Colliers Copenhagen Property Market Report 2019

2 0 1 9

COPENHAG EN PROPE RT Y MAR K E T R E PORT

3 Still going strong 4 Summary: Key property market trends

6 Property price index: Commercial property prices approaching pre-crisis peak 10 Investing in Denmark: Sound fundamentals and superior framework conditions 20 Office: Strongest office market since the crisis 36 Residential: Liquid market challenged by high price expectations 48 Retail: F&B and tourist hotspot 60 Industrial & logistics: A thriving market segment 72 Special feature: Aarhus office market 80 In brief: Aarhus, Odense, Aalborg and The Triangle Region 88 Market practices 89 Definitions 90 About Colliers

WWW The Copenhagen Property Market Report 2019 is available in an extended digital version at www.colliers.dk Sign up for our quarterly newsletter for analyses on the Danish commercial and investment property market at www.colliers.dk

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Copenhagen Property Market Report 2019

Still going strong

Despite financial market volatility and fears of slowing global growth, the Danish commercial property market is still going strong: In 2018, capital growth exceeded 4% in the Greater Copenhagen investment property market, and domestic and international property investors continue to show a healthy appe- tite for investments, in the office and industrial/logistics markets in particular. The residential market remains attractive, too, although the volume of new developments coming to the market has put a slight downward pressure on rents as well as slowed forward purchases. Short-term interest rates continue to be negative, with property financing available at extremely low rates via the highly efficient Danish mortgage financing system. Property transaction activity slowed in 2018, with the total volume of transactions falling 20% short of the record-breaking level of 2017, mainly due to a shortage of adequately priced prod- ucts. Still, 2018 comes in second in history in terms of national transaction volumes. This 2019 market report by Colliers International offers an over- view of key economic trends and of the Copenhagen commercial property market, including occupational and investment market information as well as details on transactions across sectors and submarkets. This year, we have also included a brief introduction to the most important property markets outside Copenhagen. After years of capital growth across the board, inherent risks have increased in the property market, and the margin for errors has narrowed. The market is not the remedy to cure all mistakes. Highly qualified advisory services are therefore becoming increasingly important.

The 2018 merger between Colliers International and Sadolin & Albæk created a new market leader with 150 professionals in Copenhagen and four regional offices. As the undisputed market leader in the Danish commercial and investment property market, we are dedicated to providing top-of-the-line advisory and transaction services. Our success is measured by our clients’ success.

Copenhagen, February 2019

Peter Winther, Partner and CEO (MRICS) peter.winther@colliers.com

Photo: Thomas Sinkbæk

Copenhagen Property Market Report 2019

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Summary: Key property market trends

Residentials continue to head the field

Professional investors dominate

50%

2% User 9% Private investor 18% Institutional 31% Property fund 40% Property company

40%

30%

20%

10%

0%

O ce

Retail

Hotel

Residential

Other Industrial/ logistics

2017

2018

Note: Transaction volume by segment, Denmark. Source: Colliers International

Note: Transaction volume by investor type, Denmark. Source: Colliers International

Significant increase in core investments

Domestic investors catching up

0% 10% 20% 30% 40% 50% 60% 70% 80%

46% Domestic 2017

54% Foreign 2017

50% Domestic 2018

50% Foreign 2018

Core

Value-add

Opportunistic

User

2017

2018

Note: Transaction volume by investment type, Denmark. Source: Colliers International

Note: Transaction volume by investor origin, Denmark. Source: Colliers International

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Copenhagen Property Market Report 2019

Real commercial property prices remain below 2007-level

500

400

300

200

100

0

Note: Colliers International property price index (index 100 = Q3 1984). Source: Colliers International

00

18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01

Nominal values

De ated values

Slight decline in transaction volume despite capital abundance https://helpx.adobe.com/dk/illustrator/using/graphs.html#enter-graph-data

20 30 40 50 60 70 80 90 100

0 10

09

10

11

12

13

14

15

16

17

18

Note: Transaction volume, Denmark (DKK billion). Source: Colliers International

Greater Copenhagen

Rest of Denmark

Commercial property continues to offer attractive returns

6%

5%

4%

3%

2%

1%

0%

09

10

11

12

13

14

15

16

17

18

19

Retail high street, prime 10-year government bond

O ce, prime Residential, prime

Sources: Eurostat and Colliers International

Copenhagen Property Market Report 2019

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PROPERTY PRICE INDEX

Frederiksstaden, central Copenhagen

7

Copenhagen Property Market Report 2019

Commercial property prices approaching pre-crisis peak

Sustained uptrend in Greater Copenhagen commercial property prices documented by six consecutive years of capital gains 8.9% Total average return on commercial property in 2018 15 bps Commercial property sector income return requirement compression in 2018

