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NEWS LETTER Q2 2018 Commercial property market commentary

Market update by Sadolin & Albæk 2 Property market indicators 4-5 Is speculative building returning to the Copenhagen market? 6 Development and redevelopment of commercial districts 10 Copenhagen ranked among top cities in the world for property investments 14 Business relocation activity is mounting in Denmark 17 Housing burden increasingly affects the Copenhagen market 21

Market update Q2 2018

OFFICE MARKET IN TOP FORM

By Peter Winther, Partner and CEO, Sadolin & Albæk

Danish economic growth momentum is strong, with employment levels reaching new highs. All other things being equal, employment growth is correlated with an increase in office occupational demand, and as many businesses happen to have expansion plans, they typically demand more space today than their current requirements warrant.

Naturally, this market trend is triggering an increase in the construction of built-to-suit offices. But it also serves to increase investors’ risk tolerance, trans- lating into speculative office building starts, i.e. without pre-let agreements in place. It is worth bearing in mind that a great many newly completed or vacated office premises will come into play, but presumably not until end-2020 at the

Moreover, office sector newbuilding activity was rela- tively sluggish in the aftermath of the financial crisis.

Continued downtrend in Copenhagen o ce vacancy rate

As a result, businesses find it increasingly difficult to find suitable office premises; in particular the supply of up-to-date office premises at central and attrac- tive locations is greatly outstripped by demand. In addition, today’s absolute prime office rent in the Copenhagen CBD and central harbour districts has topped DKK 2,000 per sqm exclusive of taxes and other operating costs, marking an all-time high. In view of current demand, Copenhagen CBD rents may well increase by an additional 10% over the next 18 months.

12%

10%

08 09 10 11

12 13 14 15 16 17 18

Note: O ce vacancy rate in Copenhagen proper Source: Ejendomstorvet.dk

Published by Sadolin & Albæk. Reproduction or citation only with acknowledgement of source. ISSN 2246-6959 +45 70 11 66 55, sa@sadolin-albaek.dk

Newsletter Q2 2018

Prime o ce rent is climbing in Copenhagen

economic growth and soaring online sales has virtu- ally eliminated vacancies in the logistics market. However, the dramatic decline in income returns – and corresponding substantial capital gains – is driven also by a marked drop in the illiquidity premium on logistics facilities as the investment market has widened. Residential newbuilding has been booming in recent years, in particular in Copenhagen and Aarhus, and the next 24 months will see a great number of resi- dential completions. Whereas investors in the not too distant past were quite justified in expecting a residential development to be more or less fully let from day one, a lengthier process is becoming more and more common in terms of stabilising occupancy in new residential properties. Has the residential market reached saturation point? Small residential units are often quickly re-let, whereas large units are associated with much longer re-letting periods, especially in the develop- ment areas where the volume of new supply is the highest. At the same time, the market for large units has seen a downtrend in rental prices, and it cannot be ruled out that rent levels in this segment will come under further pressure in the next 24 months. However, in our opinion there is no cause for exag- gerated alarm. The last 12 months’ slower influx of new residents to Copenhagen is probably attribu- table mainly to the strong hikes in the rental and selling prices of owner-occupied flats, with some residential demand, in particular for medium-sized family housing units, increasingly focusing on neigh- bouring municipalities where home hunters are able to get “good value for money”. Sadolin & Albæk believes that the next 24 months will see a slowdown in residential building starts in Copenhagen. As a result, supply will diminish longer term. In addition, due to the combination of a minor correction of rental and selling prices and fairly strong wage growth in the years ahead, Copen- hagen will attract mounting housing demand at the expense of the neighbouring municipalities.

2,100

2,000

1,900

1,800

1,700

1,600

1.500

Note: Rent quoted for first-rate (prime) o ce space in DKK/sqm/annum, excluding taxes and operating costs. Source: Sadolin & Albæk, Property market indicators 08 09 10 11 12 13 14 15 16 17 18

earliest – and most likely in 2021-2022. Sadolin & Albæk therefore believes that the next 18-24 months will see sustained low office vacancy rates and uptrending rental prices.

Surge in investor demand for logistics facilities

In a diversified institutional investment portfolio, property assets are often classified as “alternative investment assets” – alternative to stocks and bonds that is. Alternative investment assets typically produce relatively stable and often indexed-regulated cash flows, while providing an investor with competitive high returns, also due to the illiquidity premium that follows from the fact that property assets (and other alternative investments) are slower to sell, at least compared to stocks and bonds. In recent years’ low-interest rate environment, the institutional sector has generally shifted allocations from predominantly bonds to alternative assets. As income returns have continued to drop on office and residential properties, investors are increasingly zooming in on “alternative alternatives”, e.g. youth or student housing, hotel properties and logistics facilities. Most recently, not least logistics facilities have become highly coveted, with yield requirements on such assets plummeting the last couple of years, triggered by a strong letting market: a cocktail of

