Newsletter_Q2_2018_UK

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%

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07

08

09

10

11

12

13

14

15

16

17

18

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.

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