The Danish property market

THE DANISH PROPERTY MARKET THE TRANSACTION MARKET REMAINS HEALTHY

2019 was a reasonably strong year for the Danish economy, with a growth rate of around 2.0 per cent. In September, the key deposit rate was lowered by ten basis points to -0.75 per cent, following a move by the European Central Bank to lower rates. Despite this, Danish fundamentals remain strong, although the currency peg to the euro has become increasingly difficult to maintain. 2019 was also a year in which a lot of political debate related to the residential property market occurred. The debate was mainly related to the rental level in Copenhagen and the different factors impacting this, such as the renovation option in paragraph 5.2 of the Rental Regulation Act. This has impacted the real estate market, causing a drop in the transaction volume of the older stock equal to around 70 per cent.

The Danish real estate market in general came off to a slow start in 2019, which turned into a sprint with many large transactions in the fourth quarter. Interest rates did not rise as was initially forecast, and the low interest climate is now instead expected to persist over the coming years. This, together with plenty of liquidity in the market, catalyzed the transaction volume in the second half of 2019. The last quarter saw a strong volume of around DKK 21 billion, with the total volume exceeding DKK 55 billon. Despite DKK 55 billion being a decrease compared to 2018’s level of DKK 74 billion, the level is still high and the hesitation at the beginning of the year can be seen as a sign of a healthy market, where investors critically question the risk-inducing elements. In a market characterized by a high degree of capital allocation towards real estate investment, all else being equal, the volume of transactions is expected to be high. The challenge, however, is that sellers have limited alternative investment opportunities, which inflates seller expectations and causes yield compression on the market. Nevertheless, a strong transac

tion volume of around DKK 65 billion is expected in 2020.

Contact: Niels Juul Belling niels.belling@newsec.dk

»Sellers have limited alternative investment opportunities, which inflates seller expectations and causes yield compression on the market«

Interesting trends on the Danish property market in 2019 and 2020:

SWEDISH INVESTORS ARE PARTICULARLY INTERESTED IN DENMARK Foreign investors accounted for approximately 50 per cent of the transaction volume in 2019. Swedish investors accounted for almost half of this, equating to around 25 per cent of total volume. The foreign investors who allocated most money toward Danish properties are KLP, Niam, CapMan, Folksam and Klövern. 92 per cent of the transactions involving foreign investors occurred in the Greater Copenhagen area.

RETAIL PROPERTIES FACE CHALLENGES The retail market is facing significant challenges. This can be seen in an increasing vacancy rate, going from 5.38 per cent in 2018 to 6.31 per cent in 2019 on the national level. The transaction volume dropped from DKK 8.6 billion to approximately DKK 5.0 billion, which is a decrease of 42 per cent. In 2018, retail properties accounted for 11 per cent of the transaction volume, which dropped to 9 per cent in 2019. The decreasing demand from investors can be explained by low yield levels, especially in light of the structural development of the sector, where e-commerce is increasingly winning market share. This has increased the uncertainty in relation to the market rent and

DKK 55 BILLION 2019 transaction volume

25%

SWEDISH INVESTORS accounted for around 25 per cent of transaction volume

OFFICES ARE HIGHLY DEMANDED BY INVESTORS The office market accounted for approximately 29 per cent of the transaction volume in 2019, corresponding to DKK 16 billion. In 2018 the office market accounted for a market share corresponding to 24 per cent. Office properties have become more demanded by investors. 78 per cent of the traded office volume is in the Copenhagen area, and 13 per cent in Greater Copenhagen, which clearly underlines that the office transaction market is largely concentrated to the capital city region. The office buildings being traded often have long leases and are in prime locations. Yields as low as 3.5 per cent have been observed. 55%

THE OFFICE MARKET accounted for around 29 per cent of transaction volume

vacancy risk. This is expected to lead to higher yield requirements, which can already be observed on the market.

LONG LEASES ARE BECOMING MORE IMPORTANT There is growing interest in office properties with long leases and a strong tenant. This indicates that investors are increasingly focusing on the lease contract that is acquired, rather than necessarily focusing on the physical asset. The same can be seen in the industrial and logistics market where we increasingly see sale & leaseback transactions with triple-net leases, where the risk to the investor during the contract period is limited.