbyen)

Sources: Finans Danmark, Statistics Denmark and Realkredit Danmark

interest rates increase. The explanation lies in the fact that properties are illiquid assets, and while the sellers look at the latest realised prices, the buyers look at the increased housing burden. This implies that the activity slows down for a period of time as the sellers and buyers cannot meet.

On the other hand, the increasing interest rates’ effect on prices is delayed, as the new price level is not realised before the seller and buyer can meet again and sales are completed. If the interest rate level stabilises relatively quickly (as in 2011 and 2015), the effect will, therefore, not be reflected in decreasing housing prices.

THE HOUSING BURDEN REACHES A PRE-FINANCIAL CRISIS LEVEL

When comparing standard financing for two comparable owner-occupied apartments on the market, the net costs excl. owner expenses have increased by almost 60% in just three years, of which approximately 40% points are due to the general increase in owner-occupied apartment prices, and 20% points are due to interest rate increases ( figure 22). Throughout 2022 increasing interest rates have, thus, eroded the Danes’ purchasing power. This is reflected in the

housing burden in Copenhagen, which in the third quarter of 2022 was close to the same level as before the financial crisis.

THE HOUSING MARKET IS A COST GAME

When searching for a home, home seekers will look at the housing burden of owneroccupied versus rental housing as well as the pros and cons of the two alternatives.

In the current market, the increasing loan costs and continued high prices that are expected to decrease, make home buyers in Copenhagen hesitant. When buying the owner-occupied apartment in the example mentioned, a homeowner will currently have to pay about DKK 20,000 in interest per month (after tax deduction). The same apartment can be rented for DKK 17,500-18,500 per month, where the tenant also does not take on the risk of decreasing owner-occupied apartment prices and can terminate and vacate the lease without obligations.

Before the owner-occupied housing market becomes attractive again, it is, therefore, essential that the housing burden is normalised – either due to decreasing interest rates or lower owner-occupied apartment prices.

RENTAL PROPERTIES WILL BE IN HIGH DEMAND IN THE SHORT TERM

After a long period where the owneroccupied housing market, due to favourable financing conditions, has been doing well with high activity and increasing prices, we are now entering a period where the advantages lean towards the rental market. As the current interest rate level implies that Danes are pushed towards the rental housing market, we will see an increasing demand for rental housing in the short term. The question is now whether the rent levels will increase as a result of the high demand.

The owner-occupied housing market is currently in a vacuum. However, we are currently seeing an owner-occupied market with limited activity where housing prices are on the way down. This development is expected to continue in the coming year, and we do not believe that we will see a stabilised housing market before 2024. At the same time, many Danes are currently experiencing a real wage decline due to high inflation, which implies that we do not expect the rent levels to increase further due to the ceiling on tenants’ ability to pay. Landlords will therefore experience high demand and a stable rent level throughout 2023.

Figure 23: No. of deals, prices, long-term interest rate & housing burden – Copenhagen City (index 100=2005)

THE CAP ON RESIDENTIAL RENT INCREASES AND ITS CONSEQUENCES

As a result of the high inflation, the now-former government implemented a cap on residential rent increases in September 2022, limiting rent increases to 4% for rental housing for a two-year period. The law has been a subject of great debate in the real estate industry, with discussions about whether it constitutes expropriation.

In the following interview, lawyer Rasmus Skov from Bruun & Hjejle provides his perspective on the rent cap.

Which societal groups do you think will benefit from the cap on rent increases?

The cap on the regulation of rent at 4% per year includes both rental housing with free rent determination (for example, leases in properties that were taken into use after December 31 st, 1991) and comprehensively modernised leases in properties covered by the rules on cost-determined rent. For both types of leases, the rent will generally be on the high side compared to other leases.

Therefore, the regulation cap will benefit many tenants with high incomes who can pay a rent of, for example, DKK 2,000 per m2 per year or more for leases where the rent is set according to the rules for free rent determination. For these tenants, a regulation of the rent with the full development in the net price index would, of course, be felt, but it would probably not mean that the tenants would be forced to move.

On the other hand, there are also many leases with free rent determination that are

shared by several residents, such as students, who do not have the same high incomes, and where tenants would not be able to pay the rent if it were regulated with the full development in the net price index.

How do you see the legal nature of the initiative?

The cap on the regulation of rent at 4% per year is an intervention in the rights of landlords in relation to existing leases, where it has been agreed that the rent will be regulated with the development in the net price index. Although this is a significant intervention, it is my assessment that the regulation cap does not generally constitute an intervention that has the character of expropriation under the constitution’s § 73. Among other things, there is an exception to the regulation cap, where the landlord can regulate the rent with more than 4% per year if the landlord can document that the landlord’s expenses related to the property have increased by more than the allowed regulation of the rent. However, it cannot be ruled

out that there are some landlords who will be atypically afflicted by the intervention, and for these landlords, it can be argued that this is an expropriative intervention.

Is it your belief that someone will challenge the legislation by taking a case to court?

It is not my impression that there are landlords who will bring the intervention to court. On the contrary, there were landlords who, before the regulation cap came into effect on September 30 th , 2022, had already decided to only let the rent be regulated by 4%. These landlords consider the disadvantage of tenants moving out, the landlords having to bear the costs of renovating the lease and the risk of not being able to relet the lease at the increased rent as greater than the disadvantage of receiving the minor regulation of the rent. The churn rate in properties with free rent determination is usually quite high (approx. 20-25% per year), and if the market rent increases more than the allowed regulation of 4%, the landlord will always be able to relet the lease at the market rent without being subject to a cap on the size of the rent.

It is also not my impression that there are landlords who will bring the intervention to court with reference to the fact that the landlord’s property has decreased in value as a result of the regulation cap. When valuing rental properties, the landlord will make an NOI calculation, where the landlord – at least historically – has allowed rental income and operating expenses to increase by 2% annually. I am not aware of landlords who have calculated with a regulation of the rent with the full development in the net price index, which is currently at 10.3% (the development from October 2021 to October 2022). For the same reasons, I am not aware of buyers who require a price reduction for a rental property solely on the basis that the landlord may only regulate the rent by 4% for a period of two years.

The increase in interest rates has a far greater impact on the valuation of residential rental properties than the cap of 4%, and the increase in interest rates is currently being used as justification for price negotiations.

RASMUS SKOV

Rasmus Skov is Partner and Lawyer at Bruun & Hjejle. Rasmus is a graduate of Law from the University of Copenhagen and has been with Bruun & Hjejle’s Real Estate department for more than ten years.

Bruun & Hjejle is a leading Danish law firm within M&A, Real Estate and Litigation. Bruun & Hjejle advises Danish and international clients regarding all areas within Real Estate, including complex property transactions, financing, and property development.

The increase in interest rates has a far greater impact on the valuation of residential rental properties than the cap of 4%, and the increase in interest rates is currently being used as justification for price negotiations.”

Rasmus Skov Partner

and Lawyer, Bruun & Hjejle

EXPECTATIONS FOR 2023

In recent years, the residential segment has been characterised by a significant tenant and investor demand, which has been supported by a particularly strong owner-occupied housing market. However, the segment was challenged in 2022, where the owner-occupier housing burden increased and housing sales fell drastically. In response to this, we expect to see decreasing prices on the owner-occupied market in the first half of 2023, whereas the rental housing market is expected to develop positively.

THE OCCUPIER MARKET INCREASING DEMAND IN THE SHORT TERM

In the country’s largest cities, the rental housing market has been highly attractive for a number of years due to a significant demand, a shortage of rental housing and restrictive lending rules for buying owner-occupied housing.

We expect the high demand for rental housing to continue in 2023, among other things, as a derivative effect of the increasing interest rates that have made the owner-occupied housing market less attractive. Home seekers are thus pushed into the rental market, where the housing burden has not increased to the same extent – partly due to the introduction of the regulation cap, which limits landlords from adjusting rents by more than 4% per year for a two-year period.

Even though the housing burden on the owner-occupied housing market may normalise within a short period, either due to decreasing interest rates or decreasing prices on owner-occupied housing, we expect to see a continued attractive rental market in the country’s largest cities. This

expectation is, among others, based on forecasts of a continued large influx of residents to the cities and a continued undersupply of rental housing in Copenhagen and Aarhus.

LIMITED RENT INCREASES

As a result of expectations of falling owner-occupied housing prices, we expect to see limited increases in the rent levels for family homes. This will particularly apply in the less central residential areas, where a significant building activity has resulted in a large supply of newly built rental properties.

Our expectations of a more stable but still strong rental residential market are supported by our investor survey, which shows that the majority of investors in Q1 2023 expect rent levels to remain unchanged in both the country’s largest cities and in the provinces – but at the same time, 37% of investors expect increasing rent levels in the country’s largest cities ( figure 25 & 26).

SENIOR HOUSING COMMUNITIES WILL BE CHALLENGED

Although the tenant demand for co-housing communities has been increasing in recent years, we expect that some of the housing

forms that have concepts targeted at specific groups will be challenged in 2023.

Due to challenges on the owner-occupied market, it is it difficult for seniors to exit the owner-occupied housing market. Therefore, the demand for senior housing communities is expected to be challenged as seniors will have difficulties selling their homes.

Conversely, the interest rates and lenders’ requirements make it difficult for first-time buyers to enter the owner-occupied housing market, which is why the demand for rental housing from students is expected to remain high in 2023.

THE INVESTMENT MARKET INCREASING YIELD LEVELS

Investors have for years benefited from the low interest rates and the financial institutions’ high willingness to lend to residential properties. With limited equity and significant debt (mortgage) in relation to other property segments, investors have been able to achieve attractive returns despite the significant yield compression in the segment.

Although investors are experiencing worse financing conditions today compared to a year ago, we do not expect large increases in the yield levels. Investors continue to have a lot of capital allocated for investments in real estate, where interest is primarily focused on the safest assets.”

Kjeld Pedersen

Partner, Capital Markets, RED

However, in 2023, we expect to see increasing yield requirements. This expectation is based on the fact that with the current interest rate level, it is not profitable to use debt to purchase residential properties in Denmark’s largest cities, as the return on equity is negatively affected. This limits the potential investors to buyers with limited requirements for debt financing, including a small number of foreign investors, wealthy private individuals, and Danish pension funds.

Our expectation of increased yield requirements in the residential segment is supported by our investor survey, which shows that while at the end of 2021 and the beginning of 2022, there were almost no investors who expected increasing yield requirements, there are now 58% of investors who expect that the yield requirements will increase ( figure 24).

THE YIELD REQUIREMENTS WILL INCREASE THE MOST IN COPENHAGEN

Although investors are experiencing worse financing conditions today compared to a year ago, we do not expect large increases in the yield levels. Investors continue to have a lot of capital allocated for investments in real estate, where interest is mainly focused on the safest assets.

