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Small apartments with great prospects

3q denmark commercial real estate market

Micro living is gaining ground in metropolises around the world. In Denmark, the very small apartments may well be the answer to the housing shortage among young urban dwellers and, by extension, represent an attractive segment for investors, if supported by planning legislation.

Less is more, so the saying goes, often referring to expensive dinner dishes but now also the small apartments that are given the micro living tag. Although defined in various ways, the concept generally denotes a trend where few square metres along with space and resource optimisation are key. In consequence, economy and sustainability are concepts that are common characteristics of the movement.

In this article, our sole focus is on apartments in multi-storey apartment blocks. In brief, the concept here involves single-room and self-contained residential units designed to offer both living and sleeping space, a bathroom and a kitchenette. The living area typically extends to only 35 to 45 gross sq m of space – hence the “micro” tag.

In addition, the apartments are often part of a concept involving fully furnished and serviced buildings, for instance, offering a reception desk, cleaning and laundry facilities for all apartments in the apartment block.

Established markets are found in New York, Hong Kong, Shanghai, Tokyo, London and Berlin and other major cities around the world. Here micro living has been a means to accommodate the need for young people to remain residents of major cities despite climbing housing prices and a lack of supply in exactly this segment.

Latent demand puts market under pressure

In Denmark too we see that people aged 25-35 after graduation want to move into a place of their own having typically shared student accommodation for a while.

At closer scrutiny, the figures reveal that demand is mounting in Greater Copenhagen: In the City of Copenhagen, the number of singles (without children) living in multi-person households increased by 67% in 2010-2019. Across all household sizes, the increase in the wider group of singles without children in the same age group was “only” 28% in the same period.

Obviously, it must be taken into account that not all single men or women who today share an apartment with others would in fact prefer to live on their own.

However, most often we see that young graduates are typically forced to leave their student accommodation but are unable to muster the financial means to find a suitable dwelling in Copenhagen. As a result, the micro living segment is growing, irrespective of static supply, putting the housing market under pressure.

The trend in Copenhagen housing prices exacerbates the problem: Having seen a steady increase for years, selling prices and rent levels are currently historically high. As for movements in the average selling prices of owner-occupied apartments, we see an uptrend that remains unbroken between 1992 and 2021 except for a dip around the financial crisis. Over the past 18 months, realised selling prices have seen a truly dramatic increase.

Data provided by Statistics Denmark, Boligportal.dk (Danish web portal for rental housing) and Colliers also show that the rental prices of apartments smaller than 75 sq m rose by 15% in 2016-2020. For apartments of 99+ sq m, however, rents have seen a 2% decline.

This may partly be explained by supply, with the supply of small apartments increasing by 2% in the same period, against a 16% increase in the supply of larger apartments. As for rental prices, they have seen a sharp increase too, now standing as high as DKK 2,300 per sq m p.a. on average for premises in central Copenhagen locations. This reflects an increase of approximately 28% in the span of only eight years.

In other words, rents have now reached a level beyond the financial reach of most people, in particular those in the 25-35 age bracket. All other things being equal, this means that this target group is forced and prepared to continue to demand less living space, if the objective is to keep living in the centre of major cities, and in Copenhagen in particular.


 

 

Legislative changes open up for new investment opportunities

What bearing does all this have on the planning of future residential developments? An obvious opportunity is to create more flexible framework conditions for urban planning. If you as an investor are interested in developing residential units for young residents in the micro living segment, there is today an upper limit to how many small apartments you are allowed to build in Copenhagen.

Since 2005, new Copenhagen residential units have been subject to a minimum size requirement of 95 sq m to ensure sufficient space in the city for families with children. However, it has now become apparent that the demand for small dwellings is increasing at a steady pace.

As a result, the minimum size requirement was modified in April 2020 to the effect that it now applies only to 50% of building rights on sites comprised by new local plans. In the past, it was also required that the minimum size of dwellings in urban development areas was 50 sq m. However, this requirement has been modified too, with the minimum size requirement in urban development areas now being 40 sq m gross space.

If you acquire a site area with 10,000 sq m building rights in an urban development area, the new provisions allow for the construction of some 125 residential units of 40 sq m each, provided you construct another 53 residential units with an average size of 95 sq m.

In this context, it is worth bearing in mind that it is actually possible to develop even further 40 sq m residential units in addition to the 125 mentioned above as a portion of the other half of building rights may also be used to develop 40 sq m units, provided an overall average unit size of 95 sq m is observed.

Housing type with low climate impact

The change in legislation is a step in the right direction, but it takes even more flexible conditions if supply is to match the mounting demand. In this respect, perhaps climate-related advantages may make a difference in terms of the propensity to accept further legislative changes.

If we look to New York, the city has gained in other respects by reducing housing demand, measured as square metre living space per capita: The green impact in fact greatly improves.

A clear advantage of the micro living concept is its scaleability: This is the reason why a more intelligent use of shared functions and services such as heating supply, laundering, storage and cleaning for the entire building could play a part in the emission of greenhouse gases.

Irrespective of the existing planning legislation, we may conclude that there is increased political focus on permitting the development of small apartments. Based on the changes now in place, it is already now possible for an investor to engage in residential newbuilding for the purpose of commercial micro living operations.

It is therefore worth considering if the time could be ripe for investors to zoom in on small apartments and the prospects that such an investment may offer.

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Peter Lassen

Senior Director | Partner

Copenhagen

Peter’s primary tasks are management of Colliers’ Danish user segments and mid-market investment properties in Copenhagen. Peter is a real estate agent and primarily facilitates transactions and provides investment advice in addition to assisting with city development projects, lettings and valuations.

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