Newsletter Q1 UK 2018

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NEWS LETTER Q1 2018

COPENHAGEN MARKET REPORT 2018

View videos and read about the Copenhagen and Aarhus investment market for commercial properties.

Commercial property market commentary

Market update by Sadolin & Albæk 2 Property market indicators 4-5 Danish property market nearing international maturity 6 Student housing remains an attractive investment 9 Has the Danish grocery retail market reached saturation point? 14

Newsletter Q1 2018

Market update Q1 2018

TREES DON’T GROW TO THE SKY

By Peter Winther, Partner and CEO, Sadolin & Albæk

Property market remains strong despite jittery financial markets Financial market sentiment was extremely jittery in the first quarter of 2018. Global economic fundamentals are picking up, supported by strong global growth rates. In the United States, the economy is so strong as to trigger inflationary tendencies, with the Federal Reserve responding as expected with regular rate hikes. Despite today’s fairly strong European growth momentum and an increasingly tight labour market in Germany in particular, where wage increases are quite considerable, the European Central Bank (the ECB) remains reluctant to tighten monetary policy.

The market for investment property is however still characterised by stable and healthy developments. Office vacancy rates continue on a downward trend. In central Copenhagen, demand for up-to- date office space is strong, but supply scarce, and the market sees an increasing number of office lets at historically high rent levels of some DKK 2,000 per sqm p.a., excluding operating costs and taxes. Also, the letting market for industrial, storage and logistics facilities is strong, with low and downtrending vacancy rates.

O ce vacancy rate remains low

12%

10%

All in all, this makes for quite favourable framework conditions from an investment market perspective.

Nonetheless, stock markets have been rather volatile, in most countries remaining weak in 2018 to date. There are several reasons for this, including growing concerns of further protectionist measures evolving into an actual trade war. Moreover, geopolitical uncertainty remains strong.

08 09 10 11

12 13 14 15 16 17 18

Copenhagen, o ce

Copenhagen and environs, industrial/logistics

Following a sharp decline, Greater Copenhagen industrial/logistics vacancy rates have stabilised, whereas o ce vacancy rates remain low

Sources: Ejendomstorvet.dk and Sadolin & Albæk

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 Q1 2018

schemes are scheduled for completion in most sectors, both residential, office and hotel. At the same time, it is hardly unfeasible to assume a spell of uptrending interest rates along the way. A correction is pending – not a crisis When vacancy rates at some point start to climb, and rental prices level off or decline, property prices will be affected. All other things being equal, a weaker letting market will drive up the risk premium on property investments. If this coincides with rate hikes, it will put further upward pressure on net initial yields on investment property. At this point in time, some will invariably argue that a new property crisis has materialised, with a slump in prices and losses in the financial sector. Equity capital losses will also occur, and not least inexperienced private investors stand to suffer losses on opportunistic property and financing projects that are based on budgetary assumptions of everlasting favourable market conditions. However, Sadolin & Albæk does not foresee a deep property crisis within the next five years, and the losses incurred by the financial sector due to property engagements will be limited. In this respect, the situation will resemble the immediate post-millennium years, when an economic downturn translated into a weaker property market. Back then, there were plenty of voices warning of another deep crisis – the deep property crisis of 1992-1993 still fresh in everybody’s memory. They were wrong, however: After a couple of years of relatively poor performance, the property market started to recover – picking up momentum as from 2005. It is impossible to predict when we will see another extensive property crisis with substantial losses in the financial sector. But our guess is that it will be in ten years’ time rather than within the next couple of years.

