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Moderate return prospects for Greater Copenhagen commercial property


In 2021, Colliers expects a positive total return of approx 6% on Greater Copenhagen commercial property – but with some probability of a further decline in investors’ yield reuqirements and, by extension, stronger price hikes.

Despite substantial uncertainty in the occupational and investment markets alike, along with lockdowns and inbound travel restrictions due to COVID-19, 2020 saw a total property return of 9.9% according to the Colliers commercial property price index for Greater Copenhagen. This total return matches the level recorded over the past five years, which have seen stable price hikes exceeding inflation by a fair margin.

Total return in this context means the average return that an owner of a portfolio of Greater Copenhagen properties may achieve. The relatively high total return therefore reaffirms the “safe haven” status of the Danish property market in times of grave uncertainty. 

A great many investors were averse to selling at a discount last spring, when uncertainty peaked, whereas the autumn saw commercial property prices rebounding to pre-COVID-19-outbreak levels.

Yield compression remained a key driver in 2020
Total return is composed of income return and capital growth. Over the past five years, income return has trended slightly downwards, reflecting a decline in investors’ yield requirements. In 2020, income return was 4.1%. Yield compression also stands out when breaking down capital growth. 

Apart from yield compression, capital growth is driven by favourable occupational market trends, including declining vacancy rates, rental growth or lower operating costs.

Looking at the last five years in isolation, yield compression has been a key driver of capital growth. This applied in 2020 too, whereas rental growth had no significant effect, for the first time since 2016. As a result of increased cost-awareness among tenants, a frozen letting market, low inflation and general uncertainty concerning the short-term economic outlook, rent levels remained largely unchanged as the year wore on.

As a result, the price hikes of 2020 did not reflect favourable occupational market trends but investors’ readiness to pay a higher price to earn one krone.

Although the overall commercial property market was characterised by yield compression, the picture becomes more blurred when analysing specific market segments.

General compression was driven mainly by strong demand for centrally located office properties as well as up-to-date industrial/logistics facilities. At the other end of the spectrum, hotel and retail properties – except for grocery-sector properties – fared poorer, bearing the brunt of COVID-19 lockdowns and the great uncertainty prevailing in 2020. Overall, Greater Copenhagen commercial property returns may well have been fair, but they cover substantial differences across individual segments. 

Prospects of more moderate returns in 2021 – but with a wide outcome range
Expectations are running high in terms of Danish economy and the investment property market in 2021: The COVID-19 vaccine rollout has been initiated and the coming months are expected to see a gradual reopening of society. In addition, domestic households’ deposit accounts are now upwards of DKK 1,000bn, setting the scene for a summer that will presumably bail out both restaurants, shops and the experience-oriented industry.

Politically too, the focus is on kick-starting the economy, both in Denmark and abroad. For instance, the EU has earmarked EUR 750bn for economic recovery initiatives while central banks worldwide continue to print money.

Furthermore, the low interest rate setting is expected to continue, supporting continued substantial placement requirements and attractive financing. Several domestic pension funds have yet to achieve the targeted exposure to property; meanwhile, both domestic and foreign property funds are raising vast amounts of capital.

Although we generally subscribe to a bright outlook for 2021, we still foresee a wide outcome range as far as next year’s total return is concerned as it depends on how the next months play out.

Base scenario

At Colliers, we believe that the most likely scenario is a market characterised by a small dose of uncertainty but continued massive capital placement requirements. After years of yield compression and price hikes, our base case does not factor in significant further yield compression in most segments in 2021. However, we do foresee continued moderate downward pressure on yield requirements on the most attractive office and logistics properties in top locations.

Irrespective of the high level of office completions, office properties in top locations will be less affected by increased newbuilding activity. In terms of logistics facilities, however, many local authorities have redesignated former industrial areas for residential use, in the process limiting the opportunities of developing contemporary logistics facilities in attractive locations, an asset type attracting strong investor demand in recent years.

The occupational market will still be affected by the economic fallout from COVID-19, and inflation is expected to remain low. As a result, we do not expect any major structural shifts in rent or vacancy levels.

Based on an income return of approx 4% and subject to these expectations, we estimate total return at approx 6% in 2021, with capital growth of some 2% driven mainly by yield compression.

Best-case scenario

Nevertheless, we cannot rule out that the “the weight of money”, i.e. the enormous amounts of money that investors are required to place, will whet the appetite for investment in property, not least office property, in 2021. This may well prompt yield compression – also in terms of Copenhagen office property in non-CBD locations.

This scenario however hinges on investors’ perception of the office market. In recent years, office properties have seen uptrending prices, and once property values rise, the propensity to engage in newbuilding rises too. In the current market, we see office newbuilding in Copenhagen’s development districts, including Ørestad, Nordhavn, Sydhavn and the Carlsberg City District, but also in various Greater Copenhagen locations. In addition, it is too early to draw any conclusions as to how the coronavirus pandemic will impact on corporate office area requirements in the long term. If it turns out that investors’ appetite for office property exceeds expectations, such a scenario may result in a double-digit total return on Greater Copenhagen commercial property. 

Worst-case scenario

COVID-19 remains the overriding uncertainty factor. It is still impossible to say for sure when we will see a full reopening of society, and in this respect, potential new virus variations may play an important part, just as the reopening will depend also on the actual efficacy of the vaccines.

Both factors may have serious health implications and bearing on the property market. Although Greater Copenhagen commercial property fared well last year despite COVID-19, a protracted lockdown and increased uncertainty may have the effect that struggling hotel and retail properties may end up the losers once again. In 2021, total return will therefore be determined by the prospective time frame for a return to normal. 

Summing up
2021 is expected to see increased activity among domestic and international investors alike. There is broad consensus that society will gradually reopen within the coming months, while central banks continue to print money, supporting continued large capital placement requirements among investors along with a low interest rate level.

At the same time, however, it will be a year marked by substantial uncertainty. After years of yield compression, we expect a total return of approx 6% on Greater Copenhagen commercial property, driven mainly by a moderate decline in the yield requirement on the most attractive logistics and office properties in top locations. However, total return may well end up being higher, provided investors’ appetite for office properties turns out to exceed expectations. COVID-19 is still believed to be the factor posing the greatest risk of total returns falling short of expectations.

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Peter Winther

Executive Director & Partner | MRICS


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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Simon Krogh Nøhr

Senior Associate


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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