In 2016, the aggregate transaction volume in the Danish market for investment property reached some DKK 64bn, just shy of the previous record high of 2006 – the busiest year before the financial crisis. Greater Copenhagen accounted for some DKK 50bn, the highest transaction volume ever. Sadolin & Albæk believes that 2017 will see at least the same level of transaction activity.
Sustained brisk activity
The clean-up after the property and financial crisis has all but finished, but a great number of prospective sellers are still looking to sell.
Many opportunistic investors who invested heavily in property in the sluggish pre-crisis market now want to take home profits. This also applies to so-called value-add investors who have spent the last couple of years carrying their development plans into effect, now ready to realise the profit often associated with proactive asset management.
In addition, it is worth noting that both institutionals and other market-leading investors are deliberating whether to leverage the current market momentum to carry out strategic portfolio rebalancing manoeuvres. Finally, newbuilding activity is fairly brisk, not least in the residential segment, which also affects transaction volumes.
We are pleased to see that investor demand is strong too. From the perspective of pension funds and other institutional investors, and funds and HNWIs as well, low interest rates serve to drive up the appetite for property investments.
At the same time, fundamental drivers in the property market are clearly becoming stronger, in particular in large cities. Favourable demographic developments, employment growth and higher consumer spending are all factors that drive down residential and commercial vacancy rates, thereby supporting the potential for demand-driven rental growth in the longer term. In addition to this, inflation is edging up. This increases the income return from leases subject to NPI regulation – translating into price hikes on newly built premises.
Altogether, this makes for a near-perfect cocktail of structural, macroeconomic and financial precursors and works very much in favour of the property market.
Interest rate increases are spreading
There are no signs to suggest any imminent increase in European short-term interest rates. However, long-term interest rates are already up – driven partly by developments in the USA, partly by more favourable economic trends in Europe.
As described in another commentary in this NewsLetter (What drives investment property prices), there seems to be no clear correlation between interest rate levels and investors’ net initial yield requirements on property investments. A rising interest rate level is driven mostly by more favourable market conditions, which have a positive effect on property prices.
Nevertheless, it should not be ignored that exceptionally low interest rates have prompted a very substantial reallocation of capital from the bond markets to alternative investments, including real property. Overall, we therefore believe that investors’ net initial yield requirements will stabilise in 2017, with yield compression tapering off.
However, the brighter economic outlook and slightly uptrending inflation will generally tend to improve the operating performance of investment property. All other things being equal, it seems justified to expect future income return increases.
In the global financial markets, geopolitical risks are believed to represent a growing concern. Uncertainty concerning global free trade agreements, uncertainty as to whether referendums in Europe may affect the EU and the euro, along with other uncertainty factors worldwide, may potentially have a severe impact on financial market trends. This may also impact property markets, both globally and in Denmark.
Such uncertainty may have opposing effects on the Danish investment property market.
Geopolitical uncertainty and less free trade may obviously have severe repercussions for economic growth in a small and open economy such as Denmark. It may trigger an economic downturn with stagnant employment and consumer spending levels.
In times of uncertainty, international investors may choose to concentrate their investments in the largest and most liquid markets. This too may have a detrimental effect on the property market in Denmark, where investment properties worth a sizeable three-digit billion kroner amount are today owned directly or indirectly by international investors.
On the other hand, increased uncertainty and an economic slowdown may prompt a renewed drop in interest rates. At the same time, the Nordics, including Denmark, are quite rightly perceived as investment safe havens in times of uncertainty. Danish sovereign debt has AAA-rating. And an economy with strong and healthy fundamentals, including a balance-of-payments surplus and solid public finances, will be an attractive place to invest when times are uncertain.
All in all, we therefore predict that the market for investment property will continue to prosper in 2017, although price increases will presumably be lower than those seen in the last three years.