Greater Copenhagen commercial property prices continued to climb in 2018. According to the Colliers International property price index, Greater Copenhagen commercial prop- erties yielded a total average return of 8.9% in 2018, comprised of yield compression of income return to approximately 4.6% and capital growth of 4.3%. Having climbed for six years running, Greater Copenhagen commercial property prices have, in nominal terms, moved well beyond the peak level recorded in 2007. Factoring in inflation, however, Copenhagen commercial property prices have yet to catch up with 2007 prices, although the gap has narrowed to approximately 1.3%. Copenhagen property assets continue to offer attractive and competitive returns compared to other property markets and asset classes, but prices have soared across the board. As a result, some segments have seen a growing mismatch in buy-side and sell-side price expectations. In combination with a shortage of prime investment opportunities, this has served to curb transaction volume in the Danish property investment market: In 2018, total transaction volume landed at DKK 71bn, down from a record-breaking high of DKK 88bn in 2017. Overall, the 4.3% capital growth seen in 2018 was driven by yield compression and an inflationary uptrend. Income return requirements compressed by approximately 15 bps in 2018, corresponding to some 3.1% capital growth and exceeding our previous projections for the year by some 10 bps, driven mainly by developments in the office segment.

In real terms, Copenhagen commercial property prices remain below 2007-level

500

400

300

200

100

0

00

18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01

Nominal values

De ated values

Note: Colliers International property price index (index 100 = Q3 1984). Source: Colliers International

https://helpx.adobe.com/dk/illustrator/using/graphs.html#enter-graph-data

Property price index – Market Report 2019

8

Risk-adjusted commercial property returns outperform returns on stocks and bonds

Given a 1.2% increase in the net price index (NPI, basis for most minimum rent adjust- ments) in 2017, uptrending rents in the occupational markets have had a negligible net effect on capital growth. At first glance, this seems surprising as Greater Copenhagen occupational markets have improved in terms of climbing prime office rents in some loca- tions as well as a thriving industrial/logistics segment. However, in 2018 the retail invest- ment property market continued to struggle with increasing vacancy rates and decreasing rent levels, especially in secondary locations. In addition, office vacancy rates edged up in late 2018. Property vs. stocks and bonds When assessing the performance of Copenhagen commercial property, the return to risk reward offered by commercial real estate assets compared to other asset classes is a factor to consider. We have compared the performance of commercial property to that of stocks and bonds by analysing total return indices for each of the asset classes, i.e. including reinvested income yields for the respective asset classes. For a gross index of the Danish stock market, we use total return data compiled by MSCI, and for bonds we use Nordea’s 7-year benchmark return. For the total return on commercial property, we use the Colliers property price index, in which total return is comprised of average net initial yields and capital growth. Having rallied to unprecedented highs in 2017, stock markets took a tumble in 2018 as the MSCI Denmark Gross Index plummeted by 10.4% as the year wore on. Stock markets witnessed substantial volatility on several occasions with both the Italian election, the trade war between the US and China and challenging conditions in emerging markets causing significant volatility. Although bond markets continue to be affected by low and stable interest rates, bond returns rebounded in 2018 to a level of 1.99% at year-end 2018. By analysing time series dating back to 2000, the total return on stocks has on average outperformed commercial property and bonds by approximately 230 and 650 bps, respec- tively. Accordingly, in this period, commercial property has produced an average total return outperforming Nordea’s 7-year benchmark by some 420 bps. While the average return on stocks exceeds the average returns on commercial property and bonds, stocks also carry considerably higher return risk. When calculating risk, measured as the standard deviation on each time series, the total return on stocks proves to carry more than four times the risk of commercial property and nearly five times the risk of bonds. Computing the Sharpe’s ratio, a measure of risk-adjusted returns, for the three time-series indicates that commercial property has largely outperformed both stocks and bonds over the past 19 years. Among other things, this indicates that there is a considerable illiquidity premium on commercial property investments. Are yields set to increase in 2019? Looking ahead, we predict that capital growth will slow in 2019. Over the past six years, annual average capital growth has been 5.7%, driven mainly by yield compression across all segments of the investment property market. Although the occupational markets remain fairly healthy, we are starting to see slowing rental growth in some segments,

Total return on commercial property investments in 2019 is estimated at around 5-6%

Stable income return expected throughout 2019, supported by an inflationary uptrend

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Copenhagen Property Market Report 2019

limiting the prospects of adding value by improving income return profiles of property assets. In view of the current historically high prices, we expect yield compression to taper off with yields remaining flat or even edging up slightly over the next 12 months. Total property returns in the Greater Copenhagen commercial market are projected to be in the 5-6% range in 2019. Capital growth is expected to be supported by an inflationary uptrend in 2018 with an increase in NPI of close to 1.0%, but we project very limited changes in income return requirements. In the occu- pational markets, some office segments are expected to see rent increases while especially the retail segment is expected to remain beleaguered. Accordingly, the net effect of further occu- pational market recovery is expected to be limited. Model and approach For both the Colliers International property price index (capital growth) and the net initial yield calculations, we have used a hedonic multiple regression analysis based on empirical analysis of data collected from more than 4,800 property sales and prop- erty valuations in the Greater Copenhagen area since 1985, all involving Colliers (pre-2018, Sadolin & Albæk). The model covers all types of commercial property, but fixed implicit prices are applied for the various property characteristics, mainly location, use, state and condition/quality, suitability/rationality and econo- mies of scale, as a corrective measure to account for the differ- ences between individual properties. In this context, the return

applied is the average return, which denotes the most likely return or the return that investors may expect in a random year on the basis of historical returns. The average return should not be mistaken for the expected compound interest on investments or the geometrical average used to measure the compound return on an investment. The risk is measured by the standard deviation of the yearly returns, that is, the average deviation from the mean return. The risk measurement applied here thus provides information on the extent to which the return fluctuates around the expected average return.

