For several years, Saxo Bank has around year-start made 10 outrageous predictions for the coming year: Events that may seem unlikely, but perhaps more likely than the market wants to acknowledge.
Colliers now accepts the challenge, but in a property market context and with only 5 outrageous predictions.
The scenarios are not intended to serve as prognoses, but rather as an exercise in pinpointing relatively controversial ideas that may turn the world of investors upside down, spark debate and challenge consensus. Should some of the outrageous scenarios in fact materialise, against the odds, it will severely impact markets, a possibility every investor needs to be alert to.
Initial yield requirements dropping below 3.00%
Investors’ income return requirements on stabilised investment property have seen a sharp decline in recent years. This year, a few domestic pension funds have announced that, in their opinion, yield requirements have dropped to such a low as to render property investments unattractive.
However, we boldly assert that we will see further yield compression, for the first time ever dropping below 3.00% in Denmark (see Figure 1).
In several major German cities, prime investment properties trade at yield requirements in the 2.50-3.00% range.
Property financing may be obtained at 5- or 10-year fixed terms at an interest rate level on the low side of 1%. As a result, even if pursuing a relatively low-risk strategy, it is possible to make investments with a current return on equity of more than 5%, which is an attractive level.
Hotel industry in dire straits
In 2020, the hotel industry both in Denmark and globally has faced unprecedented challenges. COVID-19 has dramatically reduced the number of international travellers, bringing the hotel industry to its knees. It is a commonplace paradox that businesses are seen to collapse just before the market turns: When the crisis has taken such a severe toll that you cannot muster the strength to stay afloat, even with a market recovery in sight. Some will not survive, and at least two major hotel chains, represented also in Denmark, stand to face bankruptcy or reconstruction.
With multiple highly effective vaccines underway, COVID-19 will however recede as 2021 wears on, with the framework conditions for hotel operations gradually improving. In 2022, the market will be returning to normal. Others may pull through, having gained strength by taking over hotel capacity at prices not seen since 2009.
Residential rents dropping, but not in Copenhagen
Recent years have seen a fairly high volume of residential completions. In a few markets, we have already seen a large supply of new rental flats driving down rental prices.
The trend will spread across Denmark. Except for central Copenhagen, including the so-called bridge quarters around the city centre, rental prices will level off. In turn, the per capita living space requirement will increase: We will be able to afford more space, and vacancies will therefore see no dramatic increase.
The downtrend in rental prices will not inflict any losses on the investor community: Yield requirements will drop accordingly, with investors effectively paying the same prices, although operating income is lower.
Mark-to-market taxation being abandoned
Politicians will realise that a fair and just taxation of non-realised profit gains on investment property will require massive control resources, and we could well be swamped by conflicts and complaints.
Ultimately, it could lead to utterly arbitrary taxation: Nobody can fault an investor for choosing to fill in his tax form based on a cautious valuation, and it will be a matter of pure coincidence which valuation the tax authorities opt to contest.
The Danish Social Democratic government, weakened by the mink-gate* scandal, will be challenged by an increasingly self-confident opposition. At the same time, government ministers will resume paying heed to the advice of government officials, focusing on orderliness and safeguarding fair and just public administration.
Transaction volume increasing by 50%
The transaction volume in the Danish investment property market has dropped in recent years, the 2020 market being affected mainly by the lockdown prompted by the first coronavirus wave in spring.
In 2021, the tide will turn. We will see even more non-Danish investors as well as major structural changes in the market. We will see mergers, there will be high-volume portfolio transactions, and an increasing number of investors will make massive divestments in some property segments and massive acquisitions in others. We are in for a busy year in the transaction market.
Note: *Refers to the Danish Government’s decision to cull mink – without legal basis - to prevent the spread of COVID-19.