Institutional and international capital allocations to property investments in Denmark therefore remain substantial. In Q1 2018 alone, Sadolin & Albæk mediated the sale of investment properties worth in excess of DKK 5bn, and it cannot be entirely ruled out that 2018 will turn out to be yet another record- breaking year for transactions. “Trees don’t grow to the sky” However, prospective sellers of investment properties do well to remember that “trees don’t grow to the sky”. If you allow yourself to be misguided by eager advisers into believing that property prices will continue to soar, and if you ask an unrealistically high sales price, you will learn that investors may well be keen, but they are not prepared to buy at any cost. In the residential segment, where recent years have seen brisk newbuilding activity, we see stagnating and to some extent downtrending rental prices in several important development areas in the biggest cities; gone are the days when it was taken for granted that a new residential development project was fully let from day one. The coming years will see the completion of a rich pipeline of new residential development schemes, dashing hopes of continuously skyrocketing rental prices. In fact, office newbuilding has also started to pick up to meet the demand of businesses. However, when relocating to new office premises, these businesses vacate other premises. By all accounts, 2018 seems set to become a golden year in the property market. Yield requirements will edge down only slightly from the current level, but the commercial letting market is strong with climbing rental prices. Broadly speaking, investment properties continue to offer highly attractive income returns relative to alternative placement options. No cause for (great) alarm in 2018, or 2019, so it seems

Nevertheless, it should not be ignored that as from 2020 and a couple of years ahead, vast newbuilding

Newsletter Q1 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

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 6.25 4.50 6.25 5.50

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

Secondary

Aarhus Office Triangle Region

Prime

Secondary

Prime

Secondary

7.25

6.75

Vacancy rates % Greater Copenhagen

9.60 8.50 8.80

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

High

Average

Aarhus

Top

Average

Triangle Region

Top

Average

1,250

1,300

Net initial yields % Copenhagen

Prime

3.50 6.00 4.00 6.25 5.25 7.50 3.70 6.00 9.40

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

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

Aarhus

Triangle Region

8.10

Newsletter Q1 2018

PROPERTY MARKET INDICATORS

2016

2017

2018

Rent levels

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

575 325 425 275 425 275 6.25 8.75 6.50 8.75 6.50

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

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

600 375 475 275 450

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

Aarhus

Triangle Region

10.00

Vacancy rates % Greater Copenhagen

3.10

2.70 3.90 2.90

2.30 3.60 2.80

2.40 3.40 2.30

2.30

2.50

Aarhus

3.90 2.60

3.10

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

2.40

**Industrial includes production, storage and logistics facilities

2016

2017

2018

Rent levels

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

1,850 1,500 1,550 1,350 4.00 4.50 4.75 5.00

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

Secondary

Greater Copenhagen

Prime

Secondary

Net initial yields % Copenhagen

Prime

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 Q1 2018

DANISH PROPERTY MARKET nearing international maturity

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

In recent years, the Danish investment property market has seen an unprecedented surge in investment activity and historically high price levels on the most coveted types of investment property. As the prevailing economic upturn unfolds, with prospects of sustained low interest rate levels and continued brisk investment activity, parts of the Danish property market seem to be undergoing some kind of maturing process.

Typically, any property investment will be characterised based on structural indicators showing the “maturity” of the market for the property type in question. A mature investment market is a market that is highly efficient and transparent. Efficient in this context denotes a market where the return equals a completely market-conforming risk premium, fully consistent with the risk assumed by an investor. The maturity of an investment market is driven largely by active professional investors. In the Danish property market, recent years have seen mainly pension funds, major institutional – most often international – investors and major property companies and funds contributing to the professionalisation of investment markets. Professional investors are increasingly making demands, for instance with respect to due diligence proceedings, as investors keep gaining more experience with the segments (sectors) in which they are active. Market maturity driven by professionalisation

attracting institutional capital from abroad indicates that the Danish investment market in general is heading for a higher maturity stage.

Some sectors have higher efficiency potential

Other sectors of the property market have not seen the same level of investment activity, which means that it is reasonable to expect these parts of the investment market to become more efficient as investors are moving further out the risk curve to achieve higher returns and/or if they shift to new sectors. Two such sectors of the investment property market currently undergoing a maturing process are the markets for hotel and logistics properties, respectively. To illustrate this, Sadolin & Albæk has prepared a market maturity scale that shows the general maturity stages for hotel and logistics properties, including the characteristics defining each stage. Maturity stages vary according to type of property and not all market sectors are at the same stage at the same time. Theoretically speaking, the scale may be applied to all types of investment property. Please note that a given market may move in either direction, that is, both up and down the maturity scale. In recent years, logistics facilities have accounted for a very limited share of total transaction volumes as this market is characterised by a relatively pronounced