 ANDREAS BRANDT , andreas.brandt@colliers.com

Positive capital growth six years running

10% 15% 20% 25% 30%

0% 5%

-15% -10% -5%

18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 00

Total return

Income return

Capital growth

Note: Total return, income return and capital growth for commercial property in the Greater Copenhagen area. Source: Colliers International

Commercial property continues to outperform bonds

Commercial property investments best-in-class risk-adjusted returns

100 150 200 250 300 350 400 450 500

2018

2000-2018

Return

Mean return

Risk Sharpe’s ratio

MSCI Denmark, Gross Total Return Nordea benchmark, 7-year bond Commercial property, Greater Copenhagen 1

-10.4% 11.9% 24.9%

0.36

2.0% 5.4% 5.1%

0.51

0 50

8.9% 9.6% 6.1%

1.11

18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 00

MSCI Denmark Gross Total Return Index Nordea benchmark 7-year bond Commercial property, Greater Copenhagen

Note: Average return and risk on commercial property, stocks and bonds. Sources: MSCI, Nordea and Colliers International

Note: Historical returns on commercial property, stocks and bonds (Index 100 = 2000). Sources: MSCI, Nordea and Colliers International

1 Please note that the Colliers International property price index is based on observations recorded throughout the whole year and therefore the return computed is an average across the year compared to the average across the previous year.

Copenhagen Property Market Report 2019

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INVESTING IN DENMARK

Ørestad, Copenhagen

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Copenhagen Property Market Report 2019

Sound fundamentals and superior framework conditions

Copenhagen named one of the most liveable cities in the world

The Economist ranked Denmark’s capital, Copenhagen, in the top-ten of the most liveable cities in the world in 2018. In addition, the city was named the best travel destination in the world due to its historical architecture and sights, outstanding gastronomical scene and shopping opportunities as well as successful urban revitalisation and redevelopment schemes. Having attracted an increasing numbers of tourists for more than eight years in a row, today more than 10 million annually, the city is one of Scandinavia’s most popular tourist hotspots. Thanks to high scores on living standards and affluence, based on GDP per capita, social support, life expectancy, political stability and low corruption, the Danish population has repeatedly made it into the top-three of the happiest people in the world. Ideal framework conditions for investments The Capital Region of Denmark is the foremost growth centre of Denmark. Comprising 29 municipalities and more than 1.8 million inhabitants in total, the region is expected to see population growth of some 16% by 2045, corresponding to approximately 295,000 new residents. Strong population growth is a significant driver in the regional housing and labour markets. In terms of educational level, the Capital Region of Denmark has a high ranking too, with 41% of the region’s residents having completed medium- to long-cycle education relative to the national average of 33%. Danish GDP per capita exceeds the EU average by roughly 70%. In Copenhagen alone, GDP per capita exceeds the national average by 38%, making the city the unrivalled growth locomotive. Supported by these strong fundamentals, Greater Copenhagen offers an ideal framework for attractive property investments. Danish business environment among the best in the world Denmark continues to be in the international elite of places to do business, in the most recent World Bank survey on ‘Ease of Doing Business’ receiving renewed top rank- ings, topped only by New Zealand and Singapore. In fact, Denmark boasts an impres- sive track record of rankings in the global top-five – and absolute top rankings in Europe – going back more than nine years, with Copenhagen as the premier driver. In the same World Bank survey, Norway, the United States and the UK came in at number 7, 8 and 9, respectively, thus lagging far behind Denmark. In addition, Denmark is one of the most digitalised countries in the EU. In combination with a highly skilled labour force and polit- ical stability, this makes Copenhagen a European hotspot. As Denmark has a highly flex- ible and efficient job market and a minimal corruption rate, the Danish investment climate is one of the most favourable in the world.