Newsletter Q2 2018

PROPERTY MARKET INDICATORS

2018

2016

2017

Rent levels

DKK/sqm/year excluding operating costs and taxes Copenhagen Prime

1,800

1,800 1,200 1,400

1,850 1,200 1,400

1,900 1,250 1,400

1,950 1,250 1,400

2,000 1,300 1,400

Secondary

1,150

1,175

Aarhus

Prime

1,400

Secondary

775

800

850

Triangle Region

Prime

1,050

1,100

Secondary

550

Net initial yields % Copenhagen

Prime

4.00 6.00 4.50 6.25 5.25

4.00 5.75 4.50 6.00 5.25 7.00

4.00 5.75 4.50 6.00 5.00 6.75

4.00 5.50 4.50 6.00 5.00

3.75 5.50 4.50 6.00 5.00 6.75

3.75 5.50 4.50 6.00 5.00 6.75 7.30 8.50 8.90

Secondary

Aarhus Office Triangle Region

Prime

Secondary

Prime

Secondary

7.25

6.75

Vacancy rates % Greater Copenhagen

9.30

8.60 7.60 8.70

8.20 7.50 8.60

7.60 7.80 9.30

7.60 7.70 9.00

7.40 7.70 8.50

Aarhus

9.10

Triangle Region

8.90

2016

2017

2018

Rent levels

DKK/sqm/year excluding operating costs and taxes Copenhagen Top

24,000 17,500 9,000 6,300 3,000 3,000

24,000 17,500 9,000 6,500 3,000 3,000

24,000 17,500 9,000 7,000 3,200 3,000

24,000 17,000 9,000 7,000 3,200 3,200

High

Average

Aarhus

Top

Average

Triangle Region

Top

Average

1,250

1,300

Net initial yields % Copenhagen

Prime

3.25 5.75 4.00 6.25 5.00 7.50 3.90 5.60 9.00

3.25 5.75 4.00 6.25 5.00 7.50 3.80 5.50 9.40

3.25 5.50 4.00 6.00 5.00

3.00 5.25 4.00 6.00 5.00

3.00 5.00 4.00 5.75 5.00

3.00 5.00 3.75 5.75 5.00

Retail Aarhus

Secondary

Prime

Secondary

Triangle Region

Prime

Secondary

7.25

Vacancy rates % Greater Copenhagen

3.80 5.50

4.40 5.30 8.40

4.30 5.40 8.50

4.00 5.50 7.50

4.50 5.40 8.20

Aarhus

Triangle Region

8.10

Published by Sadolin & Albæk. Reproduction or citation only with acknowledgement of source. ISSN 2246-6967 +45 70 11 66 55, sa@sadolin-albaek.dk

Newsletter Q2 2018

PROPERTY MARKET INDICATORS

2018

2016

2017

Rent levels

DKK/sqm/year excluding operating costs and taxes Copenhagen Prime

575 325 425 275 425 275 6.25 8.50 6.50 8.50 6.50 9.75 2.70 4.00 2.90

575 325 450 275 425 275 6.00 8.50 6.25 8.50 6.25 9.75

575 325 450 275 425 275 6.00 8.25 6.25 8.50 6.25 9.50

575 350 450 275 425 275 6.00 8.25 6.25 8.50 6.25 9.50 2.40 3.40 2.30

575 350 450 275 425 275 6.00 8.00 6.25 8.25 6.25 9.50

600 375 475 275 450

625 375 475 275 450

Secondary

Aarhus

Prime

Secondary

Triangle Region

Prime

Secondary

275

Net initial yields* % Copenhagen

Long Short Long Short Long Short

6.00 8.00 6.00 8.00 6.00 9.50

5.75 7.75 6.00

Aarhus

7.75

Triangle Region

6.00 9.25

Vacancy rates % Greater Copenhagen

2.70 3.90 2.90

2.30 3.60 2.80

2.30

2.50

2.30 2.70

Aarhus

3.10

Industrial** *Long and Short denotes the lease term Triangle Region

2.40

2.10

**Industrial includes production, storage and logistics facilities

2016

2017

2018

Rent levels

DKK/sqm/year excluding utility charges, etc. Copenhagen Prime

1,900 1,600 1,550 1,400 4.00 4.50 4.75 5.00

1,900 1,650 1,600 1,450 3.75 4.50 4.50 4.75

1,950 1,700 1,600 1,450 3.75 4.50 4.50 4.75

1,950 1,700 1,650 1,450 3.75 4.50 4.50 4.75

1,950 1,750 1,650 1,500 3.75 4.25 4.50 4.75

2,000 1,700 1,650 1,500

Secondary

Greater Copenhagen

Prime

Secondary

Net initial yields % Copenhagen

Prime

3.75 4.25 4.25 4.50

Secondary

Greater Copenhagen

Prime

Secondary

Resi*** ***) Residential rent levels and net initial yields quoted for newly built residential units of 80-100 sqm, discounting ground-floor and penthouse units. Note that residential vacancy rates are not included as units in residential properties subject to market rent are virtually fully let. Definitions: Copenhagen: City of Copenhagen and City of Frederiksberg. Greater Copenhagen: Municipalities neighbouring Copenhagen in the Capital Region of Denmark, albeit including Hellerup, which is part of the Municipality of Gentofte but where data for Copenhagen are valid.

