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Market uncertainty may unveil investment opportunity

In times of uncertainty, it is tempting to put off all non-essential decisions, including those involving property investments. Uncertain times also give rise to opportunities, however: Competition for the most attractive investment properties weakens, making it possible to fetch assets at slightly more favourable prices.

By now, most economic observers have lost hope of inflation quickly easing back down after the past six months’ highly dramatic increase.

Price hikes are no longer seen exclusively in sectors or on goods that are directly affected by the fall-out from the most recent COVID-19 lockdowns in China or price increases in energy, commodities, and foods due to the war in Ukraine and sanctions against Russia.

Moreover, in response to widespread inflation central banks will be forced to implement substantial rate hikes in the months ahead. This spells heightened uncertainty in the financial markets – and in the investment property market, too.

The second quarter of 2022 has been characterised by continued brisk activity in the market for commercial and investment property. Danish economic fundamentals are strong, employment levels high, with demand for rental housing and commercial properties therefore on the rise – in the office, storage and industrial & logistics segments as well as in the retail segment even. Vacancy rates are low, rental growth fair.

Nonetheless, it should not be ignored that players in the investment market are becoming increasingly apprehensive. Continuous rate hikes are making the financing of investment property a more costly affair, eroding return on equity.

In addition, there is certainly a risk that central banks’ aggressive rate hikes, which are necessary to quell increasingly widespread inflation, will plunge the economy into recession.

In other words, it is imperative to cut expenditure to restore equilibrium between the supply and demand for goods and services.

Apprehensive market players tend to trigger decision-making anxiety. As a result, fewer investors will place bids on properties, with investors that do bid adopting a more cautious approach to pricing.

Overall, Colliers believes that this has affected Danish investment property prices. In some sectors, prices have stagnated, while other sectors and geographical locations are witnessing price reductions to the tune of no less than 10%.

At the same time, investors are careful not to factor in market rent increases that match the high inflation rate.

Should the economy dip into recession, the demand for lease premises will drop, stunting rental growth, all other things being equal. Although existing lease agreements allow for high net price indexation, it is of course by no means certain that market rental prices will see a corresponding uptrend.

However, it is worth bearing in mind that the prices of commercial and investment property rose by 10% in 2021, that is, by far more than the rate of inflation, with today’s prices in most cases in fact still exceeding the level recorded in early 2021.

Outlook for the next months marked by continued uncertainty, but prices will rise again
Some observers expect long-lived high inflation, some expect light recession, others deeper recession, and all are convinced that the central banks will continue to hike rates.

In many ways, this is fascinating: A mere 12 months ago, there was broad consensus that inflation would be below the 2% mark in 2022. This goes to show why you should never set too much store in prognostic certainty.

In times of uncertainty, it is tempting to put off all non-essential decisions, including those involving property investments. However, it is worth bearing in mind that once uncertainty has evaporated, the market has already responded.

In addition, uncertain times give rise to opportunities: Competition for the most attractive investment properties weakens, making it possible to fetch assets at slightly more favourable prices.

Colliers is reluctant to speculate as to whether property prices will have gone up or down in 12 months’ time, but we believe that there is a real risk of an economic slowdown sending prices lower.

However, according to our basic scenario we have already witnessed the most profound impact on interest rate markets and property prices. In today’s interest rate market, a series of rate hikes has already been factored in, and an economic slowdown with stagnant demand will invariably drive down inflation in the long term.

Though reluctant to speculate about property prices 12 months ahead, we are nevertheless confident that property prices will be higher than today in five years’ time and considerably higher than today in ten years’ time.

We recently carried out a valuation of a central Copenhagen property, which has been owned by the same owner since the 1950s. Back then, the property traded at a single-digit DKK million figure: Today’s value exceeds DKK 300 million.

For a prolonged period after the financial crisis, we have grown accustomed to climbing property prices (and for that matter climbing stock and bond prices, too). Regrettably, it is no law of nature that this trend will continue.

Against the backdrop of a healthy financial sector and constantly high global savings, however, we maintain that we are not headed into deep recession.

Moreover, we believe that for any investor not consumed by decision-making anxiety, the jittery market will offer attractive investment opportunities over the next 12-24 months.

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Peter Winther

Executive Director & Partner | MRICS

Copenhagen

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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