Since the expectation of increasing yield requirements is primarily due to the interest rate level – and not a lower demand –we expect yields to increase proportionally more in Copenhagen and Aarhus than in the rest of the country. This is due to yield requirements being lowest in Copenhagen and Aarhus, and the yield requirements primarily need to increase to ensure a positive cash flow when using debt.

Figure 24: Investor Confidence Index – Residential yields

During the coming six months, market yields for residential properties will:

From the lowest yield levels we saw in the first half of 2022, we expect the yield requirements for newly built residential properties in the country’s largest cities to increase by approximately 50 basis points.

INVESTMENTS IN REGIONAL GROWTH CITIES GENERATE RETURNS

In 2023, we expect to see a continued strong investor demand for residential rental housing properties in the country’s regional growth cities. Several investors see an advantage in the rent level being lower in these cities, reducing the investors’ reletting risk. Additionally, these properties continue to generate higher returns compared to rental housing properties in Copenhagen and Aarhus.

Figure 25: Investor Confidence Index – Residential market rent

During the coming six months, the market rent for residential units in the largest cities will:

The Cushman & Wakefield | RED Investor Confidence Index

The index monitors 112 of the most active investors’ expectations for the Danish commercial real estate market during the coming six months. The broad coverage ensures that the findings are representative reflections of the investors’ confidence in the Danish market. By conducting the survey on a biannual basis, we are also able to track changes in the confidence.

Figure 26: Investor Confidence Index – Residential market rent

During the coming six months, the market rent for residential units in the provinces will:

COPENHAGEN AND AARHUS PROVINCES

RESIDENTIAL TRANSACTIONS

RESIDENTIAL – TOP 30 TRANSACTIONS 2022

KEY FIGURES

COPENHAGEN

GREATER COPENHAGEN

OTHER ZEALAND

AARHUS

OTHER JUTLAND & FUNEN

* The average offering rent is based on 35.481 observations from 2022 and is stated in DKK per m² per year (rounded).

** The average offering period is the number of days, in which the lease was offered on the market.

RED assisted a private investor with the letting of 126 m² at Gammel Mønt 10 to Holzweiler.

RETAIL

Volume & Investors

RESIDENTIAL

Geographical Distribution

Top 5 Transactions 2022

Highlight: The High Streets of Copenhagen in 2022

Highlight: Have High Street Properties Passed Their Test?

Highlight: Is the Liquidity in Retail Returning?

RETAIL

OFFICE

48 50 54 56 58 60 62 66 LOGISTICS

VOLUME & INVESTORS

RECORD HIGH VOLUME DRIVEN BY LARGE TRANSACTIONS

In 2022, the retail segment took over the office segment’s historical position as the second largest segment with a total volume of DKK 18.3 bn, which is the highest volume ever seen in the retail segment ( figure 29).

However, the high investment activity in the retail segment should not be seen as an expression of an increased investor appetite for retail properties in 2022, as the recent years’ uncertainties in the retail market continued to limit the demand. Instead, the volume was driven by portfolio sales and large stand-alone transactions. This is reflected in the fact that the four largest transactions in the retail segment together accounted for more than half of the total volume ( figure 28).

While Danish investors have been dominant in recent years, a share of 66% of the transaction volume implied that foreign capital dominated the retail market in 2022, which is the first time since 2015.

THE LARGEST BUYERS WERE USERS

Investment activity in 2022 was particularly driven by the largest investors making acquisitions for their own use ( figure 30). Including Peek & Cloppenburg’s re purchase of four Magasin properties and Rema 1000’s purchase of a part of Aldi’s grocery store portfolio, which were, respectively, the year’s largest and second-largest transaction.

CAPITAL CONTINUES TO SEEK THE SAFEST PROPERTIES

Investor appetite for both high street properties and shopping centres continued to be limited in 2022. While only two properties were traded on Copenhagen’s high streets (Galleri K and Østergade 14), transactions with shopping centres were limited to smaller local centres with strong grocery stores as anchor tenants. Instead, the capital continued to seek less cyclical assets, including big box properties and grocery stores.

Figure 27: Origin of the investors & transaction structure 2022

Figure 28: Breakdown in price ranges 2022

Source: ReData

* The stated volumes are for the retail part only, which is why any other uses in mixed properties are not included in the volume.

Figure 29: Retail – Transaction volume 2012-2022

Figure 30: Retail – Top 5 investors 2022

Figure 31: Retail – Top 5 investors 2012-2022

GEOGRAPHICAL DISTRIBUTION

KEY FIGURES FOR ASSET TYPES

GROCERY STORES

BIG BOX STORES

SPECIALITY STORES AND F&B

OTHERS

*There is not sufficient underlying data to calculate an accurate weighted yield.

GEOGRAPHICAL DISTRIBUTION

INCREASING ACTIVITY THROUGHOUT THE COUNTRY

The increase in transaction volume in the retail segment is also reflected in the geographical distribution, where there was an increase in the investment activity in all of the geographical areas ( figure 32). However, this development is not due to an increasing investor appetite for retail assets across the country but rather the geographical distribution of the port folio sales and larger individual transactions that resulted in the growth in the segment as a whole.

While the growth in Copenhagen, Greater Copenhagen and Aarhus is primarily due to Peek & Cloppenburg’s purchase of the Magasin properties and Jeudan’s purchase of Galleri K, the growth in “rest of the Denmark” is driven by Rema 1000’s and Cibus Nordic Real Estate’s acquisitions of grocery portfolios.

GROCERY STORES GAINING POPULARITY

Rather than investing in traditional retail assets, investors have sought the least cyclically sensitive retail assets in recent years. The grocery store segment has therefore been high on investors’ wish lists and has been characterised by a decreasing yield requirements. This can, among other things, be attributed to the fact that tenants are often large and strong capital chains, who sign long-term leases, and that grocery chains have shown very strong results in recent years.

THE RISK PREMIUM FOR LOCATION RISK DEPENDS ON THE ASSET TYPE

For all types of retail leases, the market rent is highly dependent on the turnover that can be generated from the lease. The higher the turnover that can be generated, the higher the rent tenants are willing to pay. Investors, therefore, also have an eye on the turnover figures in the retail assets they buy.

While the turnover potential in grocery stores is more or less the same across the country (as it primarily depends on the number of residents and competitors in the area), there are significant differences in turnover potential in, for example, Copenhagen high street properties compared to speciality stores located in the provinces. The possibility of generating a high turnover makes the leases more attractive, which reduces the investors’ vacancy and reletting risks. This is reflected in the risk premium investors require for location risk. While in 2022, there was only a risk premium of about 100 basis points for grocery stores between the different locations, there was a risk premium of more than 200 basis points for speciality stores and F&B units.

Thus, grocery stores throughout the country were traded at lower yield levels than speciality stores and F&B units located outside the country’s largest cities. It will therefore be interesting to see how the investors’ yield requirements for the various types of retail assets will develop in the coming time.

Figure 32: Retail – Historic geographic breakdown 2020-2022

RED assisted a private investor with the letting of 264 m² at Amagertorv 18 to The Body Shop.

TOP 5 TRANSACTIONS 2022

1. MAGASIN PORTFOLIO

The year’s largest retail transaction was completed when the owner behind Magasin (Peek & Cloppenburg) acquired four Magasin properties in Copenhagen, Lyngby, Aarhus and Odense from ATP Ejendomme and PensionDanmark. Magasin has operated its department stores from the properties for many years (since 1894 on Kongens Nytorv) and sees an advantage in owning the properties themselves.

2. ALDI PORTFOLIO

In December 2022, the German grocery store chain Aldi announced that they were exiting the Danish market and had sold 114 of their 188 stores to Rema 1000. As a part of the transaction, Rema 1000 takes over approx. 1,600 employees from the 114 stores, the logistics center in Kolding and the truck drivers from Aldi’s three logistics centers. Rema 1000 sees the acquisition as an opportunity to expand faster than if they were to establish entirely new stores themselves.

Photo: ATP Ejendomme

Photo: Christian Lykking ERH

3. SG NORDIC PORTFOLIO

The Swedish real estate investor Cibus Nordic Real Estate entered the Danish market in 2022 when they acquired SG Nordic and their entire portfolio with 34 retail properties and shopping centres in Denmark. While the five shopping centres are all located in Zealand, the other properties are located across the country. Cibus Nordic Real Estate focuses on properties with grocery store chains as anchor tenants, and are market leaders in the Nordics within this segment.

4. GALLERI K

After two years of ownership, Capital Investment, on behalf of Aviva and PSP Investments, sold the high street property, Galleri K, to Jeudan in April 2022. Galleri K is a mixed-use property which has been developed and optimised over the recent years. While the rent-bearing areas are distributed over approx. 41% office, 32% retail, 18% basement (incl. parking), 6% restaurant and 3% residential, the rental income comes from approx. 28% office and 61% retail and restaurant.

5. RINGSTED OUTLET

In December 2022, Patrizia bought the outlet village Ringsted Outlet from Agat Ejendomme and CapMan Real Estate. Ringsted Outlet opened in 2008 and currently contains 48 shops and 3 restaurants, and there is an approved local plan which makes it possible to expand the outlet by up to 10,000 floor metres. Agat Ejendomme has been responsible for the establishment and development of the outlet, and in 2016 Capman bought half of the ownership.

Photo: SG Nordic

Photo: RED

Photo: Visit Ringsted.

The stated prices are for the transactions as a whole, which is why the prices may include uses other than retail.

THE HIGH STREETS OF COPENHAGEN IN 2022

Covid-19 left high streets deserted worldwide, and while the virus continues to be a topic of concern in East Asia, the last restrictions in Denmark were lifted during the first quarter of 2022. Since then, the business foundation for both owners and tenants of high street properties in Copenhagen has developed in a favourable direction with increased traffic and reduced vacancy. Therefore, it is our experience that the market is more robust today than before the pandemic began almost three years ago.

Figure 33: Vacancy level for Copenhagen’s high streets

Source: Cushman & Wakefield |RED

AN ABUNDANCE OF POSITIVE TRENDS

In 2022, we saw a reasonable letting activity across the primary high streets in Copenhagen. Overall, Amagertorv is still the most attractive location, whereas Frederiksberggade is the opposite. Frederiksberggade did not experience a multitude of new store openings in 2022, even though the interest generally favoured areas that have been particularly challenged over the past four to five years. As an example six new leases were signed on Købmagergade alone in 2022, which has contributed to a strengthening of the underlying demand on the street and a reduced vacancy level.

SIGNIFICANT REDUCTION IN VACANCY

While the vacancy rate for Copenhagen’s primary high streets decreased by more than four percentage points during 2022, the number of vacant stores decreased by 16 ( figure 33). Hence, at the end of 2022, there were almost 40% fewer vacant stores than when the supply was at a record high in the second quarter of 2021.

The overall decline in the vacancy rate was influenced by both larger and smaller developments on Amagertorv, Nygade, Vimmelskaftet, Østergade, Frederiksborggade, and Købmagergade. Frederiksberggade was, thus, the only one of the seven primary high streets that could not show any significant development in the vacancy.

