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Foreign investor demand up in provincial residential markets

Financially strong foreign investors with little or no presence in the Danish market are increasingly targeting residential property in provincial locations. Meanwhile, several domestic pension funds are looking to increase their exposure to this market.

Investors from Denmark and abroad have long had a healthy appetite for the Greater Copenhagen and Aarhus residential markets, offering strong occupational market trends and stable returns. As investors’ yield requirements have gradually come down, and residential property prices have gone up in Greater Copenhagen and Aarhus, an increasing number of investors, including some of the largest ones, have started to acknowledge the potential of major regional growth towns and cities.

Investors are here attracted by returns that exceed those achievable in Denmark’s two largest cities. At the same time, regional growth towns and cities have some characteristics in common with Greater Copenhagen and Aarhus: good job opportunities, infrastructure, educational institutions and hospitals, all of which are drivers of population growth. As a result, local investors and property tycoons, traditionally largely controlling provincial investment markets, are now seeing both domestic and foreign professional investors checking in.

The first professional investors to funnel money into residential property outside Denmark’s two largest cities were domestic pension funds and syndicators of real estate, including Koncenton and Crescendo, which were most familiar with local market conditions. Then followed a small number of Nordic investors, fronted by Heimstaden and Niam.

New roadmap to provincial markets
So far, the traditional roadmap of professional investors has involved a well-known three-stage approach: Naturally, investors have first zoomed in on Copenhagen, which has the most liquid market and the highest property volumes. As investors are gaining an insight into the Danish property market, they tend to look to Greater Copenhagen and Aarhus before investing in regional growth towns and cities. 

residential rental property

Although the trend is expected to continue largely along those lines, that is, with established investors zooming in on regional growth towns and cities, several large-scale foreign investors are however expressing interest in an alternative strategy, speeding up the shift in focus towards regional growth towns and cities.

At the moment, several financially strong foreign investors with little or no experience in Denmark are ready and waiting to make an entry in the Danish residential property market – not necessarily with Copenhagen at the top of their target list.

Goldman Sachs is the most recent example of an investor that has executed such a plan, with a limited presence in the Danish market as starting point. In 2020, they acquired a major portfolio of residential properties in a string of growth towns and cities across the Jutland peninsula.

residential rental property

For the new financially strong foreign investors to seriously enter the market, however, portfolios of a substantial volume are required: Investors are looking to quickly gain critical volume, which they may subsequently expand by acquisitions on a smaller scale. Apart from volume, some investors are also looking for an operational platform to form the basis for the ensuing upscaling, often with a future divestment scenario in mind

However, the approach is largely determined by the exit strategy, that is, how the divestment of the portfolio is to take place at some point in future. In this context, time perspective and risk tolerance are key elements. In order to contain costs in the process of building the final portfolio, properties with a long delivery horizon are are in demand. 

Whenever major portfolios of residential properties are offered for sale in regional growth towns and cities, provided they are deemed to offer a suitable basis for the above-mentioned strategy, they will experience massive investor demand. Attractive portfolios may fetch substantial portfolio premiums. The size of the premium depends on the volume and composition of the portfolio and on whether an operational platform is included.

Domestic pension funds show mounting demand
The phenomenon is not restricted to foreign investors: Several domestic pension funds are already in the process of launching regional expansion plans. Together with the relatively few investors already established in regional growth towns and cities, they are – unlike the typical first step made by fresh foreign capital – ready to opt for an alternative strategy. Due to their local market expertise and already locally anchored organisations, they have the opportunity to expand their portfolio property by property.

At the same time, we also see an increasing number of domestic pension funds seeking to get involved in the early stages of investments in order to achieve higher returns. They do so by either pursuing a so-called develop-to-core strategy, with the pension fund participating in property development, or by means of forward funding, meaning that in addition to buying the turnkey property, they also finance the actual newbuilding.

Because of the new trends, the market for residential investments is maturing at a very rapid pace. In addition to the mounting interest from domestic pension funds and new foreign investors – thanks to Danish partners – several already present investors plan to consolidate their market position. Ultimately, this will drive up transaction activity and create a more liquid market.

This is good news from the perspective of sellers, who now find themselves in a new and different situation. As a result, 2021 seems to offer prospects of strong demand for both residential portfolios and single assets in regional growth towns and cities.

Property market 2021

If you want to know more about Colliers' expectations for the commercial real estate market in 2021, you can see or review the launch of the Copenhagen Property Market Report here. You can also download the report here.

 

Related Experts

Emil Helmsøe-Zinck

Director and Head of Valuation & Advisory

Copenhagen

Emil is Head of the Valuation & Advisory team in Copenhagen and has vast experience with the investment requirements of international clients as well as major Danish pension funds. Areas of expertise include preparing detailed market analyses and valuations and sale of commercial and investment properties as well as advising clients on strategic investment decisions.

 

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Simon Krogh Nøhr

Senior Associate

Aarhus

Simon's primary tasks are to prepare detailed market analyses and valuations of commercial and investment properties as well as advise clients on strategic investment decisions.

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