Foreign investors have favourable influence on the market

Broadly speaking, investors have for years been highly active in the markets for prime (first-rate) residential, office and retail properties, both before and after the financial crisis. Today, an increasing number of foreign investors are active in the Danish market. The fact that Denmark is capable of

Newsletter Q1 2018

Stages of maturity, logistics property investments

Logistics

Stage 3

Logistics viewed as infrastructure investments. Focus on financially strong tenants with strong track- record. Investors’ appetite for short lease agreements and value-add potential is mounting. More investors enter the market and liquidity increases. Increased development activity in terms of up-to-date and efficient logistics facilities.

Stage 2

Up-to-date and efficient logistics facilities let to strong- covenant tenants on long lease agreements offer attractive risk- adjusted returns. Institutional investors show interest in investing in logistics facilities offering cash-flow security. Liquidity increases and yields are driven down, always provided occupational market momentum exists.

Stage 1

Logistics facilities are acquired mainly for owner occupation. New construction and development driven exclusively by pre-existing lease agreements. Few buyers, low liquidity and high yields.

Source: Sadolin & Albæk

in Vejle, the latter two of which are part of the Triangle Region. Such clusters typically feature a predominance of properties that are sufficiently flexible to accommodate user demands and technological advances longer term. Such a measure of flexibility serves to future-proof the facilities, further reducing the vacancy risk associated with re-letting. Moreover, it sets new standards for the construction of prime-quality logistics facilities. For investors with the required risk tolerance and an appetite for higher returns such logistics facilities may prove to be interesting investment opportunities offering highly competitive risk-adjusted returns.

prevalence of owner-occupation with few investment transactions other than acquisitions for own use.

As the occupational market is picking up and employment levels are rising, and with advancing e-commerce and supply chain changes placing new demands on corporate storage capacity and distribution channels, the users of logistics facilities naturally start to search for up-to-date and efficient properties. Because of the mounting occupational demand, such properties are whetting investors’ appetite. Recently, the emergence of clusters has supported occupational market developments, for instance STC in Køge on Zealand as well as in Taulov at Frederica and Exxit59

FACT BOX

Serving as an indication of a shift in the Danish market for logistics properties to a higher maturity stage is the joint venture investment by domestic pension fund PFA and ADP in a 500,000 sqm site for the development of a new transport and distribution centre in Taulov near Fredericia. The centre is expected to be fully developed in the span of the next ten years. The investment shows a pension fund with a stronger appetite for risk, ready to assume development risk in the logistics sector and backed by a partner experienced in owning and operating logistics as well as infrastructure in the area. Precisely this type of transaction helps to mature the investment market.

Newsletter Q1 2018

Stages of maturity, hotel property investments

Hotels

Stage 3

Hotels viewed as infrastructure investments. Focus on experienced operators with strong track- record. Hotel investors’ appetite for short lease agreements and management agreements is mounting. More investors enter the market and liquidity increases.

Stage 2

Hotels run by strong operators on long lease agreements offer attractive risk-adjusted returns. Institutional investors show interest in core-profile hotel Investments. Liquidity increases and yields are driven down, always provided hotel operators are ready to enter into long lease agreements.

Stage 1

Hotels considered special- purpose assets associated with high risk. Hotels appeal to investors with substantial risk appetite and experience with owning and/or operating hotel properties.

Few buyers, low liquidity and high yields.

Source: Sadolin & Albæk

Although parts of the Danish investment property market in general are nearing the same stage of maturity as international markets, the Danish markets for logistics and hotel properties still hold a certain amount of maturing potential compared to the investments markets in e.g. Great Britain, Germany, the Netherlands or Sweden.

Against the backdrop of the currently strong momentum in the Danish investment property market, along with the bright outlook for the logistics occupational market, we believe that it is fair to assume that the investment market for logistics properties is gradually starting to climb to a higher maturity stage. Hotel property investments were a topic of much interest in 2017. Due to highly favourable trends in the Copenhagen hotel market, operators have been queuing up to expand or enter the Copenhagen market. This has aroused investors’ interest, fostering demand for prime hotel investment properties. Demand continues to be driven largely by operators’ readiness to enter into fixed lease agreements offering long non-terminability periods. However, as investors are getting a better understanding of the hotel market and learning the ropes of how to run an efficient hotel operation, we believe that the market for hotel property investments may well begin to climb the maturity scale.