We expect the vacancy rate to decrease a further couple of percentage points before stabilising at a level slightly above 10%. However, this level may contain a large share of technical vacancy, as store leases are typically taken over several months in advance due to renovation and interior design planning.

THE SNAPSHOT SHOWS NO SIGNS OF NEW CHALLENGES

The vacancy rate and the number of vacant stores are, of course, an expression of the general level of activity in the market – but it is a snapshot that is based on retrospective observations. At the end of 2022, the consumer confidence was record low, and

the uncertainties will affect several sectors. Tomorrow’s level of activity can thus quickly be influenced by externalities that are unknown today.

However, we do not yet see any signs of a deviation in the tenant demand after 2022, which in many ways, was an uplifting year for the high streets’ importance for the retail industry.

CUSTOMERS FLOCKED TO THE COPENHAGEN HIGH STREETS AGAIN

Disregarding the periods when society was subject to covid-19 restrictions, there were, on average, slightly more customers in 2022 than in the corresponding period from the year before the pandemic ( figure 34). Traffic in the city has thus normalised, and there is no longer a backlog in customer influx. On the contrary, there is the possibility of an explosive increase in the number of customers on the high streets when the influx of foreign tourists (especially Chinese) increases again.

Rundetårn Købmagergade/ Valkendorfsgade

Frederiksborggade/ Købmagergade

Frederiksberggade Østergade/ Ny Østergade

Figure 34: Footfall count of the high streets of Copenhagen 2019 vs 2022 (Q2-Q4)

Source: Cushman & Wakefield | RED

Leased in 2021

Leased in 2022

Figure 35: High street properties in Copenhagen – No. of transactions & volume 2012-2022

Source: ReData

HAVE HIGH STREET PROPERTIES PASSED THEIR TEST?

Until 2018, the high street market was very liquid and made up a significant share of the total transaction volume in the retail segment. However, due to uncertainties about the future of physical retail, investment activity has been limited in the past 4-5 years. Nevertheless, the high streets of Copenhagen have seen a limited number of bankruptcies and store closures, and many new stores and strong brands have actually opened in the past two years. Has the market passed its test, and will we again begin to see investment activity on the high streets?

UNCERTAINTIES HAVE SLOWED INVESTOR APPETITE

The market for high street retail properties has historically been characterised by a high volume, driven by both larger standalone transactions and portfolio sales, and in the period 2012-2017, the average annual transaction volume was DKK 2.8bn, distributed over an average of 11 transactions per year ( figure 35).

In 2018 and 2019, the activity was limited to only three transactions per year due to the fear of e-commerce’s consequences for physical retail. After this, the pandemic and the subsequent store closures hit in 2020 and 2021, where fears of bankruptcies, lack of tourists, and decreasing market rent levels, made investors hesitant to invest in high street properties.

The limited liquidity and investor appetite are particularly reflected in the past two years, where, in addition to the sale of Galleri K to Jeudan, the volume in the high street segment has been less than DKK 100 million per year.

PRIME HIGH STREET HAVE PROVED RESILIENT

Despite a difficult market, where brands on the high streets have been subject to periodic closures, social distancing requirements, facemask requirements, increasing e-commerce, etc., it can be concluded that the consumer appeal of physical retail has proven resilient and that consumers want a balance between physical experiences and online shops.

RED’s latest footfall counts show that the footfall on the high streets is back to precovid-19 levels. Furthermore, many wellknown and new brands have opened new stores on the high streets of Copenhagen in recent years.

In 2022 alone, brands such as Nike, Peak Performance, Skechers and Labfresh have moved in on Købmagergade, where Watches of Switzerland (Omega & Breitling) and Burberry have moved into new leases on Østergade. At Amagertorv, you can find the newly opened Scotch & Soda and The Body Shop stores, and further down on Vimmelskaftet and Nygade, brands such as Rezet Store, Pilgrim, Normal and many more have moved in.

A MORE SECURE AND STABILISED MARKET

With the many new brands moving in the uncertainty, that has characterised the high street market for the past 4-5 years, seems to have been reduced. The new lettings can reassure investors about the rent level and thus reduce their reletting risks.

Whether 2023 will be the year when high street retail properties will again become part of investors’ investment strategies or whether fears about consumer confidence will continue to slow down activity is uncertain. But one thing is certain. There is both consumer and tenant activity on the high streets, and with properties that have been the commercial centre of Copenhagen for many hundreds of years – and will likely continue to be so in the coming centuries, it is a segment that investors will return to sooner or later.

IS THE LIQUIDITY IN RETAIL RETURNING?

Although strong tenants, long leases, and limited competition may sound like an attractive investment case, investor appetite for pure retail assets has been limited for years, and very few investors have focused on investing in shopping centres and high street properties, which, otherwise, historically have been large asset classes.

The question is now whether the risk has been overestimated and whether the current interest rate level is creating new movements in the market where investors, in search of a reasonable risk-adjusted return, will start looking at other types of retail properties.

RETAIL HAS NOT UNDERGONE THE SAME YIELD COMPRESSION

In uncertain times, capital seeks the most secure assets, and in recent years, we have seen a significant investor demand and yield compression for low-risk assets such as residential properties and the best-located office properties. This yield compression has only been possible as a result of very favourable financing conditions.

In addition to grocery stores, pure retail assets have been wiped off most investors’ shopping lists due to the fear of e-commerce, covid-19, and the accompanying shutdown of physical retail.

GROCERY STORES AND LARGE STANDALONE TRANSACTIONS HAVE DRIVEN VOLUME

Despite the limited demand for shopping centres and high street properties, less cyclical retail assets such as grocery stores have been on the rise and very liquid. Several investors have built large grocery store portfolios, which, together with larger standalone transactions such as the sale of Galleri K, BIG in Herlev, Aalborg Storcenter, and the Magasin properties, have driven the volume in the segment in the last three years ( figure 36). Thus, activity has been there, but the popularity of the asset types has changed.

Source: ReData

Figure 36: Retail – Transaction volume divided between asset types 2012-2022

NEW MOVEMENTS IN THE MARKET

After a long period with decreasing yield requirements on the safest assets, we currently have a market where high inflation and higher interest rates are pushing the yield the other way – especially for prime residential, office and logistics, where yield levels were at 4.00% or below. This creates a price gap between the buyers and sellers, where the buyers expect price corrections, whereas the sellers look at the latest benchmark traded, which causes the activity to stop, as the buyers and sellers cannot meet.

IS THE RISK ON RETAIL OVERESTIMATED?

Retail properties have, on the other hand, not undergone the same yield compression in the past five years, as activity has been limited and investors have required high risk premiums for even well-located and strong

retail assets. However, it must be noted that retail properties generally have proven to be resilient in uncertain times and that the risk may thus have been overestimated.

Shopping centres – and especially small and medium-sized local centres – have shown strong performance during the pandemic, the high street market has been characterised by many new store openings in the past two years, and big box tenants are usually financially strong capital chains that have built substantial equity in recent years, thus being resilient to potential losses.

FIRST-MOVERS WILL SECURE REASONABLE RISK-ADJUSTED RETURNS

There are several advantages of retail properties depending on the type of asset ( figure 37). These seem to have been forgotten in

THE ATTRACTIVE RETAIL PROPERTIES

HIGH STREET

• High location value

• Limited building stock

• Opportunity to build a dominant position

• Strong positive population growth, ensuring a strong occupier demand

BIG BOX

• High return and moderate risk

• Tenants are strong capital chains with high solvency

• Transparent and low market rent

• Larger product groups are resistant to e-commerce

REGIONAL SHOPPING CENTRES

• Limited competition due to restrictive planning law

• Risk diversification due to many tenants

• Grocery stores as anchor tenants

the current market, where the rejection of retail properties appears to be a general and strategic decision – regardless of price and business case. In general, it is possible to generate high total returns in most retail properties, as there are often fewer tenant turnovers and lower owner-paid refurbishment costs compared to, for example, the office and residential segments, as retail tenants often bear the costs of renovation and interior design themselves. Often there are also restrictive zoning plans that limit the possible competition or a clearly defined shopping area that is difficult to replace – for example, high street areas or dominant shopping centres.

In a market that has long been “talked down”, there may thus be attractive investment opportunities for investors who dare to initiate a retail strategy in 2023.

LOCAL SHOPPING CENTRES

• Strong performance in uncertain times

• Limited competition between tenants

• Diversified tenant mix with groceries and other stores that meet the consumers’ everyday needs

• Limited exposure to e-commerce and economic fluctuations

• High loyalty from customers and tenants, most of whom have been in the centres for many years

GROCERY STORES

• Long leases

• Tenants are strong capital chains with high solvency

• Groceries are resistant towards e-commerce

• The number of stores is restricted by the municipalities

EXPECTATIONS FOR 2023

After several years with challenges from periodic closures and distance requirements, we saw a more stabilised occupier market in 2022. Retail tenants showed confidence that the physical store will continue to exist and that consumers still want a balance between physical experiences and e-commerce. The more stabilised market is expected to be reflected in an increased tenant and investor demand for retail properties in 2023 – but the appetite will depend on the asset type.

THE OCCUPIER MARKET

THE VACANCY IS EXPECTED TO DECREASE

Many well-known brands will open stores on Købmagergade, Østergade and Amagertorv in the coming year. Therefore, we expect the decreasing vacancy rate that we saw in the second half of 2022 to continue on the primary high streets. In 2023, we also expect to see a low vacancy on the secondary high streets, as there is high demand for leases on streets such as Grønnegade and Pilestræde, where the properties are characterised by smaller units and landlords who offer favourable lease terms with greater flexibility.

Frederiksberggade has long been challenged but is now beginning to have a better F&B presence where strong F&B brands are successful. However, we expect that it will continue to be difficult to attract strong

and well-known brands with other product groups as it requires a greater strategic effort from the property owners if the attractiveness of the street is to be increased. Likewise, the occupier demand for more secondary located stores is expected to continue to be limited, especially in the country’s smaller towns.

A CONTINUED POLARISED HIGH STREET MARKET

In 2023, we expect to see further polarisation, where the spread in rent levels for speciality stores will continue to increase. While we expect to see record-high rent levels at the absolute best locations (Amagertorv), we expect to see stable rent levels for the other strong high streets (Købmagergade and Østergade), and finally, we expect to see a downward pressure on the rent levels on the less strong high streets

(Frederiksberggade) as well as for retail properties located outside the country’s largest cities.

Hence, we have positive expectations for a very narrow segment of the Danish market for speciality stores, but the majority of the market is expected to be challenged in 2023. This expectation is supported by our investor survey from early 2023, which shows that 59% of investors expect the occupier demand on the retail market to decrease in the first half of the year, and only 6% expect the demand to increase ( figure 38).

CONVENIENCE IS KEY

Generally, we are experiencing a high demand for convenience stores with parking options, which both shopping centres and big box hubs can offer.

Kristian Vinggaard Partner, Retail, RED

streets.”

