MR 2018

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Copenhagen Property Market Report 2018

Property vs. stocks and bonds When assessing the performance of Copenhagen commercial property, the return to risk reward offered by commercial real estate assets compared to other asset classes is a factor to consider. We have compared the performance of commercial property to that of stocks and bonds by analysing total return indices for each of the asset classes, i.e. including reinvested income yields for the respective asset classes. For a gross index of the Danish stock market, we use total return data compiled by MSCI, and for bonds we use Nordea’s 7-year benchmark return. For the total return on commercial property, we use the Sadolin & Albæk property index, in which total return is comprised of average net initial yields and capital growth. Following a sluggish 2016, the stock markets rallied to unprecedented highs in 2017 as the MSCI Denmark Gross Index saw a surge of 19.3% as the year wore on. In contrast, bond markets are still struggling with historically low and stable interest rates, reflected in relatively poor bond returns, accumulating to 0.21% at year-end 2017. Since 2000, the total return on stocks has on average outperformed commercial property and bonds by approximately 340 bps and 750 bps, respectively. Accordingly, in this period, commercial property has produced an average total return outperforming Nordea’s 7-year benchmark by some 410 bps. The average return on stocks exceeds the average returns on property and bonds, but at the expense of significantly higher return volatility. When calculating risk, measured as the standard deviation on each time series, the total return on stocks proves to carry more than four times the risk of commercial property in an analysis of time series dating back to 2000. Computing the Sharpe’s ratio, a measure of risk-adjusted returns, for the three time series indicates that commercial property has significantly outperformed both stocks and bonds over the past 18 years, indicating a significant illiquidity premium on commercial property investments. 2018 – another solid year for investment property Against the backdrop of a sustained rally in property prices, with annual average capital growth of 6.0% in the last five years, we predict that capital growth will be more moderate in 2018. For the past five years, capital growth has been driven mainly by substantial yield compression across all segments of the investment property market. We believe that this trend will ease off somewhat in 2018. Except for slight yield compression in the logistics segment, we believe that yields will remain flat over the next 12 months. We expect prospects of rate hikes to slow or stop further yield compression, although the outlook for the occupational markets remains bright, supported by favourable trends in Danish economy. Total property returns in the Greater Copenhagen commercial market are projected to be in the 6-7% range in 2018. However, it is possible that income return requirements will see slight compression of around 5 bps to the 4.75% mark on average, yielding a

Risk-adjusted commercial property returns outperform returns on stocks and bonds.

Total return on commercial property investments in 2018 is estimated at around 6-7%.

Stable income return expected throughout 2018, with expectations of some yield compression in the logistics segment.