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Continued brisk activity despite jittery property market

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These are uncertain times: The geopolitical scene is marked by unrest, inflation is at a 40-year high, interest rates have multiplied in less than a year, stock markets have dropped by more than 20% in 2022 to date, and consumer confidence is at the lowest level ever recorded. We are no doubt heading for a recession, but the question is how deep and long-lived it will be. Not surprisingly, property market investors have become jittery and cautious. Even so, the level of transaction activity continues to greatly exceed the latest 10-year average.

Over the past forty years, we have grown accustomed to the advantages of globalisation: The production of goods and services takes places wherever it is the least costly, the flow of goods and labour runs efficiently and almost unhampered across national borders, the manufacturing process is becoming increasingly “lean” and effective, and global wealth has grown dramatically. It may not always be justly distributed, but everyone has, in some way or another, benefitted from globalisation. 

We have now realised that this development comes with some risks. If, on account of lockdowns, supply-chain disruptions and geopolitical conflicts, we cannot rely on the delivery of the goods and services from other parts of the world that we are used to, we are forced to act more prudently, find alternative but more costly sources of supply and build larger stocks of commodities, semi-manufactures and finished goods. We are compelled to operate based on more robust business models.

This comes at a price. Goods and services become more expensive, and inflation – a virtually unknown phenomenon in the Western world for the past forty years – is back. It erodes the wealth of all of us, but there is no real getting around it. If the world is less efficient, there is less to go around, and we have to pay higher prices.

In this scenario, printing more money is not the answer. We all lose wealth because of the slowdown and, by extension, the weaker supply of goods and services at higher prices, and this obviously cannot be remedied by wage increases and subsidies to this and that. The challenge lies not in demand, the supply side is the problem.

The most volatile stock markets in years
In terms of investments, it is basic textbook knowledge that the prices of stocks and bonds are bound to follow opposing trends. When businesses are thriving, making more money, stock prices will rise. However, when activity is brisk, monetary and fiscal policies tighten, and interest rates rise, but fixed-rate bond prices decline. And once activity slows, businesses make less money. But then monetary and fiscal policies ease, interest rates drop, and bond prices will rise.

For years, stocks and bonds alike increased in value. In 2022, virtually all things declined in value.

Lots of capital is funnelled into property investments, with lots of cash waiting on the side lines. However, widespread uncertainty is leaving investors averse to making any investment decisions. For many years, not least in 2021, the market was a seller’s market, but it has now become a buyer’s market, but not a buyer’s market driven by lack of liquidity or lack of investment capacity, but rather by uncertainty and fears of a deep recession that may drive down employment levels and, by extension, rental prices.

If the predictions of Danmarks Nationalbank hold true, Denmark will enter a light recession. However, inflation is predicted to drop to slightly above the 4% mark in 2023, edging down further to just shy of 2% in 2022.

That is not so bad, all things considered. We need the pressure on the economy and wage growth to ease to prevent us from entering an inflationary spiral. Provided the economy returns to a more normalised state in 2024, including low inflation, interest rates are bound to see a renewed downtrend.

Widespread uncertainty and plenty of risks prevail. At Colliers, we are not naïve optimists, but on the other hand we do not subscribe to the view that we are facing a property crisis of a scale that is in any way comparable to the crises in the early 1990s or around the financial crisis. 

Danish intervention against full inflation-linked rent indexation in the housing market now a reality

In Denmark, a national referendum is pending. And when it comes to drawing voter support, politicians apparently know no bounds, having introduced an altogether superfluous 2-year cap on the NPI adjustment of residential rents of 4% annually as a starting point.

Politicians should refrain from interfering with existing private contractual agreements that parties have signed in compliance with applicable legislation at the time of contracting. Nevertheless, this is what has now happened in Denmark and quite a few other countries.

As such, investors and the market will of course adjust. No property owner gains from upping the rent to a level where tenants are priced out. Even without regulatory intervention, most investors would likely have hesitated to hike rents dramatically.

Considering the entirely natural regular tenant turnover in residential properties let at market rents, landlord income would in time adjust to market level anyway, whether it rises or falls.

However, I hope you will forgive me for slightly shaking my head at the implications of the new fast-tracked legislation: It means that if a highly risk-tolerant property owner has procured variable-interest financing, his expenses will have increased, and when expenses increase, the tenants are left to foot the bill with a rent increase of more than 4%.

Conversely, a prudent property owner having procured fixed-interest financing – or, as in the case of pension funds, applied 100% equity financing is subject to the 4% cap on rent regulation, even if the rent is perhaps somewhat below the level dictated by the market.

For two identical apartments, one being let at an excessive rent and financed aggressively at a variable rate of interest, the other let at a more reasonable rent and financed conservatively by a cautious owner, politicians apparently find it appropriate that the aggressive landlord is allowed to charge a far higher rent increase than the landlord that runs and finances his or her property more conservatively. Or just maybe, in the heat of the upcoming election campaign, matters have simply been rushed. 


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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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