Newsletter_Q2_2018_UK

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

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