2021 was the busiest year ever in the Danish investment property market. Between 2020 and 2021, commercial and investment property prices rose by just shy of 12%, the steepest increase since 2005, driven by yield compression in tandem with rental growth.
In 2021, the total return on Greater Copenhagen commercial and investment property was 15.6%. In other words, had you invested DKK 100 on 1 January 2021, the value of your investment would have increased to DKK 115.6 by 31 December.
The income return composed of actual realised rental income and actual operating costs accounted for 3.9% on average, with capital gains contributing as much as 11.7%.
Whereas income return has been on a steady downtrend in recent years, mirroring the trend in net initial yield requirements, both capital growth and total return are at the highest levels recorded since 2005.
Like in recent years, the main driver of the price hikes is yield compression. However, unlike the years between 2018 and 2020, the capital gains component is in fact driven largely by rental growth, not least in the industrial/logistics sector, but also in some segments of the office sector.
Total capital growth of 11.7% is driven by lower yield requirements (contributing 6.8%), lower vacancy rates (0.1%) and rental growth (4.8%).
What is more, this growth in actual recorded rent levels is not driven mainly by higher inflation, as the inflationary effects will not truly feed through until 2022: Rental growth is in fact driven predominantly by demand for commercial space, indicating brisk economic activity.
When Colliers introduces its outlook for 2022 on 3 February, continued yield compression in the year ahead will hardly be one of the things to expect, given the rising interest rates.
Although investor demand will be strong, rate hikes are likely to discourage investors from engaging in price competitions against the backdrop of ever-declining yield requirements.
However, there is reason to assume that higher inflation will contribute to sustained growth in actual realised rental income, not so much driven by strong demand but rather by the standard net price indexing mechanisms of existing lease agreements.
Stock market returns were exceptional in 2021, whereas bond yields were negative
In 2021, Danish stocks produced exceptionally high returns. However, because of rising interest rates, bond yields were generally in negative territory. Seen in this context, commercial property returns were quite handsome.
If you factor in a volatility component known to be much less pronounced than stock market volatility, the risk-adjusted returns in the property market have been highly attractive.
Read more news from Colliers here.