World Bank Survey gives Denmark top ranking as a place to do business in Europe

Investing in Denmark – Market Report 2019

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Heavy infrastructure investments The ongoing Copenhagen Metro expansion scheme is adding a circle line, ‘Cityringen’, and a line from Nordhavn (north harbour) to Sydhavnen (south harbour). Scheduled for commissioning in 2019 and 2023, respectively, these metro lines will improve urban infrastructure substantially, connecting these newly developed city districts with the rest of Copenhagen. Scheduled for commissioning in the second half of 2024, the new Copenhagen Light Rail along the Ring Road 3 corridor is believed to foster new urban growth areas, attracting long-term investments and influencing future settlement patterns. Triple-A rating Denmark is perceived as a safe-haven investment market thanks to strong framework conditions, reflected in Denmark’s AAA rating by S&P. Compared to other European coun- tries, Denmark offers highly attractive risk-adjusted returns and low volatility market rent levels. In addition, leveraged investors have the opportunity to boost effective yields due to low transaction and lending costs offered by the highly efficient Danish mortgage system. Sustained GDP growth Following significant GDP growth of 2-3% p.a. for the past three years, GDP growth slowed to 1% in 2018 according to recent estimates by Danske Bank. Consumer spending edged up slightly in 2018, driven by real wage growth and low infla- tion. In combination with increasing employment levels, these factors have improved house- hold budgets, potentially leaving room for an increase in spending. However, most Danish households continue to hold back, seemingly putting savings before additional spending. On the basis of high savings ratios it seems fair to assume that all precursors are in place for a future increase in consumer spending. Fierce competition for talent Employment levels continued to climb in 2018, driven mainly by strong job growth. The favourable employment trend has driven down the Danish unemployment rate to a record-low of 4.0%. Companies are finding it increasingly difficult to hire skilled and qualified staff, with a labour shortage therefore possibly threatening to dampen the economic upturn and exac- erbate wage pressure in several business sectors. Low interest rates and low inflation The DKK-EUR peg ties the interest rates determined by the Danish central bank, Danmarks Nationalbank, to those of the ECB. In view of Denmark’s large current account surplus and the strong demand for Danish government bonds, it is plausible that Danish interest rate levels will remain lower than those of the ECB for a significant length of time. The era of record-low interest rates is coming to an end, starting December 2018 when the ECB put a stop to the historical asset purchase programme initiated back in 2015. In the span of three years, the ECB has purchased bonds worth more than EUR 2.5 trillion.

Copenhagen residents highly educated

17% Long-cycle higher education 19% Bachelor/medium-cycle higher education 23% Vocational education 13% Upper secondary school 23% Basic school (9-10 grade) 5% Short-cycle higher education

Note: Highest level of education completed. Proportion of Copenhagen residents (rounded figures). Source: Statistics Denmark

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Copenhagen Property Market Report 2019

Continued urbanisation trend

Copenhagen: A strong growth engine

120

250 300 350 400 450 500 550

115

110

105

100

46 44 42 40 38 36 34 32 30 28 26 24 22 20 18 14 13 12 11 10 09 08

15

16

17

Capital Region

Denmark

Copenhagen

Denmark

Note: Population forecast (index 100 = 2018). Source: Statistics Denmark

Note: GDP per capita, DKK ‘000. Source: Statistics Denmark

Steady increase in Danish GDP growth

Danish consumer spending stable

2% 3%

4%

2%

-4% -3% -2% -1% 0% 1%

0%

-2%

-4%

-6%

10

13 12 11

14

15

16

17

E18

E19

10

13 12 11

14

15

16

17

E18

E19

Denmark

Eurozone

Denmark

Eurozone

Note: Growth in real GDP (y/y). Sources: Eurostat, Statistics Denmark and Danske Bank

Note: Growth in consumer spending (y/y). Sources: Eurostat, Statistics Denmark and Danske Bank

Investing in Denmark – Market Report 2019

14

Danske Bank does not expect the end of the programme to trigger any rate hikes by the ECB or Danmarks Nationalbank before December 2019 at the earliest, although long-term interest rates are predicted to increase, picking up pace as the above-mentioned rate hikes draw nearer. In 2018, the Danish benchmark yield, defined as the yield on a 10-year government bond, edged down marginally from 0.48% to 0.47%. By comparison, the short-term interest rate dropped from -0.27% to -0.30%. Political stability Denmark is consistently named one of the least corrupt countries in the world according to the annual ‘Corruption Perceptions Index’, ranking countries based on several factors, including public sector corruption and transparency in politics. The political system in Denmark is characterised by stability and consensus, with major political agreements and reforms only rarely being reversed in case of change of govern- ment. Denmark has a multi-party system comprising a relatively large number of parties in the Danish Parliament, with the four oldest and largest political parties typically obtaining a high proportion of votes (54% combined in the latest general election (2015)). This emphasises the strong element of continuity in Danish politics. Property transaction volume at DKK 71bn in 2018 Transaction volume in the Danish investment property market totalled DKK 71bn in 2018. Compared to the all-time high of 2017, this corresponds to a decline of 19%, ending a 7-year period of unbroken growth. The decline in transaction volume is not due to lack of investor demand but rather to a mismatch between sell-side and buy-side price expectations. Misguided by recent years’ rallying investment property prices, prospective sellers continue to factor in strong hikes in pricing expectations. The mismatch is most pronounced in the market for new residen- tial rental properties in prime locations in Greater Copenhagen and Aarhus (Denmark’s second largest city). In addition, uncertainty is building in the Danish residential property market as brisk newbuilding activity in the largest cities of Denmark, including Copenhagen, Aarhus, Aalborg and Odense, is raising concerns of an oversupply in the short to medium term. In addition, mortgage banks are adopting a slightly tighter lending policy in terms of commercial property financing, including development schemes. For the past four years, residential property transactions have accounted for the largest share of total investment volume, in 2018 approximately 47%, while office property transactions accounted for approximately 27% and retail property transactions for approximately 11%. The low corruption rate and general transparency of Danish society contribute to Denmark’s strong brand value.

