Despite COVID-19, demand from domestic and international investors alike remains massive due to a pronounced capital abundance in the market and sustained low interest rates. Activity in the investment property market has therefore bounced back sooner than anticipated. However, investors have become more selective with even greater focus on prime locations.
In 2018 and 2019, investment property worth DKK 71bn and DKK 57bn, respectively, traded in the Danish market. In 2019, foreign investors accounted for 52% of the total transaction volume in Denmark, thus following recent years’ trend with a growing proportion of foreign buyers – a trend expected to continue as foreign investors increasingly flock to Denmark. In terms of transactions in the DKK 200m+ bracket, international investors represent an even larger share of buyers: In 2019, they accounted for 69% of the total volume in this segment.
In the first months of the year, the global coronavirus outbreak rocked the financial markets as well as the property market. In spring, many investors were reluctant to make new acquisitions, focusing instead on managing their portfolios. In addition, international investors, generally accounting for roughly 50% of transaction activity, were subject to travel restrictions into Denmark as part of the Danish Government’s attempt to contain the virus spread. In some periods, this made it impossible to conduct property viewings. In Q2 and Q3 2020, foreign investors accounted for only 35% and 44%, respectively, of transaction volume relative to 45% and 54% in the same quarters of 2019.
Foreign investors are expected to return to the market promptly, once again accounting for a substantial share of property transactions, when conditions have returned to normal. We saw the first signs to this effect as early as in the months after the initial COVID-19 restrictions were lifted. Please also refer to the list of transactions provided at the end of this article.
Irrespective of the increased uncertainty and more difficult travel conditions, the first three quarters of 2020 have seen a transaction volume on a par with the quarterly levels recorded in 2019. Moreover, 2020 has seen multiple high-volume transactions. This may partly be explained by the fact that several transactions had either been concluded or entered an advanced stage before the coronavirus pandemic shut down society, but also by the continued strong investor demand.
In spring, buyers were seen to request a discount on the purchase price on account of the uncertainty created by COVID-19, but the sellers maintained their price expectations. As a result, several sales processes were put on hold. Price reductions have, however, failed to materialise, and investors’ massive placement requirements have already served to kick-start investment activity. Nevertheless, many investors have adopted a more selective acquisition strategy, while others have adopted a wait-and-see approach for short or long periods of time.
Office, residential and modern I&L still in strong demand
Over the last five years, there has been a minor shift in investor preferences. While office property has accounted for a relatively constant third of transaction volume, we have seen an increase in residential property transactions, whereas investor demand for retail property has weakened slightly.
This trend continued into 2020, possibly gaining momentum following the coronavirus outbreak this spring.
The office market has been hit by some uncertainty due to COVID-19 as the long-term structural repercussions remain subject to uncertainty. On one hand, homeworking has come to the fore, reducing the need for office space, but on the other hand, focus on safety and distancing in the workplace has intensified, entailing a need for more office space.
In spite of this uncertainty, today’s market continues to be characterised by exceptionally strong demand for office properties in the right locations, with many investors pursuing secure investments that offer stable cash flows and financially strong tenants. Demand is somewhat weaker, however, for office properties in more secondary locations, let on short- or medium-term leases, as the current uncertainty associated with both macro-economic conditions and the future office market has heightened risk aversion, in particular in terms of office vacancies.
In Copenhagen, investors are therefore zooming in on office properties in central locations. This is reflected in the figures relating to realised transactions since March, with four of five top-volume transactions involving properties located in the Copenhagen CBD (Central Business District). The number of transactions in the secondary segment, however, has been very limited. We expect this trend to continue in the short term or until there is more clarity about the consequences of the coronavirus epidemic and the possible remedies. Nevertheless, there are still risk-tolerant investors in the market with an appetite for properties that require development or have vacant space. But the slowdown in transaction activity has also clouded market transparency, in the process making investors somewhat guarded in terms of new investments.
During COVID-19, the residential market has proved relatively crisis resistant. Danish households appear to be highly consolidated, with the large public sector ensuring that only a relatively minor share of households is affected, just like large-scale relief packages have propped up the private sector economy.
However, it has been questioned whether we will continue to see the same scale of urbanisation in future. Abroad we are starting to see an increasing migration trend towards the suburbs where it is possible to obtain a garden and spare space for a home office. This is probably not a permanent shift, but COVID-19 has been instrumental in changing the common perception of how and where to live.
Although the crisis is bound to have an enduring effect on the residential market, in particular the rental market remains buoyant. Pre-crisis demand for rental housing centred mainly on the municipalities surrounding e.g. Copenhagen and Aarhus, driven by a substantially lower housing burden in these areas, among other things.
Investor activity remains brisk in the residential market, with residential investment property transactions accounting for almost 50% of the transaction volume in 2020 to date. Investors continue to focus mainly on Copenhagen and Aarhus, where residential properties are trading at record-low yield levels. However, in their pursuit of returns, many investors have also started to look further afield than the two largest cities of Denmark. We therefore see mounting investor activity in Copenhagen environs, the Triangle Region and other major towns and cities on the Jutland peninsula, including Horsens, Silkeborg and Viborg. Although preceding COVID-19, this trend has definitely not become less pronounced, supported by migration patterns and population forecasts which indicate a substantial increase in housing demand in many of the cited areas in the years ahead.
