Colliers Market Report Denmark 2023

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Residential - Colliers Market Report 2023

Difficult conditions for developers triggering unprecedented increase in bankruptcies in the construction sector

Hotel I ndustrial & logistics Retail Residential Office

1,119 2019

1,195 2021

1,267 2022

977 2020

982 2018

6 %

14 %

-30 %

22 %

Note: Number of registered bankruptcies, Danish construction sector. Percentage denotes y/y change. Source : Statistics Denmark, Colliers

Landlords will gain from newbuilding slowdown After some golden years for developers, conditions have radically changed on several counts. Developers were profiting from a strong rental market, historically low inflation, low interest rates as well as large placement requirements. In 2021-2022, developers were increasingly challenged by rallying construction costs, and, to a smaller extent, higher wage costs due to a boom in newbuilding. However, the root cause was a sharp increase in the prices of a wide range of materials. Some price hikes on materials, includ ing raw materials, were due to capacity restraints, some were due to supply chain/logistics disruptions in the aftermath of the coronavirus pandemic. The outbreak of the war in Ukraine exacerbated the shortage of materi als such as iron, steel and wood, and it drove up energy prices, in the process dramatically increasing the cost of energy-intensive materials, e.g. concrete, bricks and tiles. Property developers have also been challenged on financing due to the rise in interest rates and tighter loan requirements, a development that ties in with a relatively high number of bankruptcies in 2022. For instance, the banking sector demands stricter equity requirements in the construction period as well as higher security, but in turn offers lower LTVs on the completed property. In addition, investors have become more averse to com mitting to the forward funding of turnkey development schemes, although this model had in fact been gaining ground in recent years, with investors increasingly seiz ing the opportunity to enter the development or con

struction phase at an earlier stage to tap into the devel oper profit. However, this comes at the expense of higher risk, which investors are less willing to assume in a slow ing market. Forward funding has provided developers lacking the required capital with the financial means to realise projects together with investors. So, when inves tors become more reluctant to offer forward funding, it becomes more difficult for financially weak developers to realise their projects. All through 2022, several development plans were sus pended or shelved. This trend is expected to carry over into 2023. Some schemes will invariably be cancelled, whereas others, where ground has not yet been broken, could be postponed. As a result, we are highly likely to see a significant decline in the volume of newbuilding, unless interest rates and construction costs come down. Had interest rates and construction costs remained unchanged, the trend towards a strong pipeline of new supply would probably have continued, and after years of brisk newbuilding activity, this would, all other things being equal, translate into further stagnating market rent and an increase in vacancies in areas with the highest concentration of newbuilding. In a weaker pipeline sce nario, tenants of course have fewer dwellings to choose from, which from an investor perspective is good news for both rent levels and vacancy rates, mainly in areas where newbuilding has been brisk. As a result, higher interest rates, higher inflation and higher construction costs are not necessarily bad news for the rental hous ing market, at least not where fully operational proper ties are concerned.