Copenhagen Property Market Report 2020

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Copenhagen Property Market Report 2020

58

Measure against rent increases

In investor circles, recent years have seen a surge in the demand for investments in old-stock residential property (predating 1992), comprised by the rules of cost-regulated rent control. The business plan for this property type aims at comprehensive modernisation of rental units when tenants vacate. Pursuant to section 5(2) of the Danish Residential Rent Regulation Act, it is subsequently possible to re-let at utility value, i.e. just about market rent. Utility values have seen a sharp increase in recent years, in 2019 closing the gap to free market rents like never before. Section 5(2) was introduced in the mid-1990s by a government led by the Danish Social Democratic Party to incentivize private investments in housing upgrades. Many investors/landlords have made use of the rules, contributing to a more well-maintained housing stock. Some of the drivers of the stronger investor demand for old-stock residential properties include virtually non-existent vacancy risk as well as the fact that unit sizes, featuring a high proportion of centrally located small- and medium-sized flats, are well aligned with demand. In early 2019, only months before the Danish national referendum, it caused quite a political stir that some investors were rumoured to take a rather aggressive approach to modernisations ahead of rent increases. Based on broad political support, the then non-socialist government appointed an expert committee, which in the autumn proposed several possible measures. The most wide-reaching measure was the abolishment of section 5(2) modernisations. The market’s response to the recommendations of the expert committee was subdued as many investors probably believed that any intervention would only go so far. Throughout most of 2019, investor demand for old-stock properties remained strong.

raise the rent to utility value on completion of modernisations. In addition, the proposal included provisions for stricter energy-saving measures as part of upgrades and a cap on rent increases. Investors responded by putting several major transactions on hold. The introduction of a qualifying period may impact on market values as the market value of a given property will now be calculated based on a business plan that does not allow the buyer to raise the rent to utility value, even if carrying out comprehensive modernisation, for a certain initial ownership period. It is fair to expect only moderate activity in this segment until future framework conditions have been clarified. Mainly the introduction of a qualifying period will serve to make it more difficult for a prospective seller, and long-time owner, to come to an agreement on terms with a buyer forced to accept a qualifying period. Prospective sellers will therefore be greatly incentivized to carry out modernisations on the widest scale possible before putting a property up for sale.

Utility value converges towards free market rent level

1,000 1,500 2,000 2,500

0 500

12 11

E20 19 18 17 16 15 14 13

Prime market rent

Utility value

Note: Prime market rent, DKK per sq m p.a., based on newly built residential units of 80-100 sq m, discounting ground-floor and penthouse units. Utility rent is based on prime rent in the old housing stock. Source: Colliers

In December, the Danish housing minister presented a model involving a qualifying period before new owners are entitled to