Newsletter Q1 UK 2018

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

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