4 minute read
The Danish Property Market
THE PROPERTY MARKET RIDES THE WAVE OF A FLOURISHING ECONOMY
The Danish economy continues to expand. In Q4 2021, GDP was 3% above the pre-pandemic level and it is estimated to have grown by 3.9% in 2021. The economy is expected to grow by 2.8% in 2022. So far, businesses have, in general, made it through the pandemic relatively well and business confidence remains positive in most industries. Private consumption has increased substantially since the reopening of society in the spring of 2021 and is expected to grow rapidly in 2022 as well. Danish households have resumed their consumption to the usual extent at the end of 2021. Incomes and wages are expected to continue to grow, and households are likely to reduce the propensity to save in coming years. The composition of consumption is still distorted, with goods making up a larger share than normal and services making up a smaller share. In its latest forecast, the Ministry of Finance expects consumption to gradually approach its “normal” composition from before the COVID-19 crisis.
Employment skyrocketed throughout 2021 to new record levels. From January to November the number of employees increased by 154,000. This is significantly more than previously expected. Employment has risen in most industries. Unemployment has dropped to 2.5% and there is a widespread shortage of labor. The labour market is reflecting a booming economy with increasing pressure on the economy's available resources.
Inflation accelerated to more than 3% in Q4 2021, mainly due to the sharply rising energy prices. Consumer prices rose by 1.9% on an annual basis in 2021. Inflation is expected to climb to 2.2% in 2022 despite forecast declining energy prices. This is due to the increasing utilisation of capacity in the economy.
Rising inflation is affecting interest rates. The 10-year Danish government bond yield has risen from -0.5% at the beginning of 2021 to -0.2% at the beginning of 2022. However, there were significant fluctuations with interest rates tending to fall with new outbreaks of COVID-19 and surges in infection rates. Nevertheless, interest rates are still low and the Ministry of Finance forecasts this to continue in 2022. Based on market expectations, the average yield on a 10-year government bond in 2022 is expected to stay negative at around -0.1%. Thus, real interest rates will remain very low.
The property transaction volume reached a record level of DKK 98 billion in 2021 - up by 37% compared to 2020. The growth was mainly driven by strong demand for residential properties. Investment in residential assets reached DKK 53 billion making it, by far, the most transacted property type. Investment in industrial and logistic properties also contributed significantly to investment growth, almost doubled from DKK 6.6 billion in 2020 to DKK 12.4 billion in 2021 – also a record high. Investment was to a great extend driven by foreign investors. Overall, they represented 60% of the transaction volume. Foreign buyers were especially targeting industrial & logistic assets (74% share) and residential properties (63% share).
The outlook for 2022 is continued strong investment activity. Momentum from 2021 has continued into 2022 with a number of large transactions in January and a favorable macroeconomic environment going forward with high economic growth, low (albeit moderately rising) interest rates, ample access to capital and positive attention from foreign investors.
Photo: iStock
Contact: Robin Rich robin.rich @newsec.dk
Interesting trends on the Danish property market in 2021 and 2022
WILL 2022 MARK THE RETURN OF RETAIL?
Retail properties have been in low demand by investors in recent years, but the downward trend may be turning. Transaction volume soared by 38% from 2020 to 2021 – mainly due to a number of large deals involving shopping centres – such as BIG Shopping Center in Herlev and Kronen in Vanløse – and supermarket portfolios. The weak market has seen yields soften since 2019, but there are signs that this trend is bottoming-out. Investors may find retail yields increasingly attractive compared to other asset types where yields have compressed steadily and are now relatively expensive compared to retail.
DIVESTMENT BY FOREIGN OWNERS MAY INCREASE OFFICE INVESTMENT ACTIVITY
Office properties accounted for an atypically low share of the transaction market in 2021. Lack of product is restraining investment activity. In 2021, however, foreign property owners increased their divestment activity significantly representing 42% of the office transaction volume compared to 29% in 2020. Looking into 2022 office investment may experience a comeback driven by more potential sellers – Danish as well as foreign.
DKK 98 BILLION
Total investment volume in 2021
DKK 85–90 BILLION
Total investment volume expected in 2022
+ 2.8%
GDP growth expected in 2022
WILL FOREIGN INVESTORS DRIVE LOGISTICS YIELD COMPRESSION IN 2022?
Transactions in industrial and logistics properties almost doubled in 2021 compared to 2020. The massive interest resulted in a sharp yield compression. The development was most distinct for modern, well-located warehouse and logistics properties with long leases, where the yield in the Copenhagen area fell by 75–125 basis points. Prime logistics yields fell below 5% in 2021 and is currently at around 4.25%. Looking into 2022 yields may compress further as many foreign investors continue to show interest in this segment because yield levels in Denmark are still relatively high compared to neighboring countries. Foreign investors accounted for 70% of the transaction volume in this segment in 2021.
RESIDENTIAL PROPERTIES REMAIN ON TOP
It will not come as a huge surprise if the residential segment does come in on top as the most sought-after asset class in 2022. Strong demand prompted by demography and income growth combined with low interest rates and rapid expansion of new residential stock provides opportunities for long term investors.
