Newsletter Q3 2017 UK

Newsletter Q3 2017

Secure bonds discarded as risk tolerance grows (investment fund deposits and transaction volume in terms of investment property, DKKbn)

100 150 200 250 300 350 400 450

0 50

2010

2011

2012

2013

2014

2015

2016

Deposits in equity funds Deposits in hedge funds

Deposits in bond funds

Deposits in mixed funds

Transaction volume, property

Sources: Danmarks Nationalbank and Sadolin & Albæk

It is becoming obvious that low bond returns have sent investors in pursuit of higher returns. Investors have therefore turned to stocks and real property instead. Properties with great cash-flow security may act as an alternative to bonds, offering a similar low-risk profile. Among other things, this has caused a surge in investment property transaction volumes since 2011. In this context, it deserves mention that prime (first-class) properties offering great cash- flow security account for the majority of traded properties. The strong demand for such properties has driven down yield requirements, in the process driving up the pricing of this type of property, in theory equivalent to the price increases in the bond markets when interest rates are downtrending.

to fear that the favourable trend in pricing and transaction activity will not continue in the prime property segment. Although the low interest rate levels in Denmark and the rest of Europe are expected to be maintained for some time yet, it is extremely difficult to predict when Danmarks Nationalbank is expected to start hiking rates, and not least at what pace. Of course, much will depend on the ECB’s monetary policy as well as the future key indicators of economic momentum in Denmark and the rest of Europe. Provided interest rate levels remain low, we expect investors to continue to allocate an increasing share of their capital to assets other than bonds. The spread between the yield on a 10-year government bond and the net initial yield on prime residential rental properties, assets with a history of comparable risk profiles, is currently just in excess of 300 bps. Adjusted for inflation, the bond return becomes more directly comparable to the net initial yield on prime residential property. The fact that the net initial yield on prime property exceeds the inflation- adjusted bond return makes good sense as the

Will the pricing of investment property be affected?

In light of the fact that transaction volume and property pricing are gradually nearing pre-crisis levels or perhaps even higher levels, many investors may well be concerned that the market has in fact already peaked or is about to. Bearing in mind the effect of the low interest rate level, it is only natural

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