Many well-known brands will open stores on Købmagergade, Østergade and Amagertorv in the coming year. Therefore, we expect the decreasing vacancy rate that we saw in the second half of 2022 to continue on the primary high

Provided that the operator has managed to create the right mix of shops with a wide range of F&B units, experiences, and services, destination centres with attractive locations are expected to remain attractive in 2023. Similarly, well-defined small and medium-sized local centres with groceries and other non-seasonal goods are expected to continue to perform well. Conversely, local centres with many space-demanding goods and fashion are expected to need to transform towards a greater share of dayto-day shopping options, groceries, and services that supplement the stores and attract consumers.

Although big box stores appeal to customers with a wide range of cheaper goods and have proven to be very stable in recent years, it continues to be an underdeveloped segment in Denmark. Therefore, we expect to see an increased occupier demand for big box stores in 2023.

INCREASING BARGAINING POWER OF THE LANDLORD

Where the bargaining power has largely been with the tenants in recent years, we expect to see an increased bargaining power among landlords of the most attractive retail properties in 2023. Double-digit inflation

rates have enabled the landlords to make significant rent adjustments, and although we expect that few will demand the full indexation, it gives the landlords bargaining power to secure longer non-termination periods, better lease terms, etc.

The expectations of increased bargaining power among landlords are also based on the fact that despite fluctuations in the tenants’ turnover, the majority of the newly signed leases are still with a fixed rent rather than a turnover-based rent.

Continued on next page

The Cushman & Wakefield | RED Investor Confidence Index

The index monitors 112 of the most active investors’ expectations for the Danish commercial real estate market during the coming six months. The broad coverage ensures that the findings are representative reflections of the investors’ confidence in the Danish market. By conducting the survey on a biannual basis, we are also able to track changes in the confidence.

Figure 38: Investor Confidence Index – Retail occupier demand During the coming six months, the demand on the retail occupier market will:

THE INVESTMENT MARKET THE STORM HAS PASSED

In the retail segment, there is now a consensus among investors that the fear of e-commerce and the physical store’s imminent death has been overestimated. Several tenants and centres have shown strong performance in uncertain times, and the letting activity across asset types has generally been reasonable.

RETAIL YIELDS ARE EXPECTED TO ATTRACT INVESTORS

In 2023, we, therefore, expect more investors to return to the retail segment. This expectation is based on the fact that the occupier market on the high streets has shown stability during 2022 with many new leases, that creates transparency about the current market rent level and reduces the investors’ reletting risks. In the other retail segments, tenants have performed well despite difficult circumstances in recent years. Furthermore, retail assets, unlike prime residential, office and logistics properties, have not gone through the same yield compression, and in a market with large interest rate fluctuations, we expect investors to seek assets that generate an attractive return.

Although the high street market has in many ways regained its footing, investment activity in 2023 will particularly depend on when the interest rate level stabilises and when new benchmarks for prices are established, which the investors can navigate by”

THE INTEREST WILL DEPEND ON THE ASSET TYPE

The resilient grocery stores with long leases will continue to be in high demand in 2023. In addition, we expect to see a significant increase in demand for big box properties based on the fact that we, already in the second half of 2022, saw several investors establishing new big box strategies due to the its resistance towards e-commerce, strong tenants and attractive market yields.

Whether shopping centres, which have historically been a large asset class, will again become part of the investors’ strategies is difficult to predict. Although the centres have generally shown strong performance, it will continue to be crucial for the interest that the operator has managed to create the right profile for the centre. In addition, there is a risk associated with the currently low consumer confidence, which can have consequences for the investor appetite in 2023.

The development of the market is also expected to be crucial for the appetite for high street properties. Although the high street market has, in many ways, regained its footing, investment activity in 2023 will particularly depend on when the interest rate

level stabilises and when new benchmarks for prices are established, which the investors can navigate by.

STABLE YIELD EXPECTATIONS

Even though the retail segment generally showed resilience in 2022, we are currently in a market at a standstill that is adapting. If the interest rate level stabilises in the near future, we expect to see increased activity in the segment.

In spite of our expectations of increased investment activity, we expect yield requirements to remain stable or to increase marginally for the safest assets such as grocery stores, strongly anchored local centres and big box properties.

However, for high street properties, which were previously traded at yields of 3.003.25%, the currently high interest rate level implies that the yield level will, in all probability, increase. This is supported by our investor survey, which shows that almost two-thirds of investors expect yield for prime retail properties to increase in the first half of 2023 ( figure 39).

Lior Korenen Partner, Capital Markets, RED

TRANSACTIONS & KEY FIGURES

RETAIL – TOP 30 TRANSACTIONS 2022

RETAIL – PRIME YIELD LEVELS Q1 2022

Copenhagen – Prime high street (Amagertorv, Købmagergade & Østergade)

– High street (Vimmelskaftet, Nygade & Frederiksborggade)

– Secondary high street (Frederiksberggade)

– High street area

* In case of share deals, this will impact yields, due to deferred taxes

RETAIL – PRIME RENT AND VACANCY LEVELS Q1 2022

* DKK per m² per year excl. service charges

Source: Cushman & Wakefield | RED

METHODOLOGY

Zone A – Prime rent is estimated on the basis of ITZA guidelines and in this case indicates the value of the most expensive area in the model. However, properties in Denmark are rarely comparable 1:1, hence the depth of zone A (the area subject to generate the prime rent) may vary, but the value is typically determined to be between 6 m (20 ft) and 9 m (30 ft).

The vacancy rate is given by an observed amount of vacant square metres in the ground floor of high street properties relative to the total amount of square metres in the ground fl oor of properties in the respective street. Hence, retail areas on any other levels are not included in this assessment.

RED assisted a private investor with the letting of 349 m² at Købmagergade 60 to Basic & More.

RED assisted Danica with the letting of a total of 5,249 m² to Maersk, Lloyd’s Register and Viva Payment Services Denmark in Harbor House II in Nordhavn.

Volume & Investors

RESIDENTIAL

Geographical Distribution

Top 5 Transactions 2022

Highlight: The Office Occupier Market in 2022

Highlight: The Yield Curve Has Turned – Where Are We Headed?

Expectations for 2023

RETAIL

OFFICE

70 72 76 78 80 82 84 86 LOGISTICS

VOLUME & INVESTORS

THE OFFICE SEGMENT LOST ITS POSITION

With a transaction volume of DKK 13.6bn, the office segment took a third place among the most traded properties and thus lost its historical position as the second-largest segment in Denmark ( figure 42). The development is not due to investors seeking other property segments but rather a limited supply of prime offices, as well as a few billion-kroner retail transactions leading to an extraordinarily high volume in the retail segment.

PROPERTIES WERE TRADED BETWEEN DANISH INVESTORS

Danish investors dominated the office segment in 2022 ( figure 40). While almost three-quarters of the capital was invested by Danish investors, almost all sellers were Danish. The fact that properties were primarily traded between Danish investors in 2022 is also reflected in the year’s five largest office transactions, where all buyers and sellers were Danish, except for Wihlborgs.

The trend with the Danish investors’ dominance is primarily due to the fact that foreign investors are primarily demanding

prime office properties located in Copenhagen, of which there has only been a limited supply in recent years. In 2022, the trend was reinforced by the fact that sellers were hesitant to enter the market, as the increasing interest rates in the second half of the year particularly challenged the yield levels for prime properties. The lack of transactions with prime properties is also reflected in the extremely limited number of larger trans actions ( figure 41).

MORE ASSET DEALS THAN SHARE DEALS

Unlike the other property segments, where either half or the majority of the capital was placed through share deals, trans actions in the office segment were primarily carried out as asset deals. This trend is due to the fact that the activity in the segment has been driven by smaller and medium-sized transactions, where the advantages of share deals are more limited when considering the complexity.

The absence of large transactions is also reflected in the ranking of the most active investors in the segment, where only the year’s largest investor, Wihlborgs, carried

out a billion-kroner transaction ( figure 43). Moreover, the completed transactions of the other top investors were of limited size. Therefore, it was only Wihlborgs who invested more than a total of one billion kroner in the segment.

Figure 40: Origin of the investors & transaction structure 2022

Figure 41: Breakdown in price ranges 2022

Source: ReData

* The stated volumes are for the office part only, which is why any other uses in mixed properties are not included in the volume.

Figure 42: Office – Transaction volume 2012-2022

Figure 43: Office – Top 5 investors 2022

Figure 44: Office – Top 5 investors 2012-2022

GEOGRAPHICAL DISTRIBUTION

KEY FIGURES FOR OFFICES 2022

* There is not sufficient underlying data to calculate an accurate weighted yield.

RED assisted C.W. Obel with the letting of a total of 16,355 m² in the attractive previous warehouse property at Langebrogade 1-3 in Copenhagen.

GEOGRAPHICAL DISTRIBUTION

COPENHAGEN OFFICE PROPERTIES ACCOUNT FOR HALF OF THE VOLUME

Although the transaction volume within the office segment decreased from 2021 to 2022, the investment activity in Copenhagen increased to DKK 6.8bn ( figure 45). Consequently, Copenhagen office properties accounted for more than half of the total volume in the segment.

Despite the challenges in the market, the capital invested in “rest of Denmark” was more or less the same as last year. Hence, the decrease in the transaction volume in the office segment is solely due to a significantly reduced investment activity in Greater Copenhagen and Aarhus.

SIGNIFICANT RISK PREMIUM FOR SECONDARY LOCATIONS

In recent years, the office market in Denmark has been characterised by a

significant demand for the best-located properties in the country’s largest cities from Danish as well as foreign investors. Conversely, the investor appetite for office properties located outside the largest cities has been very limited, which is reflected in a significant spread in the investors’ yield requirements.

While office properties in Copenhagen were sold at a weighted average yield of 3.75% in 2022, investors factored in a significant location risk premium for secondary located properties, which were acquired at a weighted average yield between 6.05% and 7.95%.

DANISH INVESTORS DOMINATE IN COPENHAGEN

Historically, foreign capital has accounted for the majority of the investment activity in the office segment in Copenhagen.

However, this changed in 2022, where Danish investors accounted for 79% of the total capital invested. The trend was particularly driven by the fact that four out of the five largest transactions in the segment were transacted between Danish investors and that these transactions all include properties located in Copenhagen.

Figure 45: Office – Historic geographic breakdown 2020-2022

RED assisted Sampension with the letting of 4,349 m² in the multitenant property located in maritime surroundings at Sundkrogsgade 11 in Copenhagen.

TOP 5 TRANSACTIONS 2022

1. SAS PORTFOLIO

The largest office transaction in 2022 was completed when Wihlborgs acquired two office properties from PFA Ejendomme located on Amager. The properties were originally domiciles for SAS but have today been converted into modern multi-tenant properties. Wihlborgs plans to develop and modernise the properties to reduce the vacancy from the current level of approx. 20%.