Danish framework conditions are strong, supported by a political system characterised by stability and consensus

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Copenhagen Property Market Report 2019

Danish unemployment rate at structural low

Danish inflation edging up

10% 12% 14%

4%

3%

2%

0% 2% 4% 6% 8%

1%

0%

-1%

10

13 12 11

14

15

16

17

E18

E19

10

13 12 11

14

15

16

17

E18

E19

Denmark

Eurozone

Denmark

Eurozone

Sources: Statistics Denmark, Eurostat and Danske Bank

Sources: Eurostat and Danske Bank

Historically low interest rates

2% 3% 4% 5% 6%

-2% -1% 0% 1%

10 09

13 12 11

14

15

16

17

18

Eurozone (3M) Denmark (3M)

Eurozone (10-year gov. bond) Denmark (10-year gov. bond)

Note: Short-term interest rates (3M) and 10-year government bonds. Sources: Eurostat, ECB and Nasdaqomxnordic

Falck-Huset, CBD

Macroeconomic key indicators: Continued upturn in Danish economy

Consumer spending 1

Public debt 3

10-year swap yield 4

Year

GDP 1 Unemployment 2

Exports 1

Inflation 1

Denmark 2018

1.0

4.0 3.9 3.8 8.2 7.8 7.5

2.4

0.2 2.7 2.0

0.8

33.5

0.90

2019 2020

2.0

1.9

1.3 1.6

33.1

1.55

1.6

2.3

33.2

na

Eurozone 2018

1.9 1.6 1.5

1.3 1.7 1.6

2.7 2.5 2.7

1.8 1.8 1.6

86.9 84.9 82.8

0.75 1.00

2019 2020

na

1 Growth (% y/y), 2 % of workforce, 3 % of GDP, 4 End-year. Sources: Danske Bank and Eurostat

Investing in Denmark – Market Report 2019

16

International investors dominate the Danish investment market International investors have continued to consolidate their market share in the Danish investment property market. In 2018, they were involved in around 50% of overall prop- erty investments, with frontrunners Heimstaden, Blackstone, Klövern and Niam combined accounting for more than 23% of total transaction volume. Transaction activity in 2018 mainly driven by core assets A breakdown of transaction volume by investment profile shows that investor appe- tite has become stronger for value-add assets. Value-add assets are typically associated with weaker and more uncertain cash flows and a potential for operational improvements subject to proactive asset management. In 2018, 32% of transaction volume involved value-add assets. Core assets, typically fully let investment property assets associated with low risk and high cash-flow security, accounted for 60% of total transaction volume in 2018, reflecting an increase of 10 ppts on 2017. This increase to some extent ties in with the fact that investors are looking further afield, placing investments in other markets than the Copenhagen market in line with a shift in risk-profile. In the provincial markets investors still tend to focus on core assets. Investment market outlook remains bright Even though the 2018 transaction volume fell short of the previous year’s all-time high, the outlook for the Danish investment property market remains bright. In fact, the moderate slowdown may fundamentally be considered a sign of health as it reflects an investment market characterised by professional investors that base their decisions on solid analyses and calculations, resisting the temptation to be beguiled by previous years’ rallying rental prices and yield compression. Investment demand is expected to remain strong in the property market, driven by the prevailing capital abundance in the market in tandem with continued massive place- ment requirements. Relative to other asset classes, investment property continues to offer attractive risk-adjusted returns. However, climbing interest rates may motivate institutional investors to funnel allocations from property and other assets in order to increase bond exposure. Shift in the risk preferences of domestic pension funds Relative to GDP, Danish pension wealth is the largest in the world. In 2017, total private pensions savings equalled approximately 155% of Danish GDP. Traditionally, domestic pension funds have allocated between 5-10% of capital to property investments, albeit pursuing different approaches and strategies. In recent years, we have seen a shift in the risk preferences of major pension funds. Recent years’ stock market turbulence and low returns on low-risk liquid assets such as bonds have incentivised investors in general and pension funds in particular to allocate more capital to alternative investments, including investment properties as such assets are considered to offer long-term attractive risk-ad- justed returns.

Core assets head the field

3% Opportunistic 5% User 32% Value-add 60% Core

Note: Breakdown of transaction volume by investment type. Rounded figures. Transaction volume, Denmark. Source: Colliers International

Residential assets remain the most coveted

12% Retail 27% O ce 47% Residential

2% Hotel 3% Other 9% Industrial/logistics

Note: Breakdown of transaction volume by asset type. Rounded figures. Transaction volume, Denmark. Source: Colliers International

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Copenhagen Property Market Report 2019

TRANSACTION VOLUME: The decline in transaction volume is not due to lack of investor demand but rather a mismatch between sell-side and buy-side price expectations.

