Markedsupdate Q3 2017 fra Sadolin & Albæk

Markedsupdate fra Sadolin & Albæk Q3 2017

The Danish investment property market – propelled by the perfect storm

By Peter Winther, Partner and CEO, Sadolin & Albæk

”Perfect storm” is a concept commonly used to describe an incident where a rare combination of circumstances seriously exacerbate a situation.

In today’s Danish property market, it is fair winds and plain sailing all-round. Economic and employment growth momentum is fairly strong. As a result, commercial vacancy rates are downtrending, and rental prices slightly uptrending. In the housing market, rental prices are seeing a fair increase, too.

In addition, interest rate levels remain historically low. Central bank initiatives have vastly increased the amount of liquidity in the global markets, and all of this cash is now looking for investment opportunities that retain their value and maybe even produce certain returns.

It is hard to imagine better framework conditions for property investments; It is the perfect storm, only turned upside down, and the fact that the financial sector has not yet pulled all stops when granting credit is actually the only factor that prevents property prices from skyrocketing completely off the scale.

Without a banking crisis, no property crisis
This being said, we believe that the fair winds will slacken at some point or another. Within the next 12, 24 or 36 months, the market will turn and property prices will come under pressure.

The trigger may be an inexpedient rate hike to a level, which is not sufficiently supported by underlying economic growth and inflationary trends. It may be caused by a slowdown in the economy and employment. It may be because the pension fund sector on international level needs to reduce its property exposure – and international investors therefore discard investments in more peripheral markets such as the Danish. Or the root cause may be something we have been unable to predict.

However, we believe that such a setback will not cause the market to collapse. A profound and severe property crisis will not set in without a banking crisis, where the banks suffer substantial property losses and were finance possibilities dry up.

We do not envisage such a crisis in the foreseeable future. Sadolin & Albæk has mediated and offered advisory services on very sizeable transactions in recent years, and not once have we seen any instance of imprudent credit granting in the banking or mortgage banking sector.

Undeniably, the scenario is different than in 2006 and 2007, when a great many property transactions were financed with a display of risk tolerance resembling a cocktail of over-optimism, speed blindness and utter death defiance.

Significantly higher risk of misinvestments
From an investor perspective, it has been difficult to put a foot truly wrong in recent years. If you paid a high price, the market would quickly catch up the additional price, and before long even the most aggressive investments would suddenly appear highly attractive.

The margin of error is now substantially lower. Given the pricing seen in today’s market, the risk of misinvestment has increased substantially.

Nevertheless, it is important to note that today’s market is dominated by highly professional investors, who make in-depth analyses of investment risk profiles, facing the risks head on.

Recent months’ developments give rise to some concern. The latest property crisis seems to have faded into oblivion, and now private investors without in-depth knowledge of property-related risks are showing renewed interest in property investments. Both rambling development projects and less attractive built-to-suit properties at relatively secondary locations are today offered for sale as syndicated investments targeting private investors, with a return to risk ratio that would make any professional investor run away screaming.

Property agents and pessimists
Pessimists have always existed – also in the investment markets. Such “doomsayers” constantly foretell the collapse of the market. Now and again, typically 7 to 10 years apart, they are right and are hailed as geniuses.

Like other investment advisers, property agents are not pessimists. If anything, they tend to get carried away by good vibrations. When prices continue to climb, it hardly matters that you agree to sell a property on commission at too high a price – the market is bound to catch up.

However, investors should not let themselves be carried away. If a property owner only wants to sell at a price that cannot be supported by rational investment analyses, there is no reason why you as investor should waste any time on such an offering.