MR 2018

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Copenhagen Property Market Report 2018

The Danish mortgage system

The Danish mortgage system probably offers one of the world’s most efficient and reliable models of property financing, designed to work in favour of both borrowers and bond investors as well as the economy in general. It is based on flexibility, transparency and low costs due to market-based prices and advantageous prepayment terms. Compared to European commercial banks in general, Danish mortgage banks showed their resilience during the financial crisis of 2008-2009 by increasing mortgage lending.

Historically, domestic pension funds have adopted different approaches to property investments. In recent years, we have seen a shift in the risk preferences of major pension funds. In response to fiercer competition and limited supply of core assets, pension funds have increasingly zoomed in on the value-add segment in pursuit of higher returns. Recent years of stockmarket turbulence and low returns on low-risk liquid assets such as bonds have incentivised investors in general and pension funds in particular to allocate more capital to alternative investments, including investment properties as such assets are considered to offer long-term attractive risk-adjusted returns. In the past, domestic pension funds predominantly invested in core assets in prime Copenhagen locations. However, judging by transaction activity in 2016 and 2017, there has been a shift in strategy. We now see domestic pension funds accepting exposure to different segments, moving further out the risk curve and making investments in assets such as residential building plots, hotels and old-stock residential properties, typically requiring proactive, hands-on asset management. Looking ahead, we expect domestic pension funds to allocate more capital to property investments. PFA, one of the largest pension funds in Denmark, has stated that it intends to allocate 12-15% of investment capital to property investments. Other domestic pension funds are believed to follow suit over the next five years. Adding up the figures stated in the 2016 balance sheets of the five largest pension funds, total investments amount to a grand total of DKK 1,635bn. An increase in allocations from a share of 5-10% to 12-15% would imply an additional property investment volume of DKK 80-120bn. Holding this together with international institutional appetite for Danish investment assets, we expect that climbing interest rates will have only limited effect on property yields.

Mortgage lending in practice

In Denmark, the mortgage financing market is characterised by exceptionally low financing costs and a highly transparent cost structure due to a unique balance principle. Danish mortgage banks grant loans which must be secured by a mortgage on a real property, allowing for loan-to- value (LTV) ratios of up to 60-80% of the property’s “as-is” value, depending on asset type and the debtor’s credit rating. Danish mortgage banks offer financing at fixed or floating rates with a maturity of up to 30 years.