Slight decline in transaction volume despite capital abundance

20 30 40 50 60 70 80 90 100

0 10

09

10

11

12

13

14

15

16

17

18

Greater Copenhagen

Rest of Denmark

Note: Transaction volume, Denmark (DKK billion). Source: Colliers International

Prime investment yields, high-street retail

Both Copenhagen and Aarhus offer competitive returns compared to other European cities.

Oslo 4.00%*

Stockholm 3.75%

Aarhus 3.75% Amsterdam 3.00%*

Copenhagen 3.00%

Hamburg 2.90%* Berlin 3.20%*

London 2.50%

Brussels 3.25%*

Frankfurt 2.80%*

Paris 2.50%

Munich 2.80%*

Note: Yields are net initial yields except if marked (*) which denotes gross yields. Source: Colliers International

Investing in Denmark – Market Report 2019

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THE DANISH MORTGAGE SYSTEM

The Danish mortgage system probably offers one of the world’s most efficient and reliable models of property financing, designed to work in favour of both borrowers and bond investors as well as the economy in general. It is based on flexibility, transparency and low costs due to market-based prices and advantageous prepayment terms. Compared to European commercial banks in general, Danish mortgage banks showed their resilience during the financial crisis of 2008-2009 by increasing mortgage lending. MORTGAGE LENDING PRACTICES In Denmark, the mortgage financing market is characterised by exceptionally low financing costs and a highly transparent cost structure due to a unique balance principle. Danish mortgage banks grant loans which must be secured by a mortgage on a real property, allowing for loan-to-value (LTV) ratios of up to 60-80% of the property’s ‘as-is’ value, depending on asset type and the debtor’s credit rating. Danish mortgage banks offer financing at fixed or floating rates with a maturity of up to 30 years.

In the past, domestic pension funds predominantly invested in core assets in prime Copenhagen locations. In 2018, pension fund acquisitions confirmed the shift in strategy, as major transactions included building rights in an upcoming new Copenhagen loca- tion at Grønttorvet in the district of Valby, industrial/logistics building rights in Fredericia, as well as a prime multi-user office building in Nordhavn with almost all leases nearing expiry of non-terminability periods. In addition, pension funds PFA and Topdanmark acquired a turnkey hotel in the Carlsberg City District in 2018, thereby affirming their commitment to the new Copenhagen district on the former site of Carlsberg Breweries as co-owners of the company in charge of developments, Carlsberg Byen P/S. Additional owners include pension fund Pensam and Carlsberg. Looking ahead, we expect domestic pension funds to allocate more capital to property investments. In line with its stated objective of allocating 12-15% of investment capital to property investments, PFA, one of the largest pension funds in Denmark, today boasts a property portfolio worth more than DKK 70bn, up from DKK 54bn at year-end 2017. Other domestic pension funds are believed to follow suit in the years to come, increasing prop- erty market exposure. Adding up the figures stated in the 2017 balance sheets of the five largest pension funds, total investments amount to DKK 1,692bn, up from DKK 1,635bn in 2016. An increase in allocations from a share of 5-10% to 12-15% would imply an addi- tional property investment volume of DKK 80-120bn in future. Holding this together with international institutional investors’ continued appetite for Danish investment assets, we expect that climbing interest rates will have only limited effect on property yields.

 MUHAMED JAMIL EID , muhamed.eid@colliers.com  MORTEN K. PETERSEN , morten.petersen@colliers.com

19

Copenhagen Property Market Report 2019

Denmark offers highly attractive risk-adjusted returns and low- volatility market rent levels.

Copenhagen Property Market Report 2019

20

OFFICE

Fairway House, Ørestad

21

Copenhagen Property Market Report 2019

LOCATIONS OFFICE Read more

Strongest office market since the crisis

Need for more office space as employment rises

Today’s Copenhagen office market is the strongest market in more than ten years, with mounting demand driving vacancy rates down and rental prices up.

Continued economic recovery and strong confidence in future prospects have encour- aged an increasing number of businesses to expand their workforce. This applies to more or less all business sectors. Since Q3 2017, the number of full-time equivalent employees (FTEs) has increased by some 10,100 in Copenhagen and by some 18,300 in the Capital Region of Denmark. In particular, office-intensive industries such as ‘Trade and trans- port’, ‘Information and communications’, ‘Business services’ and ‘Public administration’ (categories used by Statistics Denmark) are growth drivers, combined accounting for 75% of FTE growth in Copenhagen. At the beginning of Q4 2018, the Copenhagen office vacancy rate was 6.0%, having dipped to 5.7% at start-Q1 (Ejendomstorvet.dk). Although statistics fail to show an unequivocal downtrend, it is worth bearing in mind that office vacancy rates cover both old and relatively new office buildings. A review of available office leases reveals that existing office vacancies are confined largely to old-stock buildings, whereas new and up-to-date buildings have virtually no prolonged vacancies. In the short term, the office market is expected to continue to prosper, putting further pressure on vacancy rates and rent levels. However, whereas recent years’ office market boom has been driven by the demand side and employment growth, we believe that future improvements in market fundamentals will be driven mainly by stagnant supply, which will be unable to match the projected increase in demand. Sluggish newbuilding and speculative building Broadly speaking, an increase in office occupational demand was in the past largely matched by a corresponding increase in office supply, which has served to keep office rent levels relatively constant in Copenhagen over the last 10-15 years. However, irrespective of the highly favourable conditions in today’s office market, we still see a pronounced aversion in the investor and developer community against new office construction unless a substantial share of lettable space is pre-let. Although there is a fairly strong pipeline of new office space both in the CBD and in neighbouring districts, most of it is pre-let, and several businesses are therefore likely to be frustrated in their ongoing search for new premises despite this added new supply.

