Market Update Q2 2024 - UK

Executive summary – Q1

Denmark’s GDP has been positively impacted by Novo Nordisk’s growth, while much of the rest of the economy has lost momentum. However, it is expected that the economy will gradually experience modest growth. Currently, Danish consumers are spending a relatively small portion of their income on consumption. The prospect of rising real wages and lower interest rates suggests that consumption will increase. The falling interest rates result from a drastic decline in inflation in Denmark and across Europe. Inflation is expected to rise slightly in the short term, partly due to anticipated significant wage increases. Employment continues to grow, although productivity in sectors such as pharmaceuticals has noticeably slowed. However, job growth is expected to taper off, and productivity is expected to recover, though there is some uncertainty.

These conditions are putting pressure on businesses, which is reflected in the declining leasing activity for office and industrial and logistics properties, although from a high level. This has resulted in a slight increase in vacancy rates for both segments. However, these rates remain very low in a historical context. Due to the subdued economic expectations for 2024, we expect the vacancy rate to continue to rise slightly in the coming quarters.

Transaction activity is significantly lower than last year, primarily due to the still high interest rates. Preliminary figures for transaction volume for the first five months of 2024 is DKK 10 billion, corresponding to a 39% decline compared to the first five months of 2023. However, there are signs of increasing transaction activity as central banks – particularly the ECB – are expected to lower interest rates over the coming years. Yield requirements have stagnated over the past quarters, and in many places, 12-month forecasts indicate that yield requirements will remain at roughly the same level.

The Danish economy

Annual GDP growth

After two years of strong GDP growth of 4.9% and 3.8% in 2021 and 2022, there has been a slight growth slowdown in 2023 with a GDP growth of 1.9%, and a further decline in the first quarter of 2024 a decline in GDP of 1.8%.

The latest forecast from the Economic Council shows an expected growth of 2.6% in 2024 and 1.5% in 2025. The estimate for growth in the Danish economy has thus been significantly revised upwards. At the same time, it is estimated that inflation and housing prices have stabilized and that employment remains high.

Source: Statistics Denmark & The Danish Economic Councils

In 2023 and in the first half of 2024, the development in the level of interest rates has been more subdued and stagnant compared to 2022, when interest rates rose significantly. This is due to a downward trend in inflation until the end of 2023, which has been particularly driven by falling energy costs. The short-term interest rate, which is highly correlated with the monetary policy measures of the American and European central banks, the FED and the ECB, has undergone a steady development and stands at 3.3% in May 2024. The long-term mortgage rate has been more volatile, where since October 2023 it has been decreasing. In May 2024, the longterm mortgage interest rate will be 4.5%.

Source: Finance Denmark & Statistics Denmark

Consumer confidence indicates the population’s view of its current and future economic situation and is thus a good indicator of how the general population is affected by Denmark’s economic situation. The consumer confidence indicator in February 2024 is at minus 7.4 and has thus risen slightly since January, where it was at minus 8.4. All five indicators that together make up consumer confidence indicator have risen since last month. Despite consumer confidence remaining negative, it is the highest consumer confidence indicator seen since February 2022, where it was minus 3.2. The average for 2022 was minus 22.2 and for 2023 was minus 15.6, making the current level of consumer confidence a significant improvement.

Source: Statistics Denmark

The latest figures from Statistics Denmark show an increase in the number of wage earners. From February to March, the number of employees increased by 2,600 people.

In March 2024, there were 32,400 more wage earners compared to March 2023 and are therefore at the highest level ever. The increase is due to an increase in the number of employees in several sectors, with the largest increase observed in the private sector, but there has also been significant growth within public administration and services.

Source: Statistics Denmark

Yield in

Residential rental

newer properties

Other South Jutland

Residential rental

fully developed properties

Østerbro, Frederiksberg and Gentofte

Falster and Møn

Sønderborg

Other South Jutland

Residential rental cost determined rental properties

Yield in percent and trends for the next 12 months

Development in residential rental properties

Less development activity due to high interest rates

Demand for residential rental properties has decreased significantly during 2023. This is underscored by the fact that transaction volume has decreased by around 50% from 2022 to 2023.