So far, the majority of high-volume transactions still take place in Copenhagen and Aarhus in terms of newly built residential rental properties, with the buyers typically being foreign investors with a tremendous appetite for substantial exposure to this segment.
Industrial and logistics (I&L)
The coronacrisis has both amplified and accelerated multiple trends in the industrial/logistics market. A clear trend in society is e-commerce claiming an increasing share of aggregate consumer spending on a global level. Danes too are increasingly prone to doing their shopping online, and e-commerce is generally becoming an integral part of consumer patterns, with more than 80% of the Danish population shopping online. Continued e-commerce growth – including the part involving physical goods – is believed to seriously impact the I&L sector as it requires an efficient supply chain and an efficient distribution network. Similarly, growth in online sales is expected to change the requirements of building configuration: Mounting demand increases the need for more advanced facilities to handle e.g. higher workloads by means of automation.
At year-start, i.e. pre-COVID-19, logistics properties traded at unprecedented low yield levels. Although e-commerce has grown, as has demand in this market segment, there continues to be some risk of the I&L segment being affected should consumer spending see a decline in the short term. I&L properties are therefore associated with higher uncertainty as they are more susceptible to cyclical changes than e.g. residential and office properties.
Nevertheless, after the coronavirus outbreak the occupational market has seen strong activity, with several businesses expanding storage and logistics facilities on account of higher demand. Similarly, investor demand for the segment is strong, in particular from foreign investors, when major up-to-date facilities with motorway proximity are offered for sale. Indeed, foreign investors have in 2020, both before and after the coronavirus outbreak, been involved in the largest transactions in the market. Mainly newly constructed storage and logistics facilities meeting today’s standards are attracting massive investor interest.
Irrespective of the coronacrisis, several investors still have an appetite for the new construction of logistics and storage facilities without pre-let agreements. For instance, MG has ongoing speculative construction schemes at Greve Distribution Center and in Taulov at Fredericia. This is testimony to the continued confidence in the market but also the notion that the supply of contemporary lease premises is expected to be outstripped by demand. This mismatch is deemed so pronounced as to stunt the effect of the coronacrisis.
During the coronacrisis, investor activity has been virtually non-existent in the retail segment. At year-start, i.e. before COVID-19 shut down society on a large scale, the Copenhagen shopping arcade of Galleri K was sold, as far as we know the only high-volume retail property to trade this year to date. Moreover, activity in the retail market has been extremely limited due to a gap between buy-side and sell-side price expectations as well as general uncertainty concerning the future retail market.
Unlike the retail market at large, the market for grocery shops has however proved highly resilient by being able to achieve higher sales. Despite the advances of e-commerce, consensus has it that physical supermarkets will by no means disappear. This stability is one of the reasons why the grocery segment appeals to investors at a time of uncertainty. In this connection, the typically long duration of grocery shop leases is a favourable factor, providing investors with stable cash flows longer term. At the same time, grocery shop properties are one of the types of retail property that Danish mortgage banks are still prepared to finance.
We see the same trends in the hotel market as in the retail market, with closed borders, fear of infection and general restrictions causing a dramatic slump in tourism. As a result, the hotel industry is in very dire straits, with possible bankruptcies looming ahead. The current pricing mechanism in the market is difficult to quantify due to the lack of significant transactions after the coronavirus outbreak in March.
A sharp decline in industry KPIs and substantial uncertainty concerning short-term market movements have prompted several investors to exit the hotel market. However, there are still some opportunistic investors and sector-specialists that see the current situation as an opportunity to make new acquisitions that would otherwise not have been possible.
Renewed investor activity in the market for prime property assets
The investment market has been much quicker to react than initially expected. Before the summer season, several investors announced that they would probably put further property investments on hold until the coronavirus situation was clarified. Many of these investors have already returned, now again active in the market. Activity and demand have predominantly centred on prime locations. Because of the quick rebound in investor activity, we have already recorded numerous transactions indicating that properties in prime locations are not traded at a coronavirus discount, quite the opposite.
In terms of office property, we have seen a flight to quality and prime locations in the Copenhagen CBD. In the residential segment, core investments in Copenhagen and Aarhus continue to be the most coveted, but the “affordable living” segment has also attracted interest in towns and cities with the highest population growth forecasts. As far as logistics and storage facilities are concerned, we have seen substantial interest in up-to-date facilities located mainly along the Ring Road 3 corridor or the motorway grid in general, supported by a continuously buoyant occupational market driven by growing e-commerce.
The long-term impact of COVID-19 on the property market remains uncertain, but we may probably expect mounting demand for less cyclical market segments. Mainly residential rental property is a shining example, having proved particularly unsusceptible to market fluctuations. In addition, investor demand is expected to remain strong for core investments in prime locations.
In summation, we may conclude that investor preferences have changed but that COVID-19 has above all amplified already prevalent tendencies. In the short term, an increasing number of investors are expected to resume activity in the market. However, we foresee continued sluggish activity in more cyclical segments until the macroeconomic situation has clarified. As a result, competition will remain strong for core investment opportunities in prime locations.