The trend for 2021 seems to continue in the new year in terms of price hikes, downtrending vacancy rates and increased competition among property investors. So how to navigate in a red-hot market?
In Q3 2021 alone, the volume of Danish commercial property transactions came to DKK 29 billion, with prospects of 2021 seeing an all-time high transaction volume, provided the trend continues all through Q4.
Virtually all segments have seen declining vacancy rates and climbing prices.
You could say that it has been somewhat a party, and as you know, all parties eventually end – often with a hangover and clean-up.
Even so, there is no sign of the party ending right away, and not at all next year.
After the reopening of society, Danish economy has seen strong growth momentum: Employment has rebounded to pre-COVID-19 level, and irrespective of an upward tendency in inflation and slowly rising long-term interest rates, monetary policies remain very lenient, with fiscal policies tightening only slowly.
Although yields in the property market are historically low, it therefore remains profitable for both private, professional, and institutional investors to invest in brick and mortar in 2022.
In addition, with prospects of rising inflation, investors attach great importance to the fact that rents according to most lease agreements are inflation-hedged, making property assets attractive relative to bonds, for instance.
Substantial placement requirements driving demand
Against the backdrop of massive placement requirements and increasing competition, market players may well wonder how they are to act in a red-hot market.
According to a current estimation, domestic pension funds still need to invest DKK 50 billion allocated to the property market.
In addition, they are put under pressure by foreign investors, who increasingly perceive Denmark as a secure and safe market, in 2021 proving highly competitive in the investment market for office and logistics properties in particular.
The same applies to small or major property companies and private investors. Mainly among the latter, it has become more popular to make indirect investments in the property market via private placement, including property funds.
To the investor: Forget about timing your acquisition or sale
Whereas you previously had time to evaluate your options, you are today required to be even better prepared to strike – and sometimes at a higher price than anticipated.
Our advice is to devise a roadmap and stick to it. Very few people can foresee developments, but you can study the market and know its dynamics to make decisions on an informed basis.
As a rule of thumb, it takes about six months for the effect of the private housing market to trickle down to the commercial market for residential investment property.
The same applies to the effect of monetary policies, and prices may therefore be seen to climb although interest rates are going up. Another trend is a sustainability focus: The desire to invest for a purpose that transcends cash flows and yield requirements is becoming an increasingly important means by which to future-proof investments.
As a result, we are confident that even more capital will be funnelled into real estate in 2022.
In a historical context, the residential property market has been the most attractive segment for property investors, and this will remain the case in 2022 and in future, but right now all other segments see price hikes too, and as a relatively new phenomenon, storage facilities are currently in very strong demand, driven also by COVID-19, which has caused a boom in e-commerce and in the demand for buffer stocks.
In conclusion, most economic indicators are favourable, but, as always, some of them give rise to concern to varying degrees.
The market has been challenged by supply chain disruptions along with runaway inflation in some sectors, and a new coronavirus variant is becoming more widespread.
In addition, there is a risk of economies overheating in the USA and subsequently in Europe. If uncertainty is allowed to take hold, challenges may loom ahead. However, there are no prospects of this happening in 2022.
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