The decrease in transaction volume is driven by recent years’ inflation and interest rate increases as well as general uncertainties. This has meant that the return requirements among buyers have increased significantly, while sellers are slow to adjust their return requirements to the new market situation. Overall, return requirements are also still lower in Denmark than in surrounding countries, partly because Danish property investors have a more robust financing structure to a large extent. This means they are not as sensitive to interest rate fluctuations as investors in the Swedish market, for example. Therefore, many investors have the option to hold onto their property rather than accepting a lower price in connection with a sale. The combi-

nation of high interest rates and rising taxes may mean that more private individuals choose or must rent a home, as it is currently relatively more attractive to rent than owning.

Despite significant construction activity in recent years, vacancy remains relatively limited at the national level. The vacancy rate is clearly lowest in Copenhagen, the Copenhagen area and North Zealand, while it is highest in Central and North Jutland. The housing vacancy has increased by 0.5% to 4.1% from Q4 2022 to Q4 2023.

The market rent is expected to between stable to slightly increasing in the coming year, while required returns are expected to be stable around the current reported levels. The return requirements are expected to be stable partly due to the anticipation of falling interest rates during 2024, which will quite naturally improve conditions for the transaction market.

Lolland, Falster and Møn

Development in office properties

Strong office market with low vacancy

Demand for attractive office properties was relatively stable in 2022 with several major transactions traded at low yield requirements. Although 2023 has seen several major transactions traded at low yield requirements, activity has decreased significantly by around 50%. However, unlike many other European countries, the numbers are quite reasonable. In Europe, the activity has declined more significantly with increases in yield requirements even for the most attractive properties.

Demand in Denmark is supported by, among other factors, a robust labour market characterised by record-high employment, but also by remote work being significantly less prevalent than in larger European metropolises.

Many companies still demand flexible office solutions due to increased focus on remote work, better space utilization, and scalability options. This is primarily in Copenhagen,

Available office space as a percentage of building stock

where the supply of flexible concepts is large, while in cities like Aarhus, there is high demand but only limited supplyespecially in the city centre where demand for office space is highest. However, there are also trends pointing in the opposite direction, with several companies establishing policies regarding the number of remote workdays to limit the amount of remote work.

The nationwide vacancy rate for offices was 5.2% in the fourth quarter of 2023. Vacancy has increased by 0.2 percentage points since the same quarter the year before. Yield requirements are generally expected to remain stable over the coming year, which also applies to market rents. However, the development in interest rates will be the big unknown, with considerable risk that continued high interest rates will lead to further increases in yield requirements - especially for prime office properties.

Source: Ejendomstorvet-ED Statistikken, estimates as of Q2 2024

Østerbro, Frederiksberg and Gentofte

Sønderborg

Development in retail properties

Tenants have gained increased influence

The high uncertainty of recent years has materialised in a significant decrease in transaction volume, which has fallen by around 60% between 2022 and 2023. The decline in transaction volume is broadly based, leading to significantly rising yield requirements.

There is still demand, especially for grocery portfolios with geographic diversification, as grocery stores are considered resilient to economic fluctuations. Additionally, grocery chains often lease on contracts with long non-terminable periods.

The economic unrest that arose during 2022 due to increases in interest rates and inflation led to a significant erosion of consumers’ real income and therefore purchasing power. Since the end of 2021, this has resulted in considerable declines in the quantity index. However, consumer confidence has been steadily increasing since the low point in October but is still negative, currently around -13.

Higher rent increases due to NPI regulations have pressured tenants. However, it is the impression that not all landlords have fully implemented NPI regulation. Among some landlords, consideration has been given to the tenants’ resilience or risk of termination, and consideration has also been given to the risk of a §13 regulation of rent due to the possibility of the regulated rent exceeding market rent. The risk of high NPI regulations has also increased attention among tenants to clauses regarding regulation in lease agreements. This means that there is an increasing expectation of demands for maximum regulation going forward.

