Colliers Copenhagen Property Market Report 2019

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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.