Colliers Market Report Denmark 2023

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Colliers Market Report 2023

Hotel Industri & logistik Retail Bolig Kontor o l I ndustrial l i ics Residential Office

The first six months of 2022 continued the favourable trends of 2021, with the volume of transactions exceed ing the H1 2021 equivalent, driven by substantial prop erty-specific placement requirements among large investors and property funds as well as newly estab lished international funds and funds of record-break ing size. This cushioned the immediate impact on the property market – unlike stocks – when Russia invaded Ukraine in late February. Before the summer holidays, widespread uncertainty was sparked by sharp increases first in inflation, then in inter est rates. The summer months saw a certain slowdown in price hikes and interest rate increases, allowing for

an optimistic property market outlook at start-H2 2022. However, cautious optimism was dashed by renewed, sharp and rapid interest rate increases in September and October against a backdrop of inflation that seemed to spiral out of control, exacerbated by supply chain con straints, COVID-19 lockdowns in China, and not least hikes in energy prices triggered by the war in Ukraine. The higher interest rates and, by extension, higher financing costs, put upward pressure on yield require ments, as a knock-on effect of the lower LTVs offered in the banking sector due to its focus on the positive “critical rent” that properties can produce when interest rates move higher.

Critical rent

”Critical rent” is a set of rules defined by the Danish FSA, stipulating how much rental income is required to cover interest, instalments and administration margins over a period of, say, 30 years for dwellings, given a fixed rate of interest, mind you. As interest rates move higher, repayment by means of current operating income becomes more difficult, and in the process, achievable LTVs become lower.

Deteriorating financing options as interest rates move higher

Loan-to-value

80%

70%

60%

50%

40%

30%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5% 7.0%

Yield

Jan 2022, rate 2.08% Jul 2022, rate 4.17% Oct 2022, rate 5.09% Nov 2022, rate 6.16%

Note : Rate denotes interest rate, quoted as the yield on a 30-year bond, residential property. Source : Colliers