Newsletter Q1 2018

STUDENT HOUSING REMAINS an attractive investment

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

In recent years, the investment market for Copenhagen student housing has attract- ed mounting demand, in 2017 ranking as one of the most popular segments. Investor demand is driven by a structural supply and demand imbalance in the letting market as well as yield compression on traditional residential investment properties.

Student count rising As of 1 October 2017, the student count in the Capital Region of Denmark was 108,000, a sharp increase relative to the 86,000 recorded in 2006. Corresponding to an average annual increase of 2.10%, the development should be viewed in the context of population growth rates of 1.25% in Greater Copenhagen and 0.5% nationwide in the same period.

The higher student count is driven by relatively large increases in the youth population in 1989- 2000 as well as an increase in the international student count. In the period from 2010 to 2016, the international student count in Greater Copenhagen increased by some 17,300, thus accounting for 22% of the total student count in 2016. The large student count in this period may also be explained in part

Newsletter Q1 2018

Surge in student count since 2006

150

140

130

120

110

100

06 08 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44

Population growth, Greater Cph.

National population growth

Student count, Greater Copenhagen

Note: Increase in student count vs. population growth in Greater Copenhagen and Denmark in general (index 100 = 2006) Sources: Statistics Denmark and Sadolin & Albæk

in the ranks of students in the same period. Not surprisingly, the waiting lists managed by the two largest student housing boards, KKIK and CIU, counted 12,000 and 14,500, respectively, in 2017. Assuming that the average area requirement per student is 35 sqm, the demand for student housing in terms of square metres therefore outstripped supply by as much as 735,000 sqm. However, the supply-side not only includes traditional student hall rooms, but also small flats in the private housing market. Similarly, the demand is to be adjusted for a very high number of students still living at home. Based on a survey on students’ housing conditions (Nordea, 2015), Sadolin & Albæk has made an adjusted estimation of aggregate supply and demand. Based on the findings of the survey, we estimate that 35% live at home with their parents, corresponding to 37,600 students. The number of private residential units for students is calculated as the number of student hall rooms less the number of students living at home. Accordingly, the number of students living in private residential units is some 54,000, corresponding to 50%. Students mainly

by the financial crisis and the ensuing economic downturn, translating into higher unemployment rates and, by extension, causing a shift in favour of the educational system. Irrespective of impressive historical growth rates, the student count is projected to level off longer term. The forecast is based on movements in the youth population aged 20 to 29, assuming that the student ratio of future generations remains constant. A corrective measure is applied to factor in a decline in the proportion of international students from the current 22% to 19%, with the latter corresponding to the average recorded in 2005-2016. This only marginally affects the stagnating student count, which is instead driven mainly by a decline in the youth population of future generations. Highly limited supply Broadly speaking, the Greater Copenhagen housing supply has been outstripped by demand for the past decade, with student accommodation being in particular short supply. In 2008-2017, the volume of student housing completions was approximately 35,000 sqm, equivalent to 1,000 units, which figure is to be held up against a 22,000-strong increase

Newsletter Q1 2018

Pronounced shortage of student housing continues

120,000

70%

100,000

65%

80,000

60,000

60%

40,000

55%

20,000

50%

Student count (left axis)

Student housing, no. beds (left axis)

Student-to-student housing ratio (right axis)

Note: Movements in student count and number of student housing beds versus the proportion of students accommodated in the student housing market

