Colliers Denmark Market Report 2025

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COLLIERS MARKET REPORT 2025

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Core capital on the sidelines Domestic pension funds have historically played a cen tral role in allocating core capital to the Danish property market. Their long-term strategy differs from value-add funds, which have a shorter time horizon. This could have been an opportunity for pension funds to take advantage of declining property prices in 2023 and 2024 without running quite the same risk of ‘bad timing.’ However, many pension funds remained hesitant, partly due to a falling stock market that skewed their portfolios and created a perception of overexposure in the property sector. At the same time, the bond market, which had lost its appeal for many years in the zero interest rate environ ment, became attractive again due to rising interest rates. This change has marked a shift in the allocation of risk averse pension capital, which was previously directed more towards alternative asset classes because bonds could not deliver the required return. With rising interest rates and a more competitive bond market, it was natu ral that some of their available capital found its way back into bonds, despite reasonable investment opportunities in the property sector. Swedish investors, previously very active in the Danish core segment, have been hit extremely hard in recent years. Falling prices in their domestic market and more expensive financing through corporate bonds hampered their activity in Denmark. In 2024, however, the mar ket has stabilised and Swedish real estate companies are once again trading at market values that reflect the value of their underlying property portfolios, while capi tal inflows have reopened and the unsecured corporate bond market has become liquid again. We have seen some divestment by Swedish investors in Denmark over the past year but expect Swedish property companies to be net buyers in 2025. Prospects for recovery in 2025 After two years with an extremely limited amount of allo cated core capital, we expect the core segment to see a renewed increase in allocated capital in 2025, accelerating

in terms of risk-adjusted returns. Especially in the post 2018 zero interest rate environment, significant amounts of capital were allocated to the core segment. However, this development came to an abrupt halt with the sharp rise in interest rates in spring 2022. Increased allocation of risk-tolerant capital The amount of capital allocated to the property mar ket across all risk profiles decreased significantly in 2023. However, it started to increase again in 2024. This increase is mainly due to an increased allocation of risk-tolerant capital, including value-add and oppor tunistic capital, which can better navigate an uncertain market. Core capital, on the other hand, is characterised by a low risk tolerance and a long time horizon, with real estate investments often acting as a bond substitute. Therefore, core capital has historically been attractive during periods of low and stable interest rates. Return on equity requirements for the core segment, including core+, are typically in the 3-9% range, and this type of capital often requires the investment to generate cash flow to pay regular dividends. Value-add or opportunistic capital operates with a higher risk tolerance and typically a shorter time hori zon, where the strategy focuses more on creating quick value through active ownership, which is why these types of funds typically have a predetermined time hori zon of 6-10 years. Their return on equity requirements are typically in the range of 10-20% or more, and typi cally with no requirement for regular dividends. The core segment relies on long-term security and sta ble cash flows, but rising financing costs and increased volatility in the property market have limited the num ber of attractive investment opportunities. As core inves tors retreat, the value-add segment can capitalise on the opportunities that arise as yield requirements increase due to lower demand. Part of the value-add investors’ strategy in this case will be to anticipate future yield compression, creating added value and enabling the necessary return on equity. In short, the increased mar ket risk opens up for acquisitions of property assets that in a functioning, liquid market would often end up with core investors.