Danish real estate builds on its strengths

Property transactions in Denmark’s capital, Copenhagen, jumped by 30% in 2017, underlining international investors’ strong perception of the country as a safe haven.

Total real estate transactions in Denmark last year reached DKr92bn ($14.8bn) according to Cushman and Wakefield Red. About two-thirds of the transactions were concentrated in the greater Copenhagen area. International investors accounted for 53% of all transactions, compared with 41% in 2016. Residential real estate deals made up 40% of the total, while office space accounted for 21%, retail for 18% and industrial 11%. Land and hotels made up the remainder.

In 2017, eight of the top 10 investors in Danish property were foreign. Heimstaden, the Norwegian real estate company, made 18 transactions in the Danish market, worth a total of DKr10.19bn. It was followed by ATP Ejendomme, the Danish property investor, which was part of 16 deals valued at DKr6.9bn, and Swedish real estate private equity company Niam, with 20 transactions valued at DKr5.1bn.

A new metropolis

“Copenhagen’s real estate market has been doing very well since 2009,” says Claus Lønborg, chief executive officer at Copenhagen Capacity, the Danish investment promotion agency for the greater Copenhagen area. “Following the international financial crisis, many foreign investors saw Denmark as a safe haven. It has a stable economy and a low level of bureaucracy, and Copenhagen is seen as one of the cities with the highest standard of living in the world. The city has grown tremendously. It used to be seen as a large village in the Nordic region but is now regarded as an international metropolis.”

In 2017, Copenhagen was in joint second position with Frankfurt in PwC and the Urban Land Institute’s Emerging Trends in Real Estate in Europe scorecard. Berlin took the top spot.

“All of the main real estate sectors in Denmark were depressed following the international financial crisis,” says Peter Winther, chief executive officer at Danish commercial real estate company Sadolin & Albaek. “But, thankfully, the economy is now growing well again and we see a record level of employment. Prime office rents are increasing by 5% a year.

“The real estate investment market in Denmark is now very bullish, helped by very low interest rates,” Mr Winther adds. “In particular, German pension funds are quite active in the Danish market, as German cities are now seen as expensive and the Nordic countries are viewed as safe.”

The strength of the real estate sector is highlighted by the country’s low vacancy rates: below 2.5% in the warehousing sector, under 6% in the retail sector and slightly higher than 7% in office space, according to Ejendomstorvet, Denmark’s main commercial real estate portal.

“The interest rates for commercial and residential mortgages are very low,” says Simon Birch Skou, a director at Ejendomstorvet. “This has been an important driver in both these markets.”

Sound basis

Experts say that the fact that the Danish krone has been pegged to the euro since 1999 has created much optimism for eurozone investors in the country. Among the Nordic countries, Sweden and Norway do not enjoy this advantage, and Finland is a eurozone member.

Denmark, with its 5.75 million inhabitants, enjoys sound economic fundamentals. GDP grew by 2.1% in 2917 and is forecast to increase by 2% this year, according to the IMF. The inflation rate is estimated at 1.4% this year and the unemployment rate is expected to drop to 5.7%. Denmark is one of the few countries in the world with a negative interest rate, at -0.65%. GDP per head is $50,564 and increasing at 2% annually. In January, a record 2.72 million people were employed in the country, surpassing the previous record set in April 2008.

Denmark is also one of only a handful of countries in the world to continue to have an AAA credit rating from the three main ratings agencies, Standard & Poor's, Moody’s and Fitch. 

“During the first quarter this year, transactions were 13% higher than the same period last year,” says Jacob Riiser de Lichtenberg, an associate at Cushman and Wakefield Red. “All the indicators in the real estate market are strong at the moment but there is a degree of uncertainty surrounding interest rate dynamics. We are being a bit cautious. Perhaps the market will become a bit flatter because sellers expect prices that purchasers are not prepared to pay.”

He adds that prime office space offers the highest annual yield at about 3.75%, while retail offers 3% and newly built residential 3.5%.

Peter Lassen, chief operating officer at Colliers International in Denmark, says: “Danish pension funds have also been strong investors in the residential space in Copenhagen and in the country’s second biggest city, Aarhus. There is not enough residential space available to investors, so they have started to turn to offices.”

Here to stay

Hotels are one of the fastest growing real estate markets in Copenhagen. In 2017, the total number of bed nights amounted to 7.2 million compared with 6.93 million in 2016, according to Sadolin & Albaek. This number is expected to rise to 7.7 million by 2019. In terms of bed nights, the market expanded by 66% between 2009 and 2016.

The city has 15,700 hotel rooms in total today. It is estimated that the total demand for rooms will grow by 84% during the period from 2009 to 2019, almost matched by an 80% increase in supply during the same period.

Transactions in the hotel sector in Copenhagen reached a record DKr4.85bn for the year until December 2017, according to Sadolin & Albaek. The annual occupancy rate was 82.3% in regular hotels last year but is forecast to decline to 80.2% in 2019 as more hotels come on stream. Major hotel developments expected to go live this year include Scandic Kødbyen (370 rooms), Citizen M (230 rooms) and Cabinn (1200 rooms).

Foreign investors are attracted to Denmark’s real estate market because of the country’s political and economic stability. Copenhagen looks set to continue growing strongly, as more and more people want to visit the city – and to live there.