Prime residential location: e.g. Langelinie and Havneholmen in Copenhagen; Lyngby and Rødovre in Greater Copenhagen. Secondary residential location: e.g. Valby and Ørestad Syd in Copenhagen; Brøndby/Glostrup/Albertslund in Greater Copenhagen.

Newsletter Q2 2018

IS SPECULATIVE BUILDING RETURNING TO THE COPENHAGEN MARKET?

Investors’ pursuit of attractive risk-adjusted returns along with strong tenant demand and a limited supply of up-to-date office premises in Copenhagen are making many investors and developers consider speculative office construction, i.e. office starts without having secured any pre-lets.

By Emil Helmsøe-Zinck, Senior Consultant, Sadolin & Albæk, Research & Valuation

Crisis loosening its grip Irrespective of recent years’ massive momentum in the occupational and investment markets, we have seen only a very limited number of speculative office starts since the onset of the financial crisis in 2007-2008. Over the past ten years, relatively few speculative schemes have come to market, with an added office supply far below the level that market trends would arguably have been able to support.

The investor community’s reticence is a natural corollary of dearly bought experience from the years before, during and after the financial crisis. Back then, a cocktail of all-time low vacancy rates and climbing rent levels was one of the factors trigge- ring that up to 40% of new office starts were built on speculation. As a result, the ensuing years of lower employment figures and higher vacancy rates hit speculative building schemes exceptionally hard

Newsletter Q2 2018

Increase in demand has outstripped increase in supply every year since 2014

-500,000 -400,000 -300,000 -200,000 -100,000 0 100,000 200,000 300,000 400,000

Estimated demand

Supply

Note: Changes in supply and demand in terms of o ce space (sqm) in Greater Copenhagen. Demand is estimated based on movements in employment figures, followed by the application of an estimated factor relating to area requirement based on our market knowledge. Sources: Statistics Denmark, Ejendomstorvet.dk and Sadolin & Albæk

as a high proportion was scheduled for completion in 2009-2010.

environs fell substantially below the level to be expected. Office take-up levels were therefore below the level arguably warranted by the increase in employment figures. This effect has the markings of hidden demand, reflecting the difference between the change in the quantity of actually registered office vacancies and the theoretical change in vacancies based on changes in supply and demand, as reflected in employment figures.

Several parameters herald increase in speculative newbuilding Employment trends held up against the office supply and demand of the post-crisis years indi- cate that in 2010-2017, the net decline in the supply of available office premises in Copenhagen and

Since 2014, a significant hidden demand for o ce space has been building

500,000

400,000

300,000

200,000

100,000

-100,000

-200,000

-300,000

-400,000

-500,000

Actual change

Estimated change

Hidden demand (accumulated)

Note: Changes in supply and demand in terms of o ce space (sqm) in Greater Copenhagen. Demand is estimated based on actually registered vacant space. The estimated change is calculated as the dierence between changes in net supply and demand. Demand is estimated based on movements in employment figures, followed by the application of an estimated factor relating to area requirement based on our market knowledge. Sources: Statistics Denmark, Ejendomstorvet.dk and Sadolin & Albæk

Newsletter Q2 2018

If the estimated change exceeds the actual change, the change in actual office vacancies is smaller than it should have been, based on the increase in employment and the resulting office demand. To allow for the fact that supply, all other things being equal, is expected to adjust to demand, albeit with a lag due to the time perspective of building schemes, we have in our estimate factored in the hidden demand accumulated in the period. Among other things, the hidden demand indicates that in today’s market a large number of businesses are on the verge of outgrowing existing office premises, but unable to find premises matching their requirements in terms of size, efficiency and loca- tion. Paradigm shift in office use In recent years, however, we have also seen a slight paradigm shift in regard to office use and the layout chosen by businesses. Increased focus on efficiency and flexibility has served to drive down the area requirement per employee – which helps to reduce the hidden demand. This trend is clearly confirmed by our market observations and ongoing dialogue with both landlords and tenants, but it does not

suffice to fully account for the estimated hidden demand.

In addition, the aforesaid calculation does not take into account the number of businesses currently occupying office leases that may well match in terms of size but are functionally obsolete in terms of flexibility and efficiency. This demand may also be classified as hidden, but it is not measurable to the same extent as the demand driven by and estimated on the basis of increases in employment levels. The short supply of up-to-date office buildings is gradually translating into uptrending rent levels. Copenhagen is therefore already seeing the first examples of new office lets at rent levels excee- ding DKK 2,000 per sqm p.a., excluding taxes and operating costs. This contrasts starkly with recent years’ flat trend in office rental prices in and around Copenhagen – a trend that has also served to put a dampener on the market for speculative building. As at Q1 2018, the office vacancy rate in Copen- hagen and environs stood at 5.7% and 9.1%, respecti- vely, marking a 7-year low.

