In Denmark, like in the rest of Europe, the H1 2019 transaction volume in the investment property market was substantially below the 2017 and 2018 equivalents. At the same time, there is mounting concern of a global economic setback entailing the risk of recession in both the USA and Germany. On top of this, the chaos surrounding Brexit gives rise to additional concerns, putting a dampener on new investment activity.
However, it is important to bear in mind that the Federal Reserve and European central banks have responded to the slowdown in macroeconomic key indicators with monetary easing on a massive scale. Although no one can know if this will have the intended effect on economic activity, it is a well-known fact that monetary easing and this summer’s interest rate decreases will boost investor demand for investment properties.
It is estimated that bonds worth DKK 100,000bn carry a negative yield today. Right now, the Danish pension fund sector alone probably has more than DKK 1,000bn placed in assets yielding negative returns.
Of course, interest rates may drop even further, triggering price hikes and thereby further gains on bonds trading at negative yields. However, this does not change the fact that government bonds or short-term mortgage bonds today fail to yield any returns before reaching maturity.
Obviously, this trend could potentially result in lower net initial yield requirements, driving up prices in particular on properties associated with very low risk. If, driven by the low interest rate setting, the entire Danish institutional sector should in one go decide to reallocate even just 2% of its assets from the bond market to the property market, this alone would prompt an immediate surge by more than DKK 80bn in investment property demand – more than the aggregate transaction volume of the last 12 months.
It goes without saying that almost ten years of uptrending prices in the property market will invariably be accompanied by voices claiming that the market has peaked and a crisis is imminent.
However, this is not how it will pan out. Investor demand in a world characterised by historically low interest rates and very substantial savings will make sure of that.
Transaction volume will remain high for the remainder of the year
In H1 2019, Denmark saw only one single investment transaction in the DKK 1bn+ bracket, namely AXA’s acquisition of a residential portfolio at Bella Center exhibition centre, Copenhagen. The number of high-volume transactions was moderate in Q3, with NIAM’s acquisition of the office and hotel complex Copenhagen Towers standing out as a particularly notable exception.
However, we see a fairly strong pipeline of large-scale investment transactions, and according to our estimates, quite a few single-property transactions of more than DKK 1bn each are scheduled to be completed before year-end.
International investors dominate the market for high-volume transactions
In spite of strong investment demand in the domestic institutional sector, the market for really high-volume transactions will continue to be predominated by foreign investors.
Several domestic institutionals in fact indicate that they find the pricing of very large and well-located investment properties to be excessive.
Nevertheless, relative to the net initial yield requirements at which comparable properties trade in Stockholm, Hamburg, Berlin and Munich, many prominent international investors still consider Copenhagen prices to be attractive.
Low risk tolerance and stricter loan requirements in the financial sector
All the while that the domestic financial sector is beleaguered by a substantial deposit surplus and bemoans the weak demand for loans, even the most prominent global investors seem to find it increasingly difficult to procure the LTVs in the Danish banking and mortgage credit sector that they require for SPV structures, even at an equity ratio of 40-50%.
This is hardly due to an overly conservative approach to property financing in the domestic financial sector, but rather to rigorous statements by the Danish FSA, which in its no doubt well-intentioned zeal to prevent property market bubbles has opted for detail regulation of the financial sector on a very large scale.
In this context, we are pleased to note that Governor Lars Rohde, Danmarks Nationalbank, recently raised the question of whether the financial sector has in fact become overregulated. Returning the power to decide whether to grant loans for high-volume property financing to the management of individual financial institutions is hardly going to increase the risk of property market bubbles, nor the risk of losses in the financial sector.
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