+1,295

Information and communication

+3,235

Trade and transport

+4,101

Other business services

+1,904

Construction

+1,175

Finance and insurance

+6,643

Other 1

+18,353

Total

Note: FTE growth, Capital Region of Denmark, Q3 2017 to Q3 2018.

1 Other includes Real estate, Public administration, Manufactur- ing , Agriculture and other unspecified business activities. Source: Statistics Denmark

Office – Market Report 2019

22

Distinct supply and demand imbalance may drive up rents by as much as 10% in some areas.

Broadly speaking, the financial crisis has served to make most market players less risk-tolerant, both developers and investors awaiting clear evidence of strong demand for new office space before starting new office development. Even though the market has seemed ready to absorb a certain volume of speculative newbuilding for several years now, such strong demand has in fact not registered until 12-24 months ago. As a result, we are now seeing increased appetite – albeit still not matching pre-crisis levels – for large-scale office development on a speculative basis, for instance KLP’s development scheme at Kay Fiskers Plads, Ørestad and the redevelopment of Oslo Plads in the district of Østerbro by Fokus Asset Management. Both schemes were started without any pre-let agreements in place. Ample potential for rent hikes Copenhagen office vacancy rates have now reached a level that is deemed unsus- tainable in the long term, taking into account the share of old and outdated buildings currently vacant. Strong confidence in the future has in many businesses fostered a focus on recruiting additional staff to meet demand both in the short and long term. This also poses new demands on the office premises of expanding businesses, typically not designed to accommodate growth on any large scale. As a result, several businesses are in the market for new premises, almost all of which have very specific demands in terms of flexibility, quality and location. Such requirements are often only met by new and up-to-date premises, designed specif- ically with these requirements in mind, whereas premises of an older date rarely even enter the running. However, in view of the virtually non-existent supply of new and up-to-date properties, we have recently started to see rent levels come under upward Given development periods that often drag on for years, the next couple of years will hardly see an increase in supply that is sufficient to match the existing strong demand.

23

Copenhagen Property Market Report 2019

pressure in this segment. Longer term, against the backdrop of the ongoing redevelop- ment of Kalvebod Brygge on the Copenhagen waterfront, the Copenhagen CBD is running out of the most likely development opportunities. As a result, any rent hikes that may occur will presumably not be temporary but rather reflect structural changes in CBD rent levels. Although ample development opportunities are still available in non-CBD districts like Ørestad, Nordhavn and Valby, these districts cannot be considered direct substitutes for the Copenhagen CBD, although the supply in these districts serves to put a ceiling on rent hikes in the CBD.

Office vacancy rates remain record-low

10% 12% 14%

0% 2% 4% 6% 8%

09

10

11

12

13

14

15

16

17

18

Copenhagen

Greater Copenhagen, excl. Copenhagen

Source: Ejendomstorvet.dk

Volume of net office take up at some 875,000 sqm since 2009

-250,000 -200,000 -150,000 -100,000 -50,000 0 50,000 100,000 150,000 200,000 250,000

-600,000 -480,000 -360,000 -240,000 -120,000 0 120,000 240,000 360,000 480,000 600,000

09

10

11

12

13

14

15

16

17

18

CBD (l. axis) CBD (acc.) (r. axis)

Greater Copenhagen (l. axis)

Greater Copenhagen (acc.) (r. axis)

Note: Annual net take up, quoted in sqm space. Sources: Ejendomstorvet.dk and Colliers International

Office – Market Report 2019

24

Changes in tenant demands and use of office space potentially speed up obsolescence rates, calling for earlier investments in major upgrades Continued office conversion trend for alternative uses due to high office refurbishment costs and favourable outlook for the housing and hotel markets 10% increase in volume of tenanted Copenhagen office leases over the past ten years

