MR 2018

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Copenhagen Property Market Report 2018

Prime rental market supported by short-term tenants We increasingly see long-term tenants being priced out of central Copenhagen. Indeed, we now estimate that some development areas are facing absorption periods of some 3-6 months following completion, relative to virtually no vacancies in the past. It follows that the prime rental market is supported by short-term tenants in particular, which is a relatively narrow segment. Conversely, there is a vast number of people who are unable to enter the housing market, and this trend continued in 2017 as rallying ownership prices and regulations of the mortgage market failed to benefit a large cross-section of Copenhagen residents. Combined with an overall surge in the demand for Copenhagen housing, these dynamics have driven up prices significantly in the mid-price segment. Gap between prime and secondary rental market With prime rents stagnating and secondary rents climbing, the spread between the two has narrowed to an all-time low. For example, the current gap between the rents commanded in Valby and Nordhavn is 15% while the gap in ownership prices in these districts is just shy of 60%. This mismatch poses a structural threat to housing market dynamics, exposing the ongoing desperate struggle for housing in Copenhagen. We see several future market developments that would allow the rent spread to widen. Primarily, the room for appreciation seen in the ownership market should lower the housing burden spread between rental and ownership housing. By lowering the opportunity cost, the central Copenhagen market characterised by voluntary long-term tenants should allow for higher rent levels. We also expect the rental spread to widen, as secondary rental markets in the suburbs of Copenhagen offer more development opportunities than the prime market, which translates into stagnating secondary rents and uptrending prime rents, at least in the long term. Red-hot investment market In 2017, the investment market for residential properties continued to improve on most metrics, allowing the market to retain its position as the most preferred market segment with an estimated 45% share of total transaction volume, corresponding to an estimated volume of DKK 39bn. Greater Copenhagen transactions accounted for some 68% of the total residential investment volume, underpinning the strong liquidity in this market. In spite of high investor demand, prime yields remained around the 3.75% mark. As prospects of continued substantial rent hikes seem increasingly uncertain, however, capital values in 2017 benefitted from increasing rent levels throughout the year. On certain assets, prime yields are approaching levels as low as 3.50%. This applies to stabilised properties subject to cost-regulated rent as rental growth prospects are less susceptible to affordability concerns. This is due to the “utility value” rent concept, offering a significant discount to market rent. We also believe that rental properties located in relatively weak ownership submarkets may benefit from the uptrending ownership prices, as the prime-to-secondary spread for ownership housing is likely to narrow in the coming year – as opposed to the trend envisioned for the rental market. Should the ownership market improve enough for a divestment case to exceed the value of a buy-and-hold strategy, investors may be willing to pay a yield discount, as reflected

Residential investment volume: DKK 39bn Residential share: 45% Foreign investor share: 70% Prime yield: 3.75%

Source: Sadolin & Albæk