Decentralised Copenhagen locations characterised by relatively low share of modern o ce buildings

Copenhagen

Copenhagen environs

Before 1960, 51%

Before 1960, 11%

1960-1980, 16%

1960-1980, 41%

1980-2000, 12%

1980-2000, 31%

After 2000, 21%

After 2000, 17%

Note: Breakdown of current building stock used for o ce, trade, storage, public-sector administrative purposes, etc., by construction year. The high proportion of Copenhagen buildings pre-dating 1960 is attributable to the great number of o ces laid out in the historical building stock, which continues to attract strong demand thanks to its central location. As the above data include also other uses than o ce, they may only serve as approximation. Source: Statistics Denmark

Newsletter Q2 2018

Downtrending net initial yield requirements are driving up property prices

6.00%

5.50%

5.00%

4.50%

4.00%

3.50%

3.00%

Copenhagen

Copenhagen environs

Note: Net initial yield on prime o ce property in and around Copenhagen. Source: Sadolin & Albæk

These rates cover also a large proportion of old and obsolete office leases and properties. In fact, the overall office vacancy rate may therefore well be even lower. Yield compression and price hikes may make speculative building lucrative In the office market, recent years’ yield compression, lack of investment opportunities and substantial capital placement requirements have caused inve- stors to become more risk-tolerant, moving further out the risk curve, for instance in terms of a higher number of property investments at more secondary locations and investments in earlier phases of the development process. This trend has manifested itself in the residen- tial market in particular, where strong population growth and a pronounced housing shortage have prompted a very considerable number of residential building starts in Greater Copenhagen. As a result, developers have allocated substantial resources to this segment of the market. However, we see signs of residential supply catching up with demand. Residential newbuilding activity will therefore, all other things being equal, slow in the years ahead, discontinuing its currently brisk

pace. This trend may shift resource allocation to other segments of the market, including speculative office construction. Against the backdrop of today’s market conditions, we believe that the risk-adjusted return offered by speculative building fully matches the return offered by completed office buildings, always provided that in the development process you understand and know how to accommodate the requirements of today’s offices users in terms of location, afford- ability and layout. We expect investors and developers to seize this opportunity to initiate speculative office building schemes in the years ahead, mainly in the Copen- hagen non-CBD office market and in the proximity of infrastructure hubs.

Newsletter Q2 2018

DEVELOPMENT AND REDEVELOPMENT OF COMMERCIAL DISTRICTS

By Ole Hjorth, Director, Sadolin & Albæk, Urban Development

The development of new commercial districts and the redevelopment of existing ones require not only knowledge of the framework conditions and localisation criteria weighted by businesses and investors, but also a realistic assessment of the demand for land and buildings.

Today, the 34 municipalities making up the Capital Region of Denmark offer more than 150 actual commercial districts featuring a wide variety of uses and location. The varied offering makes it easy for businesses to find a location that matches their client base, staff and solvency, but at the same time it reflects some of the most crucial sticking points in future regional and municipal planning.

Users and investors distinguish between three main types of commercial property: office property, production and workshop property as well as storage and logistics property. For each property type, specific requirements apply in terms of buil- ding quality and functionality as well as the proper- ty’s location vis-à-vis general infrastructure, visibi- lity, etc.

Corporate demands in terms of building quality and functionality as well as framework condi-

Newsletter Q2 2018

TOP-10 Localisation parameters

Lorem ipsum

59% Price

53% Good parking facilities

67% Building

50% Good accessibility by car

65% Confidence in landlord

functionality/ indoor climate

By means of regular interview-based surveys, Sadolin & Albæk monitors the decision-making process among busi- nesses looking for new lease premises. Among oce businesses in Greater Copenhagen, the following represents the top-10 “most important” determi- nants for the choice of premises:

40% Adjustment options

44% Conditions on arrival

41%

40%

39%

Proximity to Metro or S-train

Flexibility of lease agreement

Quality and signal value of lease premises

Source: Interviews conducted in 2017 by Megafon A/S on behalf of Sadolin & Albæk.

tions in a given commercial district are reflected in the supply of available commercial space. Today’s Greater Copenhagen office vacancy rate is about 7.5%, equivalent to some 900,000 sqm office vacan- cies or 35-40,000 workplaces. Office vacancies have been reduced by approximately 400,000 sqm since the peak in 2014, and today’s supply of vacant space includes a large proportion of premises that are outdated in terms of both layout and location. Overall, the vacancy rate for all storage/produc- tion facilities stands at about 2.5% in Greater Copen- hagen, equivalent to roughly 500,000 sqm space, similarly reflecting a large propor-tion of outdated premises. Potential development areas Access to efficient infrastructure seems to be one of the key drivers of current and future demand for commercial property. For the office segment, access to public transport and the general road grid is beli- eved to be a decisive factor driving demand and development opportunities as the right location enhances the ability of businesses to attract quali- fied labour from a large catchment area. If a loca- tion features intersecting infrastructure, for instance motorway and S-train or light-rail link, it is believed

to be well-positioned in the competition for busi- nesses and, by extension, workplaces.

