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Strong property market activity

uk

We believe that activity will be brisk in the Danish property market regardless of COVID-19. However, in Denmark we must be careful not to rock the boat by introducing political initiatives that are short-term populistic rather than long-term well-reasoned.

“Don’t fight the FED” an old American saying goes. George Soros may well have managed to bring down the UK’s central bank in 1992, but nobody has a fighting chance against the US central bank, the FED, especially if monetary policy is supported by the European Central Bank, the ECB. When interest rates are driven down and the FED simultaneously eases its inflationary target, it is bound to support the pricing of investment properties, fuelling investor demand. This scenario spells stronger activity in the property market.

Sound tenant demand and market liquidity

Irrespective of COVID-19, tenant demand for commercial space is strong – and investors have more money to spend than ever before.  

Already back in March, Colliers predicted that the coronacrisis would play out as a “V” with a slump in GDP and the prices of investment assets followed by an equally strong rebound. Our predictions were based on the fact that exogenous shocks to the economy tend to be considerably more short-lived than any ordinary recession prompted by imbalances, but equally on the very resolute intervention by the central banks.

Although it is too early to close the books on COVID-19 – we are probably in the middle of its second wave at the moment – economic activity has in many sectors already bounced back to pre-coronavirus level, and we see that businesses increasingly go ahead with new hires, expansions and renting new premises. This therefore means that there is a widespread belief that we are not headed for any deep and long-lived recession. Another COVID-19 wave may break, but the prospects of a vaccine coupled with the empirical knowledge that virus epidemics and pandemics eventually die, along with resolute fiscal and monetary intervention, have restored our confidence that the economy and the market will indeed recover. 

Investors continue to allocate more capital to properties

In an exceptionally low interest rate environment, likely to continue for years to come, investors will demand alternative investments. When such a scenario coincides with a change in the rhetorics of central banks, implying that an inflation above the usual target rate of 2% or slightly below is acceptable in a period following on the heels of very low inflation, it is hardly surprising that capital allocations to real estate have increased. More than anything, the property market is supported by low interest rates, while offering a certain hedge against inflation.

We therefore see not only domestic pension funds but an ever-increasing number of international investors from Europe, North America and Asia targeting Danish investment properties in both the residential and commercial segments. We believe that this may well serve to drive down initial yield requirements by typically 25 bps, in particular on properties in the most attractive locations.

The Danish government is scaring off international investors

In Denmark, we have for years prided ourselves on the political stability that has fostered a healthy and predeterminable investment climate, regardless of the incumbent prime minister’s political affiliation. As a result, we have attracted international capital, investing in Denmark and creating economic activity and jobs.

The current Danish government has apparently opted for another approach, most recently by tabling a proposal that higher early retirement benefits should be funded partly by introducing a tax on the notional gains on properties owned by companies and funds.

The underlying deliberations are sketchy at best and at any rate a manifestation of a populistic mindset. What is blatantly clear is that proposing more lucrative retirement benefits has voter appeal. It is therefore a minor concern that the proposal is to be funded by taxes imposed at random and known to curb investment activity, translating into a general welfare loss.

Mark-to-market taxation of property gains will hit long-term investors particularly hard: They will be required to pay taxes on gains they have not realised, and which, incidentally, may be calculated only with a quite substantial element of uncertainty. 

If we assume that the government by the same token intends to put a stop to depreciation for tax purposes on properties, as imposed on pension funds today, which are subject to mark-to-market taxation, the value loss on such properties becomes very substantial. 

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Incidentally, it is worth bearing in mind that the market valuation of properties is no exact science, and if we are to ensure anything near a fair tax assessment, the costs pertaining to the control apparatus, administration as well as dispute resolution are likely to exceed the projected revenues of DKK 850 million p.a.

We are absolutely certain that a majority in the Danish Parliament, the Folketing, will realise that a mark-to-market tax regime is going to hit everybody, but mainly e.g. family-owned businesses with a limited capital base, long-term investors and, thirdly, the possibility of funds to distribute dividends to charities. A tax which is impossible to calculate with precision, bound to hit in a highly random fashion, and even likely to be more costly to manage and control than the revenue, should not be introduced.

The preliminary, not overly precisely worded deliberations have already prompted a few non-Danish long-term pension funds to suspend activity in the Danish market. These funds had an ambition to invest in Denmark, thereby creating jobs and, of course, being liable to pay taxes in Denmark, both on current profits and realised capital gains.

To quote a former Danish Social-Democrat prime minister: “Could we do a little bit better?” 

 

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Peter Winther

Executive Director | Partner | MRICS

Copenhagen

Peter is Executive Director and heads Colliers’ Danish Investment & Capital Markets teams. Peter provides strategic property consultancy services and facilitates the sale of commercial and investment properties, including hotels and shopping centres, as well as property portfolios and companies.

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