Copenhagen Property Market Report 2020

Property Price Index

Copenhagen Property Market Report 2020

18

Property vs. stocks and bonds To enable us to compare total property returns with the total return on stocks and bonds, we have compiled a total return index for each asset class, including also reinvested income yields for the respective asset classes. For the Danish stock market, we have used the MSCI Denmark Gross Total Return Index, and for bonds Nordea’s 7-year benchmark return. For the total return on commercial property in Greater Copenhagen, we use the Colliers price index, in which total return is comprised of average net initial yields and capital growth. After a turbulent fourth quarter of 2018, sending stock markets on a major roller-coaster ride, 2019 turned out to be a golden year for stocks, reflected in an increase of 31.6% in the MSCI Denmark stock index. As 2019 wore on, several economies started to show signs of a downturn. In response, both the ECB and the US Federal Reserve introduced rate cuts to prop up the slowing economy. In addition, the year was marked by the US-China trade war, and in the final months of the year, stock prices rallied due to prospects of a treaty at long last. Although bond yields remain low on a global scale, the yield on Nordea’s 7-year benchmark bond closed at 3.1% in 2019. Time series dating back to 2000 show that the average total return on stocks has exceeded the total return on commercial property and bonds by 1,979 bps and 2,843 bps, respectively. In the same period, commercial property has produced an average total return outperforming Nordea’s 7-year benchmark bond by 864 bps. Whereas stocks have produced a higher average total return than commercial property and bonds, they also carry a considerably higher return risk. In order to compare the total return of various asset classes it is therefore essential to assess risk-adjusted return. Measured as the standard deviation of individual time series, the stock market shows markedly higher volatility or fluctuations than both commercial property and bonds. Broadly speaking, the total return on stocks has carried about four times the risk of commercial property and five times the risk of bonds since 2000.

The so-called Sharpe ratio, a measure of risk-adjusted returns, shows that commercial property has greatly outperformed both stocks and bonds for the past 19 years. The ratio provides a brief summary of the return and risk balance of an investment; Based on quite simple assumptions, a rational investor would prefer a higher Sharpe ratio as it offers prospects of higher return at a certain risk level. In addition, the time series show an exceptionally weak correlation between total return on commercial property and total return on other assets, that is, fluctuations in property returns scarcely track fluctuations in other asset returns. This is especially interesting in terms of major portfolios as an investor may enhance asset diversification and thereby greatly reduce portfolio risk by investing in property. From an investment perspective, property is an asset class composed of diverse assets generally held for long and usually trading in decentralised markets on a much more infrequent basis than e.g. stocks. Property normally trades at a substantial premium for limited liquidity as it is often uncertain how long it will take to sell a given asset. When prices rally, sales periods generally tend to be short, with many transactions taking place. In times of downtrending prices, however, the situation is reversed. From a purely theoretical point of view, an investor should therefore be compensated for limited liquidity with a certain premium, which helps to explain the highly attractive risk- adjusted returns on investment property.

Kalvebod Brygge, Copenhagen CBD