The Copenhagen Metro extension, with the ongoing construction of the Cityringen circle line and planned links to Sydhavnen (the south harbour) and Ny Ellebjerg, is of vital importance for the attra- ctiveness of central Copenhagen, making up the palm of the so-called “Five Finger Plan”, but the commissioned light-rail link along the Ring Road 3 corridor is believed to enhance the attractiveness of commercial districts along Ring Road 3. However, it is important to take into consideration the under- lying demand for office space. In locations with train station proximity, the quantity of commercial space potentially designated for office use is believed to exceed demand; as a result, it is necessary to adjust the zoning of new districts so as to ensure that indi- vidual districts may gain some kind of critical mass over time. The number of prospective locations along Ring Road 3 is believed to be some five or six hubs, at most, for instance Traceet at DTU in Lyngby, Gladsaxe, Herlev, Ejby and Glostrup.

For businesses in the storage and logistics segment, the focus will be on commercial districts with

Newsletter Q2 2018

” Access to efficient infrastructure seems to be one of the key drivers of current and future demand for commercial property.

direct motorway access, while at the same time offering an up-to-date building stock or the possibi- lity of constructing built-to-suit facilities. Logistics businesses continue to prefer a location in the south corridor, stretching between Høje-Taastrup and Køge, or the west corridor towards Roskilde. For businesses in the storage and logistics segment, the focus will be on commercial districts with direct motorway access, while at the same time offering an up-to-date building stock or the possibility of constructing built-to-suit facilities. Logistics busi- nesses continue to prefer a location in the south corridor, stretching between Høje-Taastrup and Køge, or the west corridor towards Roskilde. Given the higher corporate demands for infrastruc- ture accessibility as well as demands for up-to- date and space-efficient buildings, we expect to see further market polarisation, with poorly located districts characterised by an outdated building stock facing a sharp increase in vacancy rates and dilapi- dation. As a result, these areas will be in great need of revitalisation or redevelopment, but a number of barriers may slow down the redevelopment process. The greatest barrier for redevelopment or revitali- sation is the financial aspect, as even worn-down production and storage facilities may have a market Redevelopment of existing commercial districts

value exceeding the value of office building rights, even when allowing for vacancy and refurbishment. In addition, the business case in connection with the refurbishment and upgrade of old office properties may also be a challenge as the investment is only rarely recoverable due to the low rent potential in the area and sustained high vacancy risk on re-let- ting. As a result, residential conversion may be a viable option in many commercial districts as prices in the housing market to a higher extent support rede- velopment projects that involve the demolition of existing build-ings. When converting for residential use, however, existing businesses need to be taken into consideration – a process which may slow the redevelopment. Irrespective of the financial barriers, it is possible to support redevelopment, provided the task is handled correctly. Ideally, the process should include the following steps: Market-related aspects are to be factored in at the early planning stages so as to ensure ongoing market-specific qualification of the intended initiatives. This means that planning is to be perceived as an iterative process where a group of advisers work together to lay down framework conditions that are feasible in terms of both municipal strategy, physical condi-

Newsletter Q2 2018

tions, architectural requirements and the specific market which is to support the development.

may be expedient to establish a form of secreta- riat. This provides stakeholders with an oppor- tunity to voice their concerns in a structured manner and may ease communications between stakeholders and e.g. the planning department. It may be necessary to make strategic acquisitions of properties if they are deemed of central relevance for the intended develop- ment. Commercial property acquisitions are of course a costly affair but they may serve to safe- guard controlling rights.

Current owners and stakeholders in the area are to be involved at an early stage of the process to ensure local commitment and identifi- cation of issues that may slow down the redevel- opment process. It is important that the concerns and ideas of stakeholders are heard. In the event of major redevelopment schemes , and if the ownership structure repre- sents a substantial barrier to redevelopment, it

Five Finger Plan The Five Finger Plan, devel- oped in 1947, is an urban development plan focused on both metropolitan train lines and the green spaces inbetween. The idea is that the train lines (S-tog) spread like fingers on a hand from the “palm” represented by central Copenhagen. At the time of its inception, the Five Finger Plan did not go into Amager, as it did not have the infrastructure to support its inclusion. Today, Amager is considered to be the “extra finger."

Helsingør

Frederiksværk

Hillerød

Hørsholm

Allerød

207

Birkerød

Lynge

Frederikssund

Gerlev

Farum

Lyngby

Jyllinge

Veksø

Skibby

Gentofte

Ballerup

Copenhagen

Glostrup

Roskilde

Høje-Taastrup

Hvidovre

Kastrup

Dragør

The Five Finger Plan Motorays

Køge

Roads S-train Future light rail

5 km

Newsletter Q2 2018

COPENHAGEN RANKED AMONG TOP CITIES IN THE WORLD FOR PROPERTY INVESTMENTS

A new analysis ranks Copenhagen as one of the top cities in the world in terms of investment intensity and growth momentum. The city owes its ranking partly to five years’ continued growth in overall transaction volumes in the Copenhagen investment property market, partly to the city’s ability to attract a steadily increasing number of foreign investments.

By Christopher Elgaard Jensen, Manager, Sadolin & Albæk, Research & Valuation.