2. CARLSBERG PORTFOLIO

ATP Ejendomme acquired five newly built commercial properties located in Carlsberg Byen from the developer, Udviklingsselskabet Carlsberg Byen, in June 2022. The properties primarily comprise office leases but also a small share of F&B and retail units. The acquisition of the Carlsberg Portfolio was completed as a part of ATP’s strategy of securing the framework for the modern workplace through investment in attractive commercial properties in the largest cities in Denmark.

3. GENMAB DOMICILE

In the summer of 2022, the pension fund, Industriens Pension, invested in the office project with Genmab’s new office domicile on Carl Jacobsens Vej in Valby, which comprise a total of 15,000 m² and a parking garage with 250 parking spaces. The property will be taken over, when it is completed in early 2023, with a non-cancellation period of 15 years from the takeover date. Genmab’s new domicile is expected to be DGNB Gold certified.

4. VESTER SØGADE 10

In 2022, the pension fund Danica purchased the office property on Vester Søgade 10 from the nature fund Aage V. Jensen. The property was built in 1971 and is today fully let to Sund og Bælt and Mobilepay. For over 30 years, the anchor tenant Sund og Bælt has had their head office in the property and has continuously optimised and renovated their lease. The investment is a part of Danica’s strategy, where they focus on attractive properties in the larger Danish cities.

5. WOODS TEGLHOLMEN

NREP acquired an office project in Copenhagen’s South Harbor from the contractor- and development group KPC in January 2022. The property is expected to be completed in 2025 and will, in addition to the 13,965 m² office area, comprise 1,500 m² of retail and be certified with DGNB Gold. NREP will use the property for their office concept, Woods, which focuses on service and flexibility by offering offices and independent office spaces for small and medium sized companies.

Photo: Industriens Pension

Photo: Niels Nygaard

Photo: PLH Arkitekter

The stated prices are for the transactions as a whole, which is why the prices may include uses other than office.

THE OFFICE OCCUPIER MARKET IN 2022

In 2022, the office occupier market was subject to many changes. We went from high activity with historically low vacancy rates to a slowdown in activity, where companies had to rethink their offices to attract employees. The tenants regained bargaining power and began to make new and differentiated requirements for their leases and contracts.

THE YEAR THAT CONTINUED IN HIGH GEAR

The momentum we saw at the end of 2021 continued into 2022, and not even the war in Ukraine, high inflation, significant interest rate increases or a historically low consumer confidence could put a brake on the activity in the office occupier market in the first half of the year. This resulted in an extremely limited supply of the most attractive office leases and an upward pressure on the rent level. The prime rent in Copenhagen, therefore, reached a record high level of around DKK 2,000-2,200 per m2 excl. operating costs.

However, in the fall, expectations of an upcoming recession (and thus higher unemployment) were embedded among the tenants. This lowered the letting activity slightly in the last months of the year, particularly among the foreign companies who became more cautious. We, therefore, saw an increased supply of particularly smaller leases of 100-400 m2, as small businesses are faster to make decisions when the outlook for the future is uncertain, whereas

larger businesses are more cautious. We also saw that there again was a supply of larger leases of 1,000-3,000 m2, which the market had been stripped for in the first half of the year.

THE EMPLOYEES MUST BE LURED BACK

Covid-19 created much debate about what the future office market will look like. However, already in 2021, the office tenants realised that the optimal working environment is created by balancing work from home and attendance at a physical office.

However in 2022, when there were no longer any restrictions, we saw that many of the larger companies struggled to get their employees back at the offices, as employees had become accustomed to the benefits of working from home (greater flexibility and no commuting time).

Of course, it cannot be ruled out that the challenges of attracting employees in the long term will result in downsizing, as it is

not optimal with a constantly low occupancy at the offices. However, in today’s market, we see that companies are instead trying to attract employees to the offices by creating the best conditions with benefits that employees do not have at home.

THE TENANTS HAVE GAINED BARGAINING POWER AGAIN

We come from a market where the landlords have been able to pick and choose between potential tenants and where the tenants have largely had to accept the terms as they were or alternatively find another lease. However, the declining activity in the second half of 2022 turned this situation somewhat around, and we, therefore, saw that the tenants again gained greater bargaining power.

However, the uncertainties about the future, high inflation and the struggle to attract employees to the offices led to tenants not using their new bargaining power to get the rent reduced but rather on getting their new requirements fulfilled – both regarding the

physical conditions of the leases and the terms of the lease agreements.

NEW REQUIREMENTS FOR THE LEASES

In the negotiations on the lease terms, we saw that many tenants, as a result of the high inflation, again demanded a maximum on the annual rent regulation, which otherwise has not been a significant point of negotiation for several years. We also saw that all forms of flexibility were negotiated – that is, shorter non-termination periods, the possibility of partial termination, and the right to assign and sublease the premises.

In terms of the physical condition of the leases, we experienced that the requirements varied more from tenant to tenant than before, as the requirements depend on the individual company’s identity and values. However, a general trend is that we saw an increasing focus on the leases being well-located, sustainable and containing many small meeting rooms for more online meetings.

SUSTAINABILITY IS A MATTER OF IMAGE

The tenants’ focus on sustainability is largely driven by their image towards their stakeholders (customers, employees, owners, authorities, etc.). Therefore, the majority of tenants still see sustainability in black and white and demand newly built certified office leases instead of leases in older properties. This is despite the fact that new construction is one of the main causes of Denmark’s CO 2 emissions, and the most sustainable building is, therefore, actually the one that does not need to be built.

The fact that the rent level is often higher for sustainable office leases is, therefore, not because tenants in today’s market are willing to pay a higher rent for sustainability alone but rather because the sustainable leases that tenants demand are located in newly built certified properties, where the rent is already highest.

THE YIELD CURVE HAS TURNED – WHERE ARE WE HEADED?

The segment for the most attractive office properties in Copenhagen has undergone a significant yield compression in recent years, which has been driven by a high demand and a very limited supply. However, in the second half of 2022, completed transactions indicated that the yield curve – as a result of significantly increasing interest rates – turned. The question now is whether the relationship between the interest rate and the yield is clear and how much the yield must increase before the investment activity returns.

YEARS OF YIELD COMPRESSION

From 2015 to early 2022, the yield for the most attractive and well-located office properties in Copenhagen moved from around 5.00% to 3.00%, where some properties were traded at a yield below 3.00% ( figure 46). The yield compression can be attributed to favourable financing conditions and a significant investor appetite, where capital sought the safest asset classes.

WHERE ARE WE HEADED?

As a result of the significantly increasing interest rates the commercial real estate market is currently characterised by uncertainty, tightening of loan terms, and awaiting investors.

The rising interest rates affect the investors’ return on equity and currently make the use of debt negative for their business case. Investors thus seek compensation, which is reflected in the increasing yield requirements.

The question now is whether the yield will increase in parallel with interest rate increases. The short answer is no.

THE RELATIONSHIP BETWEEN YIELD AND INTEREST RATE IS NOT ALWAYS CLEAR

From 2012 to early 2022, the yield requirement for prime office properties followed the long-term interest rate parallelly, where the yield – logically enough – was higher than the interest rate. However, when analysing prime yield and interest rates further back historically, we see other interesting and opposing trends. Therefore, it may be difficult to answer where the yield will stabilise in the current interest rate market.

POST THE IT BUBBLE: INTEREST RATE DECREASES AND YIELD INCREASES

After the IT bubble, interest rates fell from around 8.00% to 5.25%, while the yield requirement in the same period surprisingly increased by 25 basis points to 6.50%. In

this period we saw an opposite correlation between interest rates and yield, where the yield increased despite the decrease in interest rates. Consequently, the yield level was surprisingly higher than the interest rate in the period from 2001 to 2005.

The reason for this is particularly: 1) The uncertainty after the IT bubble led to higher risk-adjusted yield requirements from investors in real estate, as well as 2) The investors in Copenhagen were primarily equity-financed Danish pension funds that used real estate investments as an inflation-hedge and risk diversification and did not use mortgage loans to gear their investments, so fluctuations in interest rates did not affect their return on equity.

THE FINANCIAL CRISIS: LENDING WILLINGNESS VS THE INTEREST RATE

In the second half of 2005, the trend reversed, and for a year, we saw another period where the interest rate and yield did not follow each other in parallel. During this period, interest rates increased while the yield fell significantly and reached a lower level than the long-term interest rate.

This development was particularly driven by: 1) The mortgage loan was given the legal authority to grant loans with interest-only periods to commercial real estate, as well as 2) The lending willingness of financial institutions was high, which led to the possibility of high leverage for investors. These conditions led to better liquidity in the commercial real estate market and thus increased

the demand and put a downward pressure on yield requirements – despite increasing interest rates.

Therefore, in the period before the financial crisis access to debt and the conditions for this were more controlling for the development of the yield requirements than the interest rate itself.

During the financial crisis, the trend was the opposite. The possibility of gearing was almost non-existent as the banks’ lending willingness was very limited due to market uncertainties, and the investors who could still borrow were those who had large equity on the books and therefore did not have the need. The limited access to debt and the risk in the commercial real estate industry resulted in low demand and low investment activity, which drove the yields for prime office properties up – despite decreasing interest rates in the same period.

THE MARKET TODAY IS MORE PROFESSIONALISED

After the market had stabilised again after the financial crisis, we saw a 10-year period where there was a more parallel relationship between the yield and the interest rate. This trend can, among other things, be attributed

to the fact that the commercial real estate market has become more professionalised. Foreign investors today make up a significant share of the total investment activity in Denmark, whereas equity-financed investors such as pension funds play a smaller role than before.

Foreign investors have to a great extent, used the Danish mortgage system to gear their investments and, therefore, decreasing interest rates have also led to a decline in yield requirements. In the last five years, it is the foreign investors who have been the highest bidders and thus set the benchmark for prime yields for offices in Copenhagen.

THE OFFICE SEGMENT WILL BE LIQUID AGAIN

Hence, historically, there have been periods where the yield has not followed the interest rate parallelly, which primarily has been due to market changes (IT bubble, the introduction of loans with interest-only periods, financial crisis).

Even though the yield and the long-term interest rate developed in the same direction in the period from 2015 to 2021, we saw that the difference between the two became increasingly larger until the interest curve

turned. Thus, in 2020 and 2021, investors had the opportunity for a historically high effect of using debt. However, this opportunity is gone in the current market.

The recent significant increase in interest rates has led to an upward pressure on investors’ yield requirements. While buyers expect a risk premium of 50-100 basis points, compared to when yield levels were lowest, sellers are still looking at the latest benchmark transactions and await evidence for a new market level. Therefore, we currently see sellers and buyers having different price expectations, which has resulted in a stagnant market.

In 2023, we expect to see a continued low transaction activity and an upward pressure on yield requirements, where the activity will be driven by the investors who expect a significantly lower interest rate within a couple of years, and therefore expect prime office yield to stabilise around 4.00%.