Vacancy rates for retail have been slightly increasing over the past year, with vacancy increasing by 0.3 percentage points to 3.1% in the first quarter of 2024. Yield requirements are generally assessed to be stable to slightly increasing over the coming year, while there are certain risks of declining market rents in some areas.

Source: Ejendomstorvet-ED Statistikken, estimates as of Q2 2024

Lolland, Falster and Møn

Development in industrial properties

High demand and continued low vacancy

The logistics segment has seen consistent reasonable demand in recent years, underscored by the fact that the segment in 2023 experienced the smallest decrease in transaction volume compared to the previous year – a decrease of approx. 17%. In comparison, the total transaction volume has fallen by more than 50% compared to 2022.

Demand is primarily focused on newer and modern logistics properties located close to essential infrastructure such as highways. The increased focus on supply chains is a contributing factor to the healthy activity, as demand among users for warehouse and logistics properties is rising in the West.

High-ceiling warehouses with good access and ramps are highly sought after and meet the current needs. Likewise, there is growing emphasis on sustainable and energy-efficient properties – preferably certified.

Available industrial space as a percentage of building stock

However, the supply of the most sought-after properties has not kept pace, which can be attributed, among other factors, to the conversion of urban industrial and logistics areas into residential areas. At the same time, it is increasingly difficult to find suitable land for logistics properties in prime locations, as there is to some extent a lack of municipal willingness to designate suitable land for warehouse and logistics properties. The industrial segment has also experienced high demand in recent years, primarily driven by users and to a lesser extent investors, although there has been a larger portfolio of industrial properties traded in recent years.

Vacancy rates for industrial and logistics properties have been slightly increasing over the past year, with vacancy increasing by 0.6 percentage points to 2.2% in the first quarter of 2024. Yield requirements are expected to be stable in the coming year, which also applies to market rents.

Source: Ejendomstorvet-ED Statistikken, estimates as of Q2 2024

Definitions

Location and condition

Yield and rent levels estimates are based on primary, secondary and tertiary categories, where primary is the best and tertiary is the worst. Various variables for each property type have been taken into consideration with regards to determine the facility classes, such as: size, floor plan structure, year of construction, lifts, climate control, cabling infrastructure, staff facilities, customer facilities, parking facilities, building energy rating, ceiling height, general accessibility, general condition of the property, etc.

Primary: A property with prime location and class A facilities has the best possible location in an area, the highest standard when it comes to facilities, is modern and ready to move into. This type of property will typically be sold at the lowest yield in the area, have the highest market rent and have a short reletting process.

Secondary: Average in terms of location and condition. Yield and rent levels also reflect the average levels for the area. The re-rental options are market compliant and reflect the general market conditions.

Tertiary: Poor location for the area, low standard, and outdated. This type of property is expected to be able to be sold at a relatively high yield level, and the rent level is low for the defined area. Similarly, vacancy rates can be expected to be higher than the market average.

Yield

All yields are initial net yields and are defined as the annualized rent generated by the property after the deduction of estimated annual irrecoverable property outgoings, expressed as a percentage of the property valuation (property valuation is adjusted for the value of rental deposits and prepaid rent). For comparison purposes, it is assumed that all properties are fully let at market-conform conditions.

Market Rent

All rents are headline rents, in other words, the contracted gross rent receivable, which becomes payable after any tenant incentives have expired. Market rent estimates are expressed in DKK/sq m/year. It is assumed that all properties are let at market-conform conditions.

* Area specifications

Copenhagen City = Copenhagen K ex. harbour areas.

Østerbro, Frederiksberg og Gentofte = Østerbro, Frederiksberg and Gentofte municipalities.

Harbour area (Nordhavn, Kalvebod Brygge & Tuborg Havn) = Areas located along Copenhagen’s harbour.

