MR 2018

16

Copenhagen Property Market Report 2018

Increased focus on value-add assets

particularly active in the Danish investment property market, contributing to a strong internationalisation trend and increased market transparency, thereby making the market more attractive from an investment perspective.

Value-add assets are attracting mounting investor demand A breakdown of transaction volume by investment profile shows a decline in the share of core investments in recent years, with prime core assets being in short supply. Core assets are typically fully let investment property assets associated with low risk and high cash-flow security. In 2017, 50% of transaction volume involved core properties, a sharp drop from the 2016 level of 72%. Whereas the share of value-add investments rose from 13% to 43%. 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 recent years, Greater Copenhagen has seen the highest proportion of property investment activity in terms of volume. In 2017, the figure was 51% compared to the 2016 level of 79%. Investors have started to look further afield to other large cities such as Aarhus, Aalborg and Odense in pursuit of higher returns as Copenhagen yield requirements have compressed. Investment market outlook remains bright We believe that the record-breaking transaction volume of 2017 may well be topped. Institutional investors have consolidated their position in the market, and domestic pension funds are strategically opting to allocate more investment capital to so-called alternative investments, including property investments. As a result, we foresee sustained strong investment demand for investment properties, fronted by institutional investors. Considering the undersupply of residential properties situated in prime locations, we expect an increase in the demand for development projects. In addition, we believe that demand will increase for efficient office properties in secondary locations as well as assets with redevelopment potential due to spill-over demand resulting from the lack of supply in the Copenhagen market for prime office properties. In the retail segment, Copenhagen high-street assets are expected to spearhead transaction activity, but prime shopping centres are coming to the fore, with the attractive risk-adjusted returns in this segment whetting investor appetite. The outlook for the industrial and logistics segment is bright too, with investment activity driven by an increasing number of sale & leaseback transactions. Danish pension funds expected to increase exposure to property Relative to GDP, Danish pension wealth is the largest in the world. In 2016, total private pensions savings equalled 209% of Danish GDP, a dramatic increase from the 2006 level of 136%. Traditionally, domestic pension funds have allocated between 5-10% of capital to property investments.

50% Core 43% Value-add 3% Opportunistic 3% User

Note: Transaction volume by investment type. Rounded figures.

Source: Sadolin & Albæk

Residential assets remain the most coveted

45% Residential 21% Office 20% Retail 6% Industry/logistics

5% Hotel 3% Land 1% Other

Note: Transaction volume by asset type. Rounded figures.

Source: Sadolin & Albaek