Sources: Statistics Denmark and Sadolin & Albæk

demands may be met by student housing is therefore expected to remain below the 70% mark in the years ahead. Price trend is driving up housing burden The general strain on the market for rental housing has hiked residential rental prices, also on student housing. In Copenhagen, the prime market rent (i.e. the market rent for first-rate housing) of traditional residential units is around DKK 1,950 per sqm p.a., but for centrally located student housing units it may well exceed DKK 2,000 per sqm as such units tend to be smaller. However, price movements in the student housing market are characterised by different dynamics than the traditional residential market. The housing demand of students is largely defined by limited purchasing power, putting a natural cap on rental prices. For a calculation example of students’ disposable income and housing burden, we have looked at the income and housing conditions of an ordinary student. We assume that the student is supported by the Danish State in terms of an education grant and loan, while also earning wages working an average

demand flats in the 30-60 sqm range. The supply of this flat size has been weak, as Copenhagen planning provisions typically stipulate a unit size of minimum 50 sqm and 95 sqm on average in residential newbuilding. However, the pipeline of new student housing seems to be improving, with 28 development schemes scheduled for completion in 2018-2020. Most developments take place in central Copenhagen locations; combined they will put a fairly large number of residential units on the market, e.g. Nordbro in the district of Nørrebro (700 units) and Kaktustårnene on the waterfront at Kalvebod Brygge (500 units). All in all, approximately 4,400 residential units are scheduled for completion over the next two years. Nevertheless, this volume is by no means sufficient to meet the demand from the existing waiting lists and the projected rise in the student count until 2020. Furthermore, we believe that the market effectively may absorb an even larger quantity of space as an added supply of affordable types of student housing will cause demand to shift back from students living at home and in small ordinary flats. The proportion of students whose housing

Newsletter Q1 2018

Half of typical student budget earmarked for rent

Student grant after tax

5,250

Student loan Scholarships

3,116

8,366

Average job earnings

5,818

Contributions to pension savings

-75

Labour market contribution

-1,147

Tax (37%)

-2,153 2,444 10,810 1,008 11,818 5,556 47.0%

Income after tax

Scholarships and job earnings

Housing subsidy

Disposable income Average rent payment

Housing burden

Sources: DJØF, www.su.dk og Sadolin & Albæk

Student housing as an alternative to traditional residential investments

number of hours alongside his or her studies (Djøf, 2016 – note, see below). We then deduct costs relating to taxes and pension and add a housing subsidy. We have deduced the rent level commanded by standard student housing on the basis of data available from various student halls and student housing complexes. The calculation example returns a housing burden of 47%. Student housing units continue to command monthly rental prices far below the level seen in the alternative housing stock, which helps to support the market and reduces vacancy risk to a minimum. However, the relatively high housing burden limits the possibility of future rental increase. Even students that work just as many job hours as is allowed while still qualifying for a student grant have a housing burden of 35%. Nevertheless, Danish students have some of the lowest debt burdens in Europe, which means that they may increase their purchasing power by taking out bank loans, etc. We believe that an increasing number of students during their studies will make use of such options longer term.

Recent years’ structural housing shortage has fuelled investment activity in the residential market. In particular foreign investors have shown an appetite for the segment, which has caused yield compression and generally higher risk tolerance in the market. The risk tolerance has manifested itself especially in investments being made in the early development phases. However, also alternative residential property such as student housing has become highly popular. making it possible to continually adjust rent levels. This has been an advantage in a market characterised by substantial rent hikes. In addition, the demand profile and the limited competition help to curb vacancy risk, which has been virtually non- existent. Investments in student housing typically yield a return that exceeds the return on traditional residential investments by 50-75 bps. This added return reflects both the limited prospects of rental increases and limited alternative uses, but also the fact that this type of investment requires far more proactive management. In the student housing stock, tenant turnover rates (churn rates) are higher and more predictable,

Note: Djøf is the Danish association for academics in the fields of law, business economics, political and social sciences

