Ejendomsinvestorernes risikoappetit tiltagende

Property investors’ appetite for risk is mounting
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The volume of commercial property transactions continues to soar and 2017 looks to beat all records at a forecast DKK 80bn.

By Peter Winther, Partner and CEO, Sadolin & Albæk

Strong transaction activity and a predominance of international investments
Transaction activity in the Danish investment property market continues to be brisk. Sadolin & Albæk therefore expects 2017 to see a record-high volume of traded commercial and investment properties to the tune of DKK 80bn relative to DKK 64bn in 2016.

The market is greatly affected by the fact that international investors have particular appetite for large-volume single properties and property portfolios. Whereas international investors accounted for almost 45% of aggregate property investments in 2016, they accounted for as much as 67% in the first half of 2017. The predominance of international investors has become even more pronounced in the segment involving assets with a volume in excess of DKK 500m. In the first half of 2017, they in fact accounted for a staggering 85% of transactions in this segment, up from 55% in 2016.

In terms of the very largest transactions, with a volume in excess of DKK 1bn, domestic investors accounted for 10% in the first half of 2017 – a historically low share.

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Mounting risk tolerance
In this context, it is interesting to note that investors today demand investment opportunities associated with higher risk. In 2016, 72% of the transaction volume involved core properties, i.e. typically fully let investment property associated with low risk and high cash-flow security. In the first half of 2017, the share dropped to 47% - while the share of value-add investments, i.e. investments associated with weaker and more uncertain cash flows and a potential for operational improvements subject to proactive management, rose from 13% in 2016 to 49% in the first half of 2017.

At the same time, however, so-called opportunistic investments associated with very high risk continue to account for a negligible share of the aggregate investment volume.

The stronger risk tolerance is seen in the domestic institutional sector too: An increasing number of pension funds are investing heavily in the value-add segment.

To a certain extent, the appetite for risk is driven by the decline in returns on investments in the core segment as recent years have seen downtrending net initial yield requirements in this segment. Investors in pursuit of higher returns may therefore be tempted to accept higher risk.

Stronger growth momentum and letting market recovery support higher risk tolerance
Nevertheless, it is important to emphasise that the fundamental drivers of the property market are fairly strong. Economic momentum is strong, inflation is edging up, and the commercial letting market is recovering.

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Measured in terms of sqm space, office vacancies have been reduced at a steady pace in recent years, and in the Copenhagen CBD (Central Business District), the office vacancy rate is at an 8-year low. The commercial letting market is strong, the vacancy risk is diminishing, and rental prices are uptrending.

Due to the favourable development investors are ready to assume higher risk.

Consequently, the appetite for risk is not driven by an unthinking pursuit of high returns in a low interest rate environment, but by fundamental analyses of the risk profile of property investments in an improved market.