Investors forced to innovative thinking in pursuit of returns Like in most other western hemisphere countries, a low interest rate level has become the new normal in Denmark. As a result, returns on investment assets have generally been driven down in the post-crisis years. This trend has made it more difficult for inve- stors to achieve returns that match their strategic goals and requirements.

caused many investors to zoom in on new sectors, segments or locations in their pursuit of the best risk-adjusted returns. More cities emerging on the property investment world map In the competition for the best risk-adjusted returns, several major cities, in particular those of northern Europe, stand out as especially attractive property investment destinations. Copenhagen is one of the cities in this strong league. In view of recent years’ dramatic surge in media attention on Denmark’

In this respect, the investment property market is by no means an exception, as yield compression has

Newsletter Q2 2018

measure for the market liquidity and overall transac- tion activity of a given city.

The index distinguishes between the following types of cities:

1. Established World Cities: Cities that are long-standing preferred investment destinations. Examples: London, Paris, New York, Los Angeles, Sydney and Tokyo. 2. New World Cities: Small and mid-sized cities that are not yet Established World Cities, but have attracted an increasing number of inter- national investors in the last three years, in the Investment Intensity Index ranking on a par with Established World Cities. Examples: Amsterdam, Silicon Valley, Dublin and (not least) Copen- hagen. In 2017, Copenhagen sat in 10th position globally, whereas Oslo topped the rankings. However, the 2017 index was based on 2015 data. In addition, transactions involving residential property were not

second-largest city, Aarhus, it cannot be ruled out that Aarhus too will rank among the top cities in the foreseeable future. JLL (formerly Jones Lang LaSalle), Sadolin & Albæk’s international alliance partner, compiles an annual Investment Intensity Index, which for selected cities compares the volume of direct commercial real estate investment, measured in terms of average transaction volume, over a three-year period rela- tive to the city’s economic size. The index provides a

Copenhagen ranked among top cities in transaction index

800

700

600

500

400

300

200

100

Munich Stockholm Helsinki*

Oslo Copenhagen

Amsterdam Berlin Brussels Frankfurt am Main

Greater London

Greater Paris

Hamborg

2012 2013 2014 2015 2016 2017

Note: The figure shows index values for overall transaction volumes in selected European cities in 2012-2017. Index 100 = 2012. *) Index value 2017 in Helsinki driven by one single transaction worth DKK 28.3bn. Sources. JLL and Sadolin & Albæk

Newsletter Q2 2018

At the same time, the net initial yields achievable on property investments in Denmark are at least on a par with – and most often exceed – the net initial yields achievable in Established World Cities (e.g. London and Paris) and

included in the underlying statistics. We therefore venture the claim that Copenhagen will be given a higher ranking in 2018, in particular if residential property investments are included in the data basis.

cities with similar growth momentum and invest- ment intensity as well as largely similar economic, socio-economic and demo- graphic conditions (e.g. Amsterdam and Frankfurt).

While Established World Cities continue to attract the largest capital inflows, it is remarkable to note that in terms of intensity and growth momentum, the transaction volumes recorded in the New World

In addition, Denmark is generally known as a “safe-haven” investment destination and one of very few countries to issue AAA-rated government bonds.

When investors factor in these conditions in their pursuit of favourable risk-adjusted returns, Denmark is a fairly obvious choice, in particular the capital of Copenhagen, perfectly in line with the prevalent globalisation trend. Will the intensive investment activity in Denmark and Copenhagen continue? All in all, Sadolin & Albæk believes that Copen- hagen is set to continue its ascent to the top of the global city elite in terms of investment intensity and momentum. Foreign investors continue to display a strong appetite for Denmark and Copenhagen, and quite rightly so. As Copenhagen and Denmark in general are becoming increasingly familiar and common markets, where large international investors have exposure, we believe that the favourable trend is likely to continue. Although growth in overall trans- action volume will hardly be as strong as seen in the past three years, we expect a continued increase in

Cities are clearly the highest. As indicated by the index figure, Amsterdam, Copenhagen and Helsinki are heading the field, whereas Oslo, judging by index movements, will hardly retain its leading posi- tion. It is therefore quite likely that Copenhagen may make it into the top-three when the index is updated to include 2017 figures. Copenhagen’s top ranking is well-justified There are numerous reasons why investors are increasingly choosing to invest in Copenhagen. For instance, Copenhagen has a top ranking in the so-called City Momentum Index by JLL, which compares selected cities in terms of socio-economic and commercial real estate momentum as well as competitive future-proofing. The index measures the cities according to multiple parameters, including technology, educational level, environmental quality, transparency, infrastructure and international patent applications. Copenhagen ranks number 6 in the European index and number 22 globally. In addition, Denmark is generally known as a “safe- haven” investment destination and one of very few countries to issue AAA-rated government bonds. Danish economy is strong and healthy, the balance of payments positive without fail since the begin- ning of the 1990s, and the unemployment rate is relatively low compared to both the United States and the rest of Europe. Moreover, Denmark and Copenhagen are characterised by high political transparency and virtually no corruption.

foreign investments. All the while, Copenhagen is quietly edging its way up to take a top posi- tion among the world cities that enjoy the best framework conditions for property investments.

