The coronavirus pandemic is still not over. But as the vaccine rollout progresses, Danish society is slowly returning to normal. In many ways, the property market’s framework conditions have changed during the pandemic – but will we see any permanent consequences, also when the direct effects of the pandemic have tapered off, hopefully over the next 12 months?
Lockdowns along with meeting and travel restrictions affected all segments of the property market
As expected, homeworking and restrictions fuelled the demand for housing. When travelling and spending in terms of holidays, dining out, concerts, nightclubbing, etc. are no longer an option, means will be freed up for other types of consumption, including housing.
When, on top of that, you are forced to work from home, it is only natural that you are likely to want a larger home with a better home workplace.
As a result, housing consumption, measured in terms ofper capita living space, has risen during the coronavirus pandemic, driving up the demand for rental and ownership housing alike, with prices climbing on that account.
In terms of logistics and storage facilities, the shift was even more dramatic. For one thing, a surge in e-commerce has boosted the demand for distribution facilities.
However, due to disrupted and collapsing global supply chains,businesses are today forced to operate with larger buffer stocks of commodities and semi-manufactures, withthe insourcing of some parts of production having become a trend.
Finally, retail trade lockdowns caused unsold goods to pile up,driving up the demand for storage space. This explains the surge in prices of storage and logistics facilities.
The retail segment, except for grocery shops and big box retailers, suffered a severe blow, with central Copenhagen bearing the brunt: Here the period of temporary shop closures was succeeded by a prolonged period of sluggish activity due to the absence of tourists from abroad.
Multiple shops had to turn the key, and we have recorded an increase in vacancies and a downward trend in rental prices.
As far as offices areconcerned, the short-term effect of homeworking served to make offices largely redundant. Nevertheless, vacancy rates did not rise significantly in the short term.
The vast majority ofbusinesses have held on to their office leases during the coronavirus pandemic in order to safeguard the option of reopening office workplaces when possible. This explains why vacancy rates did not increase, and why rental prices remained stable.
However, the hotel markettook the hardest blow by far, in Copenhagen in particular. In the absence of business guests and tourists from abroad, occupancy rates plummeted to near zero.
Is the property market rebounding to its pre-COVID-19 state?
The residential market is experiencing an unprecedented high. But there are signs of a certain slowdown in activity, in particular in the ownership housing market, where recent months have seen adropin transaction volume. This is not unusual, considering the already high level of market activity with substantial price hikes.
With travel and social distancing restrictions being lifted, housing consumption will, all other things being equal, feel a negative effect.
However, homeworking is to some extent here to stay. This will invariably increase per capita living space, also longer term.
The same applies to storage and logistics: Even if supply chains return to normal, businesses will take care not to render themselves too susceptible to future crises of a similar nature. This spells increased demand for storage space.
In addition, e-commerce growth will drive up the demand for logistics space. Even in a society free of restrictions and with open shops, consumers will have grown accustomed to shopping online, with brick-and-mortar shops accounting for an ever-smaller share of total retail sales.
By the same token, we are hardly likely to fully return to the former aggressive expectations of increases in retail rental prices. But then again: Traditional shops in attractive locations will remain in strong demand also in future as an add-on to support online sales.
In terms of the office market, concerns have been voiced that many businesses will gradually downscale their office space requirements on account of homeworking.
The concerns are valid, mainly in certain lines of business where office work largely compares to production work of a more routine nature.
Nevertheless, it is worth bearing in mind that such office workplaces probably to a large extent already faced extinction within the next decade as such tasks would be increasingly handled by Artificial Intelligence systems.
In addition, many businesses have already learnt that extensive use of home workplaces may have a detrimental effect on company culture, knowledge-sharing, the exchange or generation ofideas as well as employee satisfaction.
In the future struggle to attract the best talent, we believe that the identity and team spirit springing from a well-functioning office environment will be given top priority. So far, we have not been able to detect weaker demand for office space after the coronavirus pandemic, on the contrary.
As for hotels, we believe that the market for business travels and meetings is hardly likely to fully rebound to pre-COVID-19 levels. We havecome to realise that many meetings can take place online whilespending much less time and less costs.
On the other hand, we believe that the tourist market will make a speedy and strong recovery. We see a substantial pent-updemand for getting out, for travelling, for adventure. In view of fair economic growth, including fair wage growth, there is every reason to expect quite a boom in the tourist industry in the next 24 months.
Massive price hikes due to extremely lenient monetary and fiscal policies
Against the backdrop of high global savings, exceptionally low interest rates and inflationary tendencies, at least in the short term, investor demand for real estate has been immense over the past 12 months, and this trend seems set to continue for some time to come.
The monetary and fiscal initiatives aimed at preventing an economic slump during the corona crisis have been successful. However, substantial hikes in property prices have prompted massive investments in newbuilding, in the process impairing property market resilience.
So far, however, we are not worried: We have never seen a deep property crisiswithout a banking crisis. The property market is a wash in equity capital, loan-to-value ratios are conservative, and risk aversion in the financial sector is substantial.
Against this backdrop, we simply see no risk of any banking crisis in Denmark or other western economies, even in the slightlylonger term.
Nevertheless, nothing lasts forever, and one thing is for certain: In 2021, the next property crisis is more imminent than it has been for the past 12 years, and in 2022 even more so.
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