Office properties prone to accelerating obsolescence risk In the past, office properties were constructed and fitted out based on the assumption that they would remain contemporary and require only slight refurbishment prior to possible re-letting. Today, however, even properties built only 10-15 years ago are increasingly perceived as being functionally obsolete in the face of current tenant demands. If these tenant demands are not factored in when developing new premises, major rede- velopment and refurbishment prior to re-letting will be required, should the original tenant decide to move out. In particular, buildings dating from the 1980s and 1990s are at a disadvantage as they were designed in a period when the primary focus was on energy efficiency, with no consideration of future requirements. This type of office premises is therefore character- ised by low ceiling heights, relatively small window sections and low building depth – all features that are difficult to change even with heavy investment. Even properties built after the millennium, on the outside seemingly modern and well-main- tained, have certain shortcomings that require costly upgrades. For instance, indoor climate installations tend to be under-dimensioned, unable to cater to today’s workspace density increases. It is often not enough to increase the central capacity as the installations fitted throughout the building are not designed for scalability. As a result, large-scale replacement is typically required in order to scale up the installations to today’s demands. The new metro line, Cityringen, opens up new possibilities Following an almost decade-long construction period, the long-awaited new Copenhagen Metro line, Cityringen, is finally scheduled for opening in summer 2019. Whereas the first phase of the Metro, inaugurated in 2003, runs across Copenhagen, Cityringen is a circle line that effectively ties together most districts of Copenhagen. Districts formerly part of neither the S-train nor the metro grid are now connected with the rest of city. As a result, these districts will be better positioned to compete for busi- nesses thanks to their enhanced accessibility. In north-western Copenhagen, in particular the areas surrounding the square of Skjolds Plads, Nørrebro station and Vibenshus Runddel have seen the first signs of development activity in anticipation of Cityringen. These areas are expected to attract businesses that prefer more decentralised locations than the CBD. At Vibenshus Runddel, Vibenshuset is now fully let, following ten years of fluctuating vacancy rates. On the opposite side of Lyngbyvejen, ATP is currently preparing a site for mixed-use office and residential development. The district of Nordvest (Copenhagen NV) is already witnessing increased demand for office space on the border to the district of Nørrebro (Copenhagen N), with Nørrebro station being an important demand driver in the area as it is set to become a future transport hub for S-train and metro services.

MAP NEXT PAGE  The map overleaf shows the planned Copenhagen Metro expansion, pinpointing the stations of areas that may come into play when becoming part of the Copenhagen metro network

25

Copenhagen Property Market Report 2019

v/Kry

Great importance Moderate importance Cityringen Existing Metro line Future Metro line

Orientkaj

Levantkaj

Poul Henningsens Plads

Nordhavn

Vibenshus Runddel

Skjolds Plads

Nørrebro

Trianglen

Østerport

Nørrebros Runddel

Nuuks Plads

Marble Church

Aksel Møllers Have

Nørreport

Forum

evang

Kongens Nytorv

Gammel Strand

Frederiksberg

Fasanvej Solbjerg

Copenhagen City Hall

Christianshavn

Frederiksberg Allé

Copenhagen Central Station

Lergravspa

Enghave Plads

Islands Brygge

Amagerbro

Havneholmen

DR Byen Universitetet

Source: Colliers International

Enghave Brygge

Ny Ellebjerg

Office – Market Report 2019

26

Slight decline in Greater Copenhagen office transaction volumes DKK 13.4bn in 2017 DKK 11.9bn in 2018

The current S-train line servicing this station, the F-line, arches its way around the city centre, running between Hellerup and Ny Ellebjerg, today making it necessary to change lines to reach central Copenhagen. The new metro station is expected to give this loca- tion a major boost in terms of improved accessibility. Office areas are still being converted for other uses The high costs associated with the refitting of outdated office premises to match today’s demands are also part of the reason why we see an increasing proportion of office prem- ises, both old and relatively new ones, being converted for other purposes, including hotel and residential uses. Even if situated in a central location, where office space is expected to be in strong demand, the premises require such high capital expenditure in upgrades to meet the requirements of a new office tenant that an alternative use scenario often proves more lucrative in terms of income return. This was the case with the building dubbed ‘Ørkenfortet’ (Desert Fort), the main building of the former Nordea head-office complex at Christianshavn, acquired by domestic pension fund ATP Ejendomme and currently undergoing redevelopment into a Hilton hotel. Another example is Kalvebod Brygge 20, which the Arp-Hansen Hotel Group acquired for hotel conversion (Wakeup hotel brand). Formerly a multi-tenant office building, with tenants including Falck A/S and Nykredit, the property did not attract suffi- cient investor interest based on continued office use as this would imply substantial refurbishment costs. At Holmens Kanal, the current head office of Dansk Bank will presumably be converted for residential and retail uses when the bank relocates to brand-new premises on the former post office site, ‘Posthusgrunden’. This trend is important to bear in mind when considering the current pipeline of office premises as a great many of the businesses that currently account for pre-lets will in fact vacate premises that will not become available again in the office market but be converted. Momentum in the market for prime office investment properties is as strong as ever, driven mainly by today’s strong office occupational market and massive placement requirements in the investor community. Properties situated in Copenhagen, including the CBD and adjoining districts, have attracted particularly strong investor demand. However, this sustained strong appetite is not fully reflected in the transaction volume recorded in the office market in 2018: Down from from DKK 13.4bn in 2017 to DKK 11.9bn, the recorded Greater Copenhagen office transaction volume is not believed to give a fair representation of underlying demand. An increasing number of existing investors active in the Greater Copenhagen market have announced plans to increase office property market exposure. So far, this has not manifested itself in a corresponding increase in transaction volume as mainly the shortfall in supply has dampened investment activity. Transaction volume does not give a fair representation of investor demand