Newsletter Q2 2018

BUSINESS RELOCATION ACTIVITY IS MOUNTING IN DENMARK A new analysis ranks Copenhagen as one of the top cities in the world in terms of investment intensity and growth momentum. Why is that and which factors are in play when a business decides to relocate and is to choose new office premises? An analysis of Copenhagen relocation patterns reveals some trends.

By Peter Kaalund Højland Petersen, Senior Consultant, Sadolin & Albæk, Research & Valuation

Number of Greater Copenhagen office relocations quadrupling In recent years, domestic businesses have shown a higher relocation frequency. In 2017 alone, some 9,000 business relocations were recorded na- tionwide, including about 3,400 in Greater Copen- hagen, where relocation activity picked up steadily in 2010-2017. The increase in relocations is to some extent driven by businesses in pursuit of larger premises matching their growth requirements. This tallies with the more favourable framework condi- tions on the back of global economic recovery and the resulting stronger demand for Danish goods

and services. According to Danske Bank, domestic companies posted turnover growth of 6.3% in 2017.

Moreover, the number of business start-ups has grown dramatically. The increase is most pronounced in the largest towns and cities, in particular Copenhagen, accounting for 45% of all start-ups in 2017. Since 2009, the annual number of business start-ups has increased by 126%. Apart from more favourable framework conditions, this trend also ties in with more lenient business start-up regulations in terms of so-called IVS companies (entrepreneurial limited companies).

Newsletter Q2 2018

Fierce competition for young talented employees Greater Copenhagen has witnessed a population boom in recent years, which is predicted to continue with some 19% population growth by year 2045. Nevertheless, net migration into Greater Copen- hagen has been negative for the past three years. Many of those choosing to leave Greater Copen- hagen move to northern Zealand, north of Copen- hagen. However, the trend is altogether different for young residents aged 15-29. This age group has seen a sustained net inflow into Copenhagen for the past seven years, partly because of the avail- ability of educational institutions, partly due to the young wishing to remain in the city after gradua- tion. According to a national survey by CA Karri- erepartner, 71% of residents in the Capital Region of Denmark are prepared to stay and work in the region, and young residents of other regions simi- larly point to the Capital Region as their preferred choice, with only their regional place of study ranking higher. Domestic businesses are well aware of this urbanisa- tion trend among the young, and location is there- fore key to attracting candidates from the pool of young talents. More than 290 businesses moved to Greater Copenhagen in 2017, in particular from

neighbouring municipalities, e.g. Greve, Køge and Roskilde. But 25 businesses in fact moved from Aarhus to Greater Copenhagen. Most recently, consultancy firm Valcon decided to relocate from Hørsholm north of Copenhagen to the Copenhagen city centre, citing as reason its past difficulties in attracting new staff and its wish to be closer to its clients. However, although some busi- nesses clearly prioritise a central Copenhagen loca- tion, Greater Copenhagen has seen a slight net outflow of businesses since 2010. Several businesses have moved sales and service functions to the cities, while either retaining produc- tion facilities in out-of-town locations or outsourcing them. This trend is expected to continue as Copen- hagen is perceived as Denmark’s growth centre due to its strategic location in the Nordics and interna- tional business approach. Mounting international attention has made an increasing number of interna- tional companies set up business in Greater Copen- hagen, first and foremost in the district of Ørestad due to its short proximity to Copenhagen Airport. Short-distance relocations most prevalent in central Copenhagen An analysis of Copenhagen moving patterns reveals that most relocations take place over a short distance, with expansive businesses relocating

Number of relocations has quadrupled in Greater Copenhagen

Number

Index

112

4,000

110

3,500

108

3,000

106

2,500

104

102

2,000

100

1,500

1,000

500

Relocations Gt. Copenhagen, no.

GDP growth, fixed prices

Sources: Statistics Denmark and virk.dk

Newsletter Q2 2018

Copenhagen business relocations 2017

112

122

Copenhagen N

Copenhagen NV 14 36

Copenhagen Ø incl. Nordhavn

430

209

231

Brønshøj 5 17

Vanløse 5 20

Copenhagen K

100

114

Frederiksberg

Copenhagen S incl. Ørestad

Valby

Relocations inside district

Newcomers to district

Copenhagen SV

Leaving district

within a confined geographical area. This espe- cially applies to the Copenhagen CBD, Copenhagen K, which has seen brisk relocation activity. This district is characterised by a relatively old building stock with a high ratio of obsolete office units that are less flexible than newer premises and therefore less adaptable to increases or reductions in corpo- rate area requirements. This is one of the reasons why multiple Copenhagen businesses have opted for short-distance relocations in recent years. Since 2013, the liberal professions and the smallest businesses (2-9 employees) have accounted for most relocations. Conversely, the relocation

The share of same-district relocations is also very pronounced in the district of Frederiks- berg. In 2017, 67% and 49% of all relocations in Copenhagen K and Frederiksberg, respe- ctively, took place within the same district. Along with Copenhagen K, new city districts such as Ørestad and Nordhavn are topping the list of districts attracting most newcomers because both districts have a greater offering of up-to-date office premises.