Remaining Copenhagen = Vesterbro, Nørrebro, Nordvest, Valby, Sydhavn (ex. harbour areas), Brønshøj, Husum, Vanløse, København S (ex. Ørestad and harbour areas), Kastrup and Dragør municipalities.

Western suburbs = Hvidovre, Rødovre, Glostrup, Brøndby, Albertslund, Vallensbæk, Ishøj, Høje Taastrup, Ballerup and Herlev municipalities. Northern suburbs = Lyngby, Holte, Farum, Birkerød, Gladsaxe, Rudersdal and Furesø municipalities.

Residential rental properties

1) Newer residential rental properties are properties that have been occupied after 31.12.1991 and thus covered by the rules on free/market rent according to the Danish Residential Rent Regulation Act section 54 (1, 1).

2) Cost determined rental properties are older residential rental properties that have been occupied before 31.12.1991 and are regulated in accordance with the provisions of the Danish Residential Rent Regulation Act on cost-determined rent.

3) Fully developed older residential rental properties are older home rental properties without further potential for rent increases through modernization pursuant to section 19 (2) of the Danish Residential Rent Regulation Act.

Data for available commercial premises

The source of available commercial premises is the latest available supply statistics from Ejendomstorvet. Further information about these statistics can be found at ejendomstorvet.dk/statistik/udbudsstatistik.

Trends

All trends reflect our expectations to the level in 12 months time.

 The figure is expected to increase

 The figure is expected to remain unchanged

 The figure is expected to decrease

Note on estimates

The valuation of a property depends on many specific factors, including conditions of the lease, the tenant, and the property condition. The estimates cannot be used uncritically in the valuation of one specific property but can serve as input related to the valuation. Reproduction or citation only with acknowledgment of source. While every effort has been made to ensure that the information provided is accurate, EDC International Poul Erik accepts no liability for errors.

North Zealand = Gribskov, Helsingør, Allerød, Hillerød, Egedal, Fredensborg, Halsnæs and Hørsholm municipalities.

East Zealand = Greve, Køge, Lejre, Roskilde and Solrød municipalities.

West Zealand = Holbæk, Kalundborg, Odsherred, Ringsted, Slagelse and Sorø municipalities.

South Zealand = Faxe, Næstved, Stevns and Vordingborg municipalities. Lolland, Falster and Møn = Guldborgsund and Lolland municipalities.

Other Funen = All municipalities at Funen ex. Odense.

Other South Jutland = Billund, Fanø, Haderslev, Tønder, Varde, Vejen and Aabenraa municipalities.

West Jutland = Skive, Struer, Holstebro, Thisted, Morsø and Ringkøbing-Skjern municipalities.

As an investor, it is crucial to approach an investment objectively. With analyses from EDC Poul Erik Bech, we provide you with the opportunity to do just that by ensuring that your investment is based on a solid data foundation. EDC Poul Erik Bech Research offers area-specific analyses for the entire country that can be tailored to your specific needs. Additionally, we provide in-depth analyses of population trends, housing supply, transaction volume, and more, which can help you as an investor to make the right decisions based on a solid knowledge foundation.

If you have questions, you are more than welcome to contact us:

Joseph Alberti Head of Research

CONTACT

EDC Poul Erik Bech

Zealand/Funen

Copenhagen +45 5858 8378

Herlev +45 5858 8376

Taastrup +45 5858 8472

Hillerød +45 5858 8377

Roskilde +45 5858 8395

Køge +45 5858 8379

Næstved +45 5858 8380

Slagelse +45 5858 8396

Odense +45 5858 8397

Jutland

Kolding +45 5858 8399

Aabenraa +45 5858 8425

Sønderborg +45 5858 8422

Esbjerg +45 5858 8398

Vejle +45 5858 8423

Aarhus +45 5858 8670

Silkeborg +45 5858 8427

Herning +45 5858 8567

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