Solid Danish economy and falling interest rates pave the way

The market back on track: Solid Danish economy and falling interest rates pave the way

Throughout the latter half of 2022, all of 2023, and the first half of 2024, the real estate market has faced challenges, with a frequent disconnect between buyers and sellers. However, it now appears that the market is heading toward brighter times. This is primarily due to a strong Danish business sector, resulting in a solid Danish economy, as well as a declining interest rate level.

The Danish economy, overall, is remarkably strong and has avoided the feared downturn and recession that seemed looming. The business sector, in particular, is robust, with record-high employment levels continuing to grow and stable inflation around the target of 2%. Therefore, there is reason for optimism, says Joseph Alberti, Head of Research at EDC Poul Erik Bech:

"We have overcome a couple of challenging years and are now entering a time when the Danish economy is expected to continue its positive momentum. The Danish economy is in a strong position, led by Novo Nordisk and the pharmaceutical industry, while the rest of the business community is also showing positive signs. Denmark's GDP is expected to increase over the next few years by 2.3% in 2025 and 1.5% in 2026, so there is plenty of reasons for optimism regarding the Danish economy and hopefully, this optimism will positively impact the real estate market.”

"Central banks have cut interest rates several times over the past few months and there are already signs that transaction volumes are starting to increase. At the same time, rates of return are now mostly moving sideways, which is good news for investors. The yield gap, meaning the gap between the rate of return properties can generate and the interest rate at which they can be financed, is widening, which should further stimulate the transaction market" notes Joseph Alberti. 

Specifically, this has meant that the financing rate on a mortgage loan has fallen almost 1.5 percentage points over the past year, and this also means that those who acquire an investment property can have a larger part of the transaction financed with mortgage loans. The high requirement for equity capital has greatly contributed to keeping private investors away from the market, especially in the capital area and Aarhus.

Stability in the Danish marketAlthough there are signs of improvement in the transaction market, the market is still adjusting. Denmark has taken a steadier approach than other European countries, and according to Joseph Alberti, the adjustment is ongoing, making it interesting to see how it unfolds:

"Although there are signs of improvement, and it seems we are moving towards brighter times, the adjustment to the new interest rate level is still underway. We cannot expect interest rates to drop back to pre-crisis levels, therefore it is about finding a satisfactory equilibrium in Denmark, we typically use a more long-term approach to financing than other European countries, meaning that the rate of return have not increased in line with interest rates, which has been challenging.”

“In Denmark, long-term financing is common, whereas in countries like Sweden, short-term financing options are prevalent. This has meant that the adjustment has happened somewhat faster for our Swedish neighbors than in Denmark. However, looking at the current development, it may very well be that the Danish market has adapted at a sensible pace compared to other countries that adjusted too quickly and too drastically. The higher proportion of long-term financing has led to far greater stability in the Danish real estate market,” says Joseph Alberti.

A major transaction drives the marketThe transaction volume for the third quarter of 2024 ended at DKK 9.6 billion, which is mainly due to September, when the transaction volume ended at DKK 6.2 billion. However, this was mainly driven by a single major transaction, explains Joseph Alberti:

"The transaction volume in September 2024 has increased significantly compared to the previous two months of the third quarter, but it is slightly misleading. The high transaction volume is mainly due to a large transaction, explaining why the industrial and logistics segment accounted for nearly 57% of the transactions. At the end of September, DSV sold their newly built logistics center in Horsens for DKK 3.3 billion, so when there is not a larger volume of transactions, a large transaction like this naturally stands out.”

"This is not to say that we are not on the right track. The transaction volume is at a reasonable level and year-to-date the transaction volume is 5% higher than last year, so the market is back on track. Additionally, we must remember that transaction volume alone is not the only measure of the market’s performance. The overall state of the business sector also greatly impacts the movements in the real estate market. Here, we conclude that Danish business and economy are in a strong position, and the real estate market appears to be back on track after a couple of challenging years. Therefore, we also expect that the transaction volume for the year will exceed last year,” concludes Joseph Alberti.

More information

Joseph Alberti, Head of Research, EDC Poul Erik Bech +45 5858 8564 • joal@edc.dk