Newsletter Q2 2018

frequency of the largest Greater Copenhagen busi- nesses has been slower.

In the same survey, indoor climate, confidence in landlord and price are quoted as three key local- isation parameters. The largest businesses (50+ employees) attach particularly great importance to indoor climate, which only to some extent applies to minor companies (less than 50 employees). Conversely, price is more important to small busi- nesses than to large ones, which becomes even more pronounced when the small businesses relo- cate. Not all companies are able to land a location in central Copenhagen, where office vacancy rates are already low and where the building stock is limited. In addi- tion, today’s business tenants are demanding up-to- date and flexible office facilities, which are most commonly found outside the CBD. It therefore follows that accessibility and easy access to public trans- port become a weighty parameter for choice of office location, also in terms of recruiting young employees. Greater Copenhagen has a well-developed infrastruc- ture offering both Metro and S-train connections as well as bus services. This means that businesses find it easier to settle in non-CBD locations as their staff will still enjoy a relatively short commute. Changing business localisation criteria and moving patterns demand a lot of providers of office space. Longer term, a sustained increase in relocation activity will fuel the demand for an optimisation of existing office environments, which today appear outdated. In addition to the existing office stock, some building plots for office newbuilding still remain in the development areas of Copenhagen. These sites are expected to be developed at a steady pace, just as it is expected that the layout of new office space will increasingly take into consider- ation the mentioned shift in the preferences of busi- nesses and their wish to attract both employees and clients. Sadolin & Albæk foresees continued brisk relocation activity and an increase in the number of businesses screening the market for new office premises. Small businesses in the liberal professions are believed to continue to show the highest relocation frequency. Future demands on providers of office space

Centrally located and flexible office space highly coveted When minor businesses search the office market for new office space, they tend to value a central city location higher than major businesses do, for the sake of both staff and client base. A city setting is particularly key for many businesses in the liberal professions. Such businesses typically have natural ties to the city as it represents a natural part of their business platform. Recent years have seen as shift in the office prefer- ences of businesses. Whereas price used to be a key determinant for choice of office premises, a business today typically also values other factors, including flexible layout allowing for up- or downscaling and changing organisational structures, including more temporary staff. This trend has been a boost to serviced offices (office hotels) as they offer substan- tial flexibility both in terms of commitment periods and area adjustability. In Denmark, office hotels have gradually become recognised as a viable alternative to traditional office leases. This is supported by a 2017 survey by Sadolin & Albæk involving 600 busi- nesses. In the survey, 40% of the business respond- ents cited flexible lease conditions as an important determinant for their choice of office premises.

Newsletter Q2 2018

HOUSING BURDEN INCREASINGLY AFFECTS THE COPENHAGEN MARKET

By Jacob Bruun Borring, Senior Consultant, Sadolin & Albæk Research & Valuation

High Copenhagen housing prices continue to feed an ongoing debate for or against the construction of more non-profit housing and the introduction of more lenient unit size requirements of residential newbuilding.

Housing burden affects the market for rental housing in particular In particular rental housing is the focal point of discussion when it comes to housing burden (defined as the proportion of disposable income spent on housing costs). Among other things, this ties in with the fact that the housing burden in the rental market is higher than in the ownership housing market for several reasons. For instance, it is a natural corollary of the higher flexibility associ- ated with rental housing, and the tenant segment

has an overrepresentation of low-income groups with the highest housing burden. However, tighter loan requirements in the ownership housing market has also forced a great many inhabitants to become tenants, which has boosted the demand for rental housing. The latter has especially fed through to the rental markets in secondary locations of Copenhagen, e.g. Valby, Vanløse and Copenhagen NV, where rents have been soaring in recent years. The market

Newsletter Q2 2018

Rent hikes relatively higher in secondary Copenhagen locations

90 100 110 120 130 140 150 160 170 180 190 200

Primær markedsleje

Vanløse

Valby

Note: Rental growth per sqm in selected Copenhagen districts, index 100 = 2009 Source: Sadolin & Albæk

for first-class rental housing, the prime market, is subject to different demand dynamics. In this market, flexibility rather than need is the market driver, but changing price levels may well force tenants to shift to the ownership market. Housing burden is therefore a less important parameter in the secondary market as the alternative in the ownership housing market is beyond the realm of

financial possibility – that is, provided they want to continue to live in Greater Copenhagen.

When comparing the pace of rent increases in various Copenhagen districts after the property market bottomed out in 2009, it becomes clear that the gap between the rents in prime and secondary locations is narrowing. Over the past three years in

Price hikes relatively higher on small Copenhagen flats

220

200

180

160

140

120

100

<60 sqm

60-90 sqm

>90 sqm

Note: Price per sqm space, index 100 = 2009 Source: The Knowledge Centre for Housing Economics (Boligøkonomisk Videncenter)

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