However, it is our clear belief that investors still expect that prime office properties will generate a total yield that exceeds the longterm interest rate. Therefore, in the long term, we expect that the office segment will again be among the most liquid segments in Denmark.

Figure 46: Prime yield for office properties in Copenhagen & the long-term interest rate 1998-2022

EXPECTATIONS FOR 2023

After a long period of time with a very strong office market, where the vacancy rates were historically low, rent levels were increasing, and yield requirements were under downward pressure, we expect to see a more challenging occupier- and investment market in 2023. However, the extent of the challenges will depend on the type and location of the offices.

THE OCCUPIER MARKET

A SLOWDOWN IN CONSTRUCTION ACTIVITY

A significant pipeline of office projects in urban development areas has previously raised questions about whether demand would be able to keep up with supply in the long term. However, in 2022, we saw that supply chain problems, high construction costs, and increasing interest rates resulted in a slowdown in construction activity, with a number of projects either being cancelled or postponed. Due to the continued uncertainties in the market, we expect developers to remain reluctant about initiating new construction. Therefore, we only expect a limited new supply of building stock to be added to the office market in the coming years.

At the beginning of 2023, we expect to continue to see more limited activity in the occupier market, as tenants are waiting and not in a hurry to make moving decisions in a market with continued uncertainty. This expectation is supported by our investor survey from early 2023, which shows that 32% of the investors expect the occupier demand to decrease in the first half of the year ( figure 47). However, the majority of

the investors still expect occupier demand to remain unchanged.

Given that only a relatively mild recession is expected and tenants are better prepared than before the financial crisis, we only expect a temporary slowdown and that tenants will resume activity in the second half of 2023.

THE VACANCY RATES WILL BE INCREASING

The combination of the limited new supply and the lower tenant activity is expected to result in a slightly increasing vacancy rate for offices in 2023, both in Copenhagen and the surrounding municipalities.

However, the very low vacancy levels we saw in 2022 were abnormal, so that the vacancy is expected to increase is not a sign that we are expecting a crisis, but rather a vacancy that returns to a more normal level, where there is room to negotiate lease terms without the leases being snatched away.

Despite the slower pace at the occupier market and the expectation of slightly

higher vacancy rates in 2023, the office market is starting from a strong position, where the demand for prime office leases is still very strong, and there is still a significant gap to the rent levels in other Nordic countries. Therefore, we do not expect to see a downward pressure on prime rent levels in Copenhagen.

THE DIFFERENCE IN RENT LEVELS IS BECOMING GREATER AND GREATER

However, we expect to see an increasing gap in the rent for primary and secondary leases. The increasing gap in the rent levels is due to the fact that tenants are expected to continue to make non-negotiable requirements for the characteristics of their leases, where the rent level is only a secondary requirement.

The most attractive leases will, therefore, be the newly built leases that can meet the modern office tenant’s requirements in terms of sustainability, good indoor climate, attractive shared facilities, flexibility in layout and size that are located in attractive locations in the city centre of Copenhagen with short distance to public transportation and with an

(…) that the vacancy is expected to increase is not a sign that we are expecting a crisis, but rather a vacancy that returns to a more normal level, where there is room to negotiate lease terms without the leases being snatched away.”

Anders Krogh Partner, Office Letting, RED

attractive local environment. However, the supply of these leases will continue to be very limited, which might result in an upward pressure on rent levels for the absolutely best, well-located offices in Copenhagen – despite the expectation of an upcoming recession.

The older and less well-located offices in Copenhagen, as well as offices located outside of Copenhagen, cannot meet the office tenant’s demands to the same degree. Therefore, we expect to see a more limited demand and a greater vacancy for these leases. Consequently, we expect the rent level to come under a downward pressure or, at best, remain stable.

THE INVESTMENT MARKET

INCREASING YIELD REQUIREMENTS ARE INEVITABLE

Generally, we expect to see an upward pressure on yield levels for office properties in 2023, and results from our investor survey show that the majority of the investors have

the same expectations, with almost two out of three investors expecting yield requirements to increase in the first half of the year ( figure 48). Our expectation is based on the fact that favourable financing conditions and a strong office occupier market over a longer period of time have resulted in yield levels being under downward pressure, but in 2023 investors are looking into a more risky market with significantly higher interest rates and greater uncertainty on the occupier market.

THE DISTANCE TO COPENHAGEN AND AARHUS WILL BE DECISIVE

Even in times of greater security on the occupier market, we saw that investors focused their investments on prime office properties located in the country’s largest cities. With increased uncertainties outside the country’s largest cities, we expect this preference to be reinforced in 2023. Therefore, the majority of investment activity is expected to involve prime properties located in Copenhagen and Aarhus, and yield levels are expected to increase

During the coming six months, the demand on the office occupier market will:

proportionately more the further the distance is from the country’s largest cities.

Despite the expectation of continued strong underlying conditions for prime office properties, we also expect yield levels to be increasing for these prime properties. This is because, with the current interest rates, investors will be able to achieve a significantly lower leverage and have a limited or negative direct return if using debt financing for the office properties that were previously sold at yields of around 3.00%.

THE ACTIVITY WILL RESUME

Economists worldwide have very different expectations of when inflation will normalise and interest rates will stabilise as well as how deep the recession will be. Therefore, it is still difficult to predict when the market will regain stability, and market participants will have greater clarity about the future. However, when it happens, we expect both the occupier and investment activity in the office market to increase and yield levels to stabilise.

During the coming six months, market yields for office properties will:

The Cushman & Wakefield | RED Investor Confidence Index

The index monitors 112 of the most active investors’ expectations for the Danish commercial real estate market during the coming six months. The broad coverage ensures that the findings are representative reflections of the investors’ confidence in the Danish market. By conducting the survey on a biannual basis, we are also able to track changes in the confidence.

Figure 47: Investor Confidence Index – Office occupier demand

Figure 48: Investor Confidence Index – Office yields

CLICK TO SEE DATA FOR ALL OF THE AREAS

On app.redata.dk/kontormarkedet there is a detailed overview for each of the 19 areas corre sponding to the information that is shown for Copen hagen City in the box on the right.

* The rent is the average gross rent (DKK per m² incl. operating expenses) for which leases in the area were offered in 2022.

** The rent is the average gross rent (DKK per m² incl. operating expenses) for which the most expensive leases in the area were offered in 2022. The calculation of the top rent depends on the number of leases offered in the area, but is in most cases based on 1-5 leases.

*** The yield level indicates the expected prime yield level for the area in Q1 2023.

OFFICE MARKET INSIGHTS

INSIGHT INTO THE OFFICE MARKET IN COPENHAGEN CITY

Copenhagen City includes all of Copenhagen K, parts of Copenhagen W (the areas near The City Hall Square, The Lakes, Bernstorffsgade and Kalvebod Brygge), as well as the newer office buildings on Weidekampsgade in Copenhagen S. This area is the area with the largest share of offices in Copenhagen Municipality. The area compromises several creative companies as well as IT and consulting companies with many young employees who both prioritise to live and work centrally in Copenhagen.

Offices account for 32% of the total building stock in Copenhagen City, where the majority are in the older building stock. The market rent in the area varies significantly depending on the location and the quality of the leases. Most of the leases

(46%) are offered at a gross rent of DKK 1,600 to DKK 1,950 per m². However, there are also leases offered for less than DKK 1,000 per m² and up to DKK 2,800 per m² in the area.

The most expensive leases are located around the Metro stations in, among others, Frederiksstaden, at Kongens Nytorv and in the areas around The City Hall Square and Nørreport. In particular, the buildings around The City Hall Square have experienced significant rent level increases after the Metro opened, and many of the buildings have been thoroughly renovated. For example, office leases are offered at a gross rent of DKK 2,321 per m² in PenSam's property at Farvergade 10, and in Helmershus on The City Hall Square, the office leases are offered at levels from DKK 2,650 per m².

OFFICE – TOP 30 TRANSACTIONS 2022

RED assisted with the letting of 501 m² to CVC Denmark on the 1st floor of this prominent property located on Amaliegade.

VOLUME & INVESTORS

VOLUME DRIVEN BY A STRONG FIRST HALF

2022 started with an insatiable investor appetite for industrial and logistics properties, but activity slowed down in the second half of the year due to the increasing interest rates. Therefore, the transaction volume in 2022 fell to DKK 13.5bn ( figure 51). Consequently, the segment went from being the third-largest segment in Denmark in 2021 to the fourth-largest in 2022.

The fact that activity slowed down in the second half should not be seen as an expression of a lack of demand in the segment but rather as an expression of the interest rates’ impact on the yield requirements, which made it difficult for sellers and buyers to meet. This resulted in only 12 transactions with a volume of over DKK 150 million being completed during the year ( figure 50).

The interest in logistics properties is thus still high, which is driven by a combination of an increasing occupier demand and the fact that investors can still achieve relatively high returns on Danish logistics properties

compared to similar properties in our neighbouring countries.

FOREIGN CAPITAL DOMINATES

Foreign investors have gained a significant impact on the Danish market for logistics properties, and again in 2022, foreign capital dominated, accounting for 61% of the total volume in the segment. The foreign investors are particularly visible in the larger transactions, and both in 2022 and in total, in the period from 2012 to 2022, the capital behind the five largest logistics investors was primarily foreign ( figure 52 & 53).

While the majority of investments in the logistics segment were made by foreign investors, the sellers were primarily Danish ( figure 49), and we thus see that foreign investors are gaining an even greater influence on the Danish logistics market.

INVESTMENTS ARE SPREADING TO MORE INVESTORS

Where the five largest investors previously accounted for about half of the total volume, the five largest investors in 2022 only accounted for just under a third of the total volume. Thus, activity is spreading among

more investors, including new investors in the segment, such as Starwood Capital and Arrow Capital Partners, which were behind the year’s largest and second-largest transaction in the segment, respectively.

Figure 50: Breakdown in price ranges 2022

Figure 49: Origin of the investors & transaction structure 2022

Source: ReData

* The stated volumes are for the logistics part only, which is why any other uses in mixed properties are not included in the volume.

Figure 51: Logistics – Transaction volume 2012-2022

Figure 52: Logistics – Top 5 investors 2022

Figure 53: Logistic s – Top 5 investors 2012-2022

GEOGRAPHICAL DISTRIBUTION

RED has carried out valuations of a number of Corem’s Danish industrial and logistics properties located on Zealand.

KEY FIGURES FOR LOGISTICS 2022

* There is not sufficient underlying data to calculate an accurate weighted yield.

** The number of properties with industrial use in Copenhagen and Aarhus mainly consists of properties with a secondary use as storage.

*** Herof 11 logistics properties, which were sold for a total volume of DKK 1,144 million corresponding to a weighted price of DKK 7,800 per m² and a weighted yield of 4.40%.