Newsletter Q1 2018

Nevertheless, the spread between yields on student housing and traditional residential investment property has been narrowing in the last couple of years, and we expect it to become even less pronounced as the market matures and attracts renewed investor interest. We see several European investment markets where the yield spread has been virtually eliminated. In Denmark, investor activity is spearheaded by multiple domestic pension funds, including PFA, Danica and AP, but also several funds, e.g. Rockspring and Koncenton. We believe that fund-based foreign investments will dominate the investment market for student housing in 2018 because of the prospects of attractive risk-adjusted returns, driven mainly by the spread vis-à-vis yield requirements on traditional residential investments as well as the availability of favourable financing conditions. Irrespective of an increase in supply and a projected decline in the student count longer term, we still maintain that student housing represents an attractive alternative investment opportunity in the residential segment. However, historically, planning requirements for this type of dwelling have been fairly lax, resulting in low-quality buildings being constructed at inferior micro-locations. These buildings are at risk of being outperformed as the supply of new types of student housing picks up. From an investment perspective, it is therefore important to factor in the demand situation in a period that stretches beyond the next five years ahead. Read more: In Aarhus, too, the development in the student count has great bearing on housing demand. Read our analysis of the Aarhus residential market here.

Good to know

In Denmark, student housing is only rarely concentrated on campus or next to the grounds and buildings of a university, college or school. Instead, students can rent a room either in a student hall of residence (“kollegium”) or in a privately owned house or flat. Some students share a privately rented flat. Alternatively, students may rent a room or flat in student housing complexes, owned by a property investor, e.g. a pension fund. In Copenhagen, the waiting lists for student hall rooms (which are typically the least expensive) are administered by KKIK (Student and Youth Accommodation Office Copenhagen) and CIU (Centralindstillingsudvalget).

Newsletter Q1 2018

HAS THE DANISH GROCERY RETAIL MARKET REACHED SATURATION POINT?

By Andreas Brandt, Senior Consultant, Sadolin & Albæk, Research & Valuation

Uptrending turnover figures and the presence of multiple players notwithstanding, the Danish grocery retail sector is starting to slow down. Shifts in consumer behaviour and fierce competition are putting the grocery retail market under strain, but property in- vestments in the sector may still prove lucrative – provided you know how to pick the right locations.

Over the past decade, the Danish grocery sector has expanded dramatically. In particular low-budget supermarkets like Netto, Rema 1000 and Lidl have flourished, as a shift in consumer behaviour towards higher cost awareness has contributed to turnover growth, facilitating large-scale expansion of the grocery shop network in the low-budget sector.

Although the expansion has taken place at the expense of e.g. small grocery shops and corner shops, the sector has seen a boom in aggregate turnover and total sales area. However, according to the latest data from Retail Institute Scandinavia, growth has slowed in recent years, with budding signs of market saturation in the grocery retail sector.

Newsletter Q1 2018

Steady uptrend in the turnover and sales area of Danish grocery shops …

114

2,500

112

2,450

110

2,400

108

2,350

106

2,300

104

2,250

102

2,200

100

2,150

2,100

Turnover, MDKK (left axis)

Sales area, sqm (right axis)

Note: Development in turnover figures and sales areas, grocery retail sector, 2008-2017 Source: Retail Institute Scandinavia

well as shop closures by e.g. Aldi and Coop have in fact failed to reduce competition in the market. Similarly, the decline in the number of shops has not resulted in any immediate increases in the turnover per sqm in existing shops. Demographic shifts affect market developments On the face of it, stagnating turnover and fewer shops seem to suggest that the grocery retail market has reached saturation point, but the

Despite slower growth, strong competition for market share and low margins, however,

supermarket chains like Rema 1000 have announced that they expect to keep opening new grocery shops at a rapid pace. Taking into account the already high per capita sales area in the Danish grocery retail sector by Western European standards, further expansion may put the sector at risk of overcapacity. The risk of overcapacity is further exacerbated by the fact that the market exit of the Kiwi chain, a general decline in the number of grocery shops as

… But steady decline in the number of shops and turnover per sqm

47,000

3,200

46,800

3,100

46,600

46,400

3,000

46,200

46,000

2,900

45,800

2,800

45,600

45,400

2,700

45,200

45,000

2,600

Turnover, DKK per sqm (left axis)

No. shops (right axis)

Note: Development in number of shops and turnover per sqm, Danish grocery shops Source: Retail Institute Scandinavia

Newsletter Q1 2018

Small towns feature significantly less shops

130

120

110

100

>100,000

40,000 - 100,000

10,000 - 40,000

2,000 - 10,000

<2,000

Note: Breakdown of grocery shops by town sizes (index 100 = 2008). The index operates with five sizes of towns and cities, as defined by Retail Institute Scandinavia based on number of inhabitants. Town sizes are subject to regular revision, i.e. a given town or city may change category according to the number of inhabitants in a given year. Source: Retail Institute Scandinavia

Denmark shows that the population of major cities is expected to grow across a number of age brackets, whereas the population of smaller towns is generally getting older, while population growth turns negative. Consequently, the risk of overcapacity is far more pronounced in the grocery retail markets of smaller towns, entailing a risk of structural vacancy in properties presently or previously occupied by grocery shops. This is also to be viewed in light of the fact that several small towns have a higher number of grocery shops today than deemed sustainable longer term. Due to fierce competition among retail chains, it happens that grocery shops open in towns that in fact cannot absorb them, for the purpose of driving out existing shops within a certain number of years. This makes the sector prone to cannibalisation trends to the detriment of many minor grocery shops and corner shops in particular, but in recent years the more established chains have also been affected. Sadolin & Albæk foresees that the continued pursuit for market share among retail chains will make cannibalisation a key factor in future.

figures cover substantial demographic and geographic differences. Demographics is one of the primary drivers of the market for grocery shops as an increase in the number of inhabitants, all other things being equal, expands the customer and turnover bases of the grocery shops in a given catchment area. Similarly, fluctuating age compositions may cause a shift in an area as the purchasing power of its inhabitants changes over time. Factoring in the urbanisation trend, it becomes clear that the grocery retail sector is thriving in major towns and cities, whereas shops in smaller towns are in dire straits. Measured in terms of overall turnover and sales area, respectively, indications are the same, albeit showing a more favourable trend in towns and cities in the 2,000-10,000 and 10,000-40,000 population brackets. Demographic movements in major cities experiencing population growth therefore support a sustained favourable trend in the number of grocery shops as well as in turnover. As a result, Sadolin & Albæk does not believe the grocery retail markets of major cities to be characterised by overcapacity. In addition, the latest population forecast by Statistics

Newsletter Q1 2018

Analysing market trends from a geographical perspective, there are no immediate signs to suggest a fundamental change in grocery retail market characteristics.

Not a Copenhagen phenomenon

closures among the ranks of established retail chains within the next five to ten years, when the non- terminability periods of existing leases reach expiry. Urbanisation too is believed to become a factor to be

Analysing market trends from a geographical perspective, splitting Denmark down the middle, with the eastern part including postal codes 0-4999 (i.e. mainly Zealand – including

Greater Copenhagen – and Funen), and remaining postal codes denoting the western part (mainly Jutland), there are no immediate signs to suggest a fundamental change in grocery retail market characteristics. Growth is concentrated in major towns and cities, whereas smaller towns to a varying degree are hit by faltering turnover figures and shop closures. In the eastern part of Denmark, Copenhagen is the evident growth centre, which tallies with demographic trends, whereas we see growth in a wider selection of town sizes in the western part of the country. Growth in some of the smaller towns and cities is believed to be prompted by political initiatives, such as legislative changes in planning provisions, making it possible to set up grocery shops with a larger sales area than in the past. Expansion potential – in the right places Because of structural changes in the grocery retail market, investors in the market for grocery shops are not only required to be alert to a shop’s market performance and any unexpired non-terminability period of the shop lease. Sadolin & Albæk believes that it is also important to factor in underlying demographic movements in a given area to get an idea of how variables such as age composition and purchasing power will change over time. This is especially important when investing in areas already subject to competition between different local grocery shops. Overall, we therefore believe that the strong competition in the grocery retail market in smaller towns and cities will prompt further shop

reckoned with in future, in terms of both vacancy rates and rent levels for units suited for grocery retail in certain parts of Denmark. Conversely, Sadolin & Albæk estimates that the grocery retail markets of quite a few major Danish towns and cities continue to have spare capacity, with fundamental demographics allowing for an expansion of sales areas and turnover. As a result, investment opportunities in major towns and cities are believed to be driven by underlying factors that are deemed to have a favourable impact on the grocery retail sector, in the short term as well as in the long term.

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