GEOGRAPHICAL DISTRIBUTION

INVESTMENTS ARE MOVING OUT OF GREATER COPENHAGEN

While foreign investors had a clear dominance in Greater Copenhagen in both 2020 and 2021, the picture was more evenly distributed in 2022 ( figure 54). This can, among other things, be attributed to the fact that foreign investors have moved their investments and more than doubled their investments in the rest of Jutland. Although the transaction volume in “other Jutland” increased by almost 75%, it was not enough to offset the significant drop in investment activity in the other geographic areas, and the total volume in the segment thus fell by more than 20%.

The decreasing share of assets sold in Greater Copenhagen is not due to a lack of demand from investors but rather a limited supply of prime logistics properties. While no prime properties were sold in Greater Copenhagen in 2022, six prime logistics

properties were sold in 2021 with a total volume of DKK 3.9bn equivalent to more than half of the total volume in Greater Copenhagen. Moreover, in the second half of 2022, the interest rates increases implied that it became more difficult for core investors to achieve the desired equity returns as a result of the low yield levels for prime logistics properties located in Greater Copenhagen.

THE PROPERTIES OUTSIDE GREATER COPENHAGEN ARE SOLD AT HALF PRICE

When looking at the square meter prices for industrial and logistics properties located in Greater Copenhagen compared to the rest of the country, tenants’ and investors’ continued preference for Greater Copenhagen remains clear. In 2022, properties in Greater Copenhagen were sold at an average square meter price that was almost twice as high as properties located on the rest of Zealand, Jutland, and Funen, which is due to a

combination of higher rent levels and lower yield requirements.

This also explains part of the decrease in the overall transaction volume, as (based on an average consideration), almost twice as many square meters must be traded in the rest of the country as in Greater Copenhagen in order to maintain the same volume.

However, it is worth noting that the differences in rent and yield levels are not solely due to the distance to the country’s largest cities. The key factor for industrial and logistics properties is not that the property is centrally located but rather that it is a modern property located in an easily accessible logistics area with short distance to the motorway network. The most sought-after logistics areas in Denmark are, therefore, the Triangle Area in Jutland, Greve Distribution Center, Skandinavisk Transport Center in Køge and Avedøre Holme on Zealand.

Figure 54: Logistics – Historic geographic breakdown 2020-2022

RED has an ongoing valuation mandate on carrying out the valuation of the logistics hub named Greve Distibution Center

TOP 5 TRANSACTIONS 2022

1. PARETO PORTFOLIO

The largest logistics transaction of the year was completed when American Starwood Capital acquired a portfolio with ten logisticsand industrial properties from Pareto Securities. The properties are all attractively located in Jutland along the E45 highway, with most of the properties being located in Aarhus, Horsens and Fredericia. The properties are all fully let to strong tenants on long leases.

2. LACUS PORTFOLIO

In the spring of 2022, the Australian property investment- and management company, Arrow Capital Partners, made their first acquisition in Denmark and the entire Nordic region when they purchased a portfolio of ten industrial-, warehouse- and logistics properties from Swedish Pristine Properties. At the time of the acquisition, the letting percentage for the portfolio was 97%, and most of the tenants were large Danish and international companies.

Photo: Pareto Securities

Photo: Presse

3. EGESKOVVEJ 20

The Swedish logistics property investor Catena expanded their Danish portfolio in April 2022 when they entered into a forward purchase agreement with Ejendomsinvest Egeskovvej to acquire a logistics property located at Egeskovvej 20 in Horsens. The property is let to DKI Logistics on a 10-year lease from the takeover in October 2022. The property was sold at a net initial yield of 4.10%.

4. VEKTOR KAPITAL PORTFOLIO

After American Highbrook Investors entered the Danish market at the end of 2020, they have rapidly expanded their Danish portfolio, and the portfolio currently includes a total of 18 properties. In March 2022, Highbrook Investors completed the year’s fourth-largest transaction in the logistics segment when they bought a portfolio with three logistics properties located in Kolding, Vejle and Odense.

5. EGESKOVVEJ 24

Two months after the acquisition of Egeskovvej 20, Catena again entered into a forward purchase agreement with Ejendomsinvest Egeskovvej for the purchase of a new logistics property located at Egeskovvej 24 in Horsens. The property is also let to DKI Logistics on a 10-year lease from the takeover in December 2022. The property was sold at a net initial yield of 4.15%.

Photo: Byens Ejendom

Photo: Klima-, Energiog Forsyningsministeriet

Photo: Catena The

stated prices are for the transactions as a whole, which is why the prices may include uses other than logistics.

THE MARKET DRIVEN BY UNREALISED POTENTIAL

In recent years, we have witnessed a more or less insatiable investor demand for modern well-located logistics properties both in Denmark and globally. This demand has largely been driven by the investors’ positive expectations for the occupier market and the yield spread to the other segments. But have the investors’ expectations for the segment been fulfilled, or is there still potential in investing in Danish logistics properties?

Figure 55: Prime logistics yield level in the Nordics 2012-2022

THE UNDERSUPPLY CONTINUES

The market is characterised by the fact that the majority of the newly built logistics properties are so-called built-to-suit, where the properties are already let before they are fully built. Additionally, we have only seen extremely limited speculative construction, and in 2022 the significant increases in building materials prices, interest rates, and labour shortages resulted in a number of projects being cancelled. As a result, the national vacancy rate for Danish logistics properties reached an all-time low (1.33%) in the third quarter of 2022, where the majority of vacant leases are older properties that do not meet the modern logistics tenant’s requirements.

As a result of the undersupply, the logistics market worldwide is characterised by landlords having more negotiating power than tenants.

RENT GROWTH HAS BEEN ABSENT

Despite the strong tenant demand and the limited supply, the prime rent level for logistics properties has only increased marginally historically. An analysis conducted by Cushman & Wakefield among 250 logistics markets worldwide shows that in the period 20172020, in 25% of the markets, there was zero or negative rental growth, and in an additional 25%, there was less than 2.5% rent growth annually. Looking at the average development in the Nordics, rent levels have only increased by 0.3-3.6% annually since 2012 ( figure 56), and in Denmark, the prime rent has increased by an average of 3.00% annually (from DKK 500 to DKK 650 per m2).

THE EXPECTATIONS ARE STILL THERE

However, in the coming years, it is expected that prime rent levels for modern logistics properties will increase globally, which is based on both strong tenant demand and the fact that due to significant price increases, it is no longer profitable to construct new logistics properties at the current rent levels. The expectations of rent increases apply particularly to the logistics areas with limited development opportunities due to the shortage of building land, zoning laws, etc. In Denmark, it is therefore particularly expected that we will see

increasing rent levels in Greater Copenhagen and in the areas around Aarhus.

INVESTORS HAVE PRICED IN THE POTENTIAL

Even though the significant rent potential has not yet been realised, we have witnessed a significant yield compression on the logistics market ( figure 55). This yield compression has globally been driven by high investor appetite, expectations of increasing rental levels, and the fact that there has been a significant risk premium compared to other property segments.

When looking at the Danish market versus the rest of the Nordics, Denmark is a strong logistics hub with efficient access to Continental Europe, which has been – and still is –characterised by having the lowest rent level and the highest yield level. These underlying factors make Danish logistics properties

highly attractive investment assets. This led to prime yields decreasing by 250 basis points from 2012 to early 2022, where the yields were at their lowest.

THE MARKET VALUE INCREASED BY 150%

Despite the more limited increase in the prime rent, the significant yield compression implied that the market value per m2 for prime logistics properties increased by almost 150% from 2012 to early 2022 ( figure 57). However, the increase in investors’ yield requirements in recent months has quickly reduced this to a total growth of approximately 109%.

In recent years, investment activity has, thus, been driven by investors’ positive expectations for the segment. Therefore, it will be interesting to see whether 2023 will be the year when the rent potential is realised and investors’ expectations are met.

Figure 56: Prime rent level in the Nordics 2012-2022 (index 100 = Copenhagen 2012)

Figure 57: Example calculation of the development in m 2 prices on the logistics market

LOGISTICS

EXPECTATIONS FOR 2023

The tenant and investor appetite for Danish logistics and warehouse properties has been significant in recent years. Despite a continued high demand, interest rates and mortgage institutions’ limited lending willingness are expected to slow down investment activity and result in increased yield requirements in 2023.

THE OCCUPIER MARKET

EXTREMELY STRONG TENANT BASE

We expect the recent years’ trends in occupier demand for logistics properties to continue in 2023. Despite economic uncertainty, logistics and warehouse properties have an extremely strong tenant base where users continue to demand additional square meters. We, therefore, expect that the supply will have difficulty keeping up with the demand, particularly in the prime segment.

These optimistic expectations for the occupier market are based on continued growth in e-commerce combined with more companies wanting to increase their critical inventory and be closer to consumers as a result of supply chain issues, creating a higher need for capacity and demand for more square meters.

The positive expectations for the occupier market are supported by our investor survey, which shows that 90% of investors expect to see stable or increasing occupier demand in the logistics market in the first half of 2023 ( figure 58).

INCREASING RENT LEVELS FOR PRIME PROPERTIES

In 2023, we expect to see an upward pressure on rent levels for the most attractive and well-located logistics properties, whereas rent levels for less well-located and older industrial properties are expected to remain unchanged or only increase slightly.

This expectation is due to the vacancy rate for Danish logistics properties reaching a historical low in the third quarter of 2022, where the majority of the vacant leases were older properties that did not meet the users’ requirements. Therefore, there is still a low supply of the most modern properties and combined with the fact that a number of development projects of new logistics properties were cancelled in 2022 due to the interest rate developments, price increases for building materials, and a shortage of labour, it is expected that the undersupply will be intensified in 2023.

Our expectations of increasing rent levels in the prime segment are also based on the fact that it must continue to be profitable for investors to develop the properties – despite

the increased construction costs. On the other hand, logistics tenants, in particular, are affected by higher costs as a result of rising energy prices, which may limit how much the rent can increase.

THE INVESTMENT MARKET CONTINUED APPETITE BUT EXPECTATIONS OF INCREASING YIELD REQUIREMENTS

In 2023 we expect to see continued high demand from investors in the segment due to the ongoing high demand from tenants. Additionally, the fact that the new government has cancelled the planned mark-tomarket taxation on properties will create less risk for investors, as they will not be challenged to depreciate the properties for tax purposes before they technically become obsolete.

Nevertheless, the yield requirements are expected to be pushed up significantly from the record low levels we witnessed in early 2022. This expectation is supported by the fact that our investor survey shows that almost half of the investors expect that

Our expectations of increasing yield requirements are particularly due to financing challenges for investors. Rising interest rates and decreasing lending willingness from mortgage institutions make logistics and warehouse properties difficult to finance.”

Nicholas Thurø Managing Partner, Capital Markets, RED

we will see increasing yield requirements in the first half of 2023, and the majority of the remaining investors expect to see unchanged yield levels ( figure 59).

Our expectations of increasing yield requirements are particularly due to financing challenges for investors. Rising interest rates and decreasing lending willingness from mortgage institutions make logistics and warehouse properties difficult to finance. Specifically, demands for relatively large instalments make it difficult for funds that regularly distribute returns to their investors to invest in logistics properties.

UNDERLYING FACTORS WILL LIMIT THE UPWARD PRESSURE ON YIELDS

However, we do not expect that the yield requirements in the logistics segment will

increase as much as in our neighbouring countries, as there is still a premium to achieve compared to similar properties in both the rest of the Nordic region as well as Germany and the Netherlands.

Moreover, the strong tenant demand for modern logistics properties on the Danish market will more or less eliminate the investor’s reletting risk, which will limit how much the yield requirement for prime logistics properties will increase.

THE TENANTS ARE THERE – BUT WILL THE INVESTORS TAKE THE RISK?

Despite the high demand for modern logistics properties in Denmark in recent years, relatively few investors have taken the risk of speculative construction. Instead, most new construction has been done on a

“built-to-suit” basis, where the property is leased before it is built.

Despite the historically low vacancy rate and high demand for leases, we do not expect to see more speculative construction in 2023 than we did in 2022. This expectation is due to the high interest rates and significant increases in construction costs, which has led to a generally cautious attitude in the market among developers, tenants, and landlords.

Figure 58: Investor Confidence Index – Logistics occupier demand

During the coming six months, the demand on the logistics occupier market will:

Figure 59: Investor Confidence Index – Logistics yields

During the coming six months, market yields for logistics properties will:

The Cushman & Wakefield | RED Investor Confidence Index

The index monitors 112 of the most active investors’ expectations for the Danish commercial real estate market during the coming six months. The broad coverage ensures that the findings are representative reflections of the investors’ confidence in the Danish market. By conducting the survey on a biannual basis, we are also able to track changes in the confidence.

TRANSACTIONS & KEY FIGURES

LOGISTICS – TOP 30 TRANSACTIONS 2022

* Estimated price. The stated prices are for the transactions as a whole, which is why the prices may include uses other than logistics.

LOGISTICS – PRIME RENT AND YIELD LEVELS Q1 2023

On behalf of Catena, RED has carried out valuations of a number of their Danish industrial and logistics properties located throughout the country.

* DKK per m² per year excl. service charges

** In case of share deals, this will impact yields, due to deferred taxes

Source: Cushman & Wakefield | RED

RED has conducted a valuation of the newly opened Hotel Scandic Spectrum located at Kalvebod Brygge in Copenhagen on behalf of the owner Havfonn.

THE HOTEL SEGMENT IN 2022

THE CHALLENGING YEARS ARE COMING TO AN END

From when covid-19 hit Denmark in early 2020 until spring 2022, the Copenhagen hotel market was turned upside down. The other wise increasing number of annual visitors suddenly stopped, and repeated waves of covid-19 restrictions resulted in a lack of travel activity among foreign tourists. This resulted in occupancy rates that were both extremely low and, for long periods, lower in Copenhagen than in the rest of the country, which is in contrast to before covid-19 ( figure 62).

However, after some hard years for the hotel industry, a built-up travel desire resulted in significant increases in both the travel activity and the occupancy rates from March 2022. At the same time, the occupancy rate in Copenhagen increased more than in the rest of Denmark, and in the summer months, the occupancy rate in Copenhagen was at 75-83% and, thus, almost at pre-covid-19 levels.

FOREIGN TOURISTS ARE SLOWLY RETURNING

Looking at the distribution between Danish and foreign tourists visiting Copenhagen hotels, the absence of foreign tourists remains clear ( figure 60). Historically, about two out of three tourists were

foreigners, but in 2020 and 2021, the distribution was almost the opposite. However, the figures for 2022 show that foreign tourists have begun to return to Copenhagen, as foreign tourists accounted for well over half of the total number of tourists in the year.

Thus, the hotel market in 2022 was not yet back to the level from before covid-19, but with significantly higher occupancy rates and more foreign tourists than in both 2020 and 2021.

INVESTORS DEMAND UNATTAINABLE DISCOUNTS

Despite the more positive trends for the Danish hotels, there only was limited investment activity in the hotel segment, and consequently, the transaction volume only reached DKK 1.4bn in 2022 ( figure 61). The limited activity is primarily due to the investors’ demand being focused on the most attractive assets and investors expecting significant price discounts compared to the pre-covid-19 price level. However, the sellers were unwilling to meet the investors’ demands for price discounts, and the sale of actual distressed hotel properties has therefore been lacking.

The fact that there was a certain volume in 2022 despite the limited demand is primarily

due to the sale of two user properties (The Square & Hotel Kong Frederik) and the sale of one prime hotel property (25hours hotel Papirøen), which together accounted for 77% of the total transaction volume in the segment.

A MARKET IN BALANCE WILL ATTRACT INVESTORS

For a number of years, many new rooms were added to the Copenhagen hotel market. However, in recent years, we have seen that the uncertainties in the market have meant that many new hotel projects have either been cancelled, postponed or converted to other uses. As a result, there is now a more limited pipeline of projects with new hotel rooms.

Therefore, when the market is more normalised, we expect that there will again be a balance between supply and demand on the hotel market, which we expect will result in increased investor demand for hotel properties. This expectation is driven partly by the fact that hotels are typically let to strong tenants on lease agreements with long no-termination periods. Moreover, recent years’ yield compression in the other property segments has resulted in investors being able to achieve a relatively high risk-adjusted yield by investing in hotels in today’s market.

Figure 60: Share of Danish and foreign tourists in Copenhagen (January-November)

Figure 61: Hotel – Transaction volume 2012-2022

Figure 62: Hotel – Occupancy rate 2018-2022

COPENHAGEN HOTELS HAVE A STRONG POSITION IN A CHALLENGING MARKET

The Danish hotel market has for years been challenged by covid19 and a lack of foreign tourists. However, in 2022, the travel activity in Copenhagen almost returned to pre-pandemic levels despite continued uncertainties. It will, therefore, be interesting to see what conditions the hotel market will be characterised by going forward.

As General Manager at NH Collections Copenhagen, Anders Duelund has a unique insight into the trends in the hotel market. In the following interview, he provides his perspective on the hotel market in Copenhagen in an international context and his view on which changes and factors that will characterise the market in 2023.

Denmark and Copenhagen are clearly of interest to everyone, both nationally, Nordically and internationally. This applies to both travellers and investors.”

Anders Duelund General Manager, NH Collection Copenhagen

ANDERS DUELUND

Anders Duelund is General Manager at NH Collection Copenhagen and has been working in the hotel industry since 1996. Anders graduated from the Hotel Management School in Aalborg, has been a Trainee at Scandic Hotels and later took several courses at INSEAD.

NH Hotel Group is a leading multinational hotel operator with more than 350 hotels in Europe and America. In the fall of 2021, the group opened the 5-starred NH Collections Copenhagen “Ørkenfortet”, located in central Copenhagen, which was their first Danish hotel.

What strengths and weaknesses do you see in the Copenhagen hotel market?

The hotel market has been in positive growth since the spring of 2022, and despite a significant increase in the number of new rooms in recent years, the market has still managed to grow in RevPar [revenue per available room]. Denmark and Copenhagen are clearly of interest to everyone, both nationally, Nordically and internationally. This applies to both travellers and investors.

A weakness may be that the primary part of the newly opened hotels are national and Nordic brands, i.e., potential price competition among 3- and 4-starred hotels. 5-starred and luxury hotels have grown more in price (RevPar) than 4-starred and below.

Do you expect to see structural changes in the hotel market in 2023?

2023 is difficult to predict, but M&E [meetings & events] are, as in 2022, continuing to grow throughout Copenhagen - despite warnings of a crisis. Room bookings are taking longer, which is most clearly seen in internationally branded hotels. So, there is more caution here than from Nordic travellers.

Which factors do you expect to be crucial in attracting guests in 2023?

• Smart “hassle-free” guest IT solutions such as online check-in/check-out, choosing your room directly, and unlocking the room door with your mobile phone.

• More personal and present service.

• More “luxury” = guests are still more willing to pay for quality.

• Focus on sustainability in general, including sustainable/organic F&B products.

How do you feel about the increasing supply of hotel rooms in Copenhagen?

Positively – especially if more international brands come to the city. These also help make Copenhagen more attractive to tourists and, not least, attract international congresses.

Room bookings are taking longer, and this is most clearly seen in internationally branded hotels. So, there is more caution here than from Nordic travellers.”

Anders Duelund General Manager, NH Collection Copenhagen

TOP 5 TRANSACTIONS 2022

1. THE SQUARE

The year’s largest hotel transaction was completed when Danica Pension sold The Square, located in Copenhagen, to Arp-Hansen Hotel Group, which is the operator of the hotel. The Square is a 4-starred hotel with 268 rooms, a breakfast restaurant, a lounge and a bar. The acquisition was made as a part of Arp-Hansen’s strategy of owning the properties in which they wish to operate a hotel in on the long run.

2. 25HOURS HOTEL PAPIRØEN

German Union Investment Real Estate acquired the 25Hours project on Papirøen in Copenhagen from a consortium of Danica Pension, Nordkranen and Unionkul, in August 2022. In 2024, when the development of the hotel is completed, it will have four stars and comprise 128 rooms. The hotel is let to KNSA Germany on a 25-year lease and will be operated by Ennismore under their 25Hours concept.

Photo: Dimension Design

Photo: Dimension Design

3. HOTEL KONG FREDERIK

In September 2022, the Cofoco Group purchased Hotel Kong Frederik, located at the City Hall Square in Copenhagen, from the businessman Fritz Schur, who has been in charge of the operation since he acquired the hotel back in 2014. Hotel Kong Frederik is a historic 4-starred hotel with 110 rooms, conference facilities, a breakfast restaurant, and a private roof terrace. Cofoco plans to carry out a significant renovation of the hotel during 2023.

4. ZLEEP HOTEL VIBY

The real estate company Dades acquired a high-rise building located on Viby Torv from the insurance company Aros Forsikring in October 2022 as a part of their strategy of expanding the shopping centre Viby Centret. The property was completely renovated in 2014 and currently houses the 3-starred Zleep Hotel Viby with 126 rooms, a restaurant, as well as office areas for the previous owner, Aros Forsikring.

5. HOTEL ÆRØ

In 2022, Hotel Ærø, located on the harbour in Svendborg on Funen, was sold to the family company Halberg Hotels, which took over the hotel’s operation. Hotel Ærø is a historic 3-starred hotel from 1889 with 58 rooms, a restaurant and a spa. Halberg Hotels focuses on hotels in Svendborg and the surrounding area, and with the acquisition of Hotel Ærø, Halberg Hotels owns a total of three hotels in Svendborg.

Photo: Hotel Kong Frederik

Photo: Zleep Hotel

Photo: Hotel Ærø

ABOUT RED

Cushman & Wakefield | RED provide advice within sales, leasing, tenant representation and valuation to the largest companies and players within real estate on the Danish real estate market. Our values in a complex and dynamic world consist of meticulousness, experience, and responsibility.

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