MR 2018

30

Copenhagen Property Market Report 2018

Prime yields on CBD office properties dropped to an all-time low of 4.00% in 2017.

Climbing market rents may drive yields below the 4.00% mark Massive placement requirements are driving demand, in particular for prime office assets. As such assets are in relatively weak supply, the office segment has seen yield compression since 2013. Prime yields on CBD office properties dropped to an all-time low of 4.00% in 2017, driven mainly by downtrending vacancy rates and a brighter outlook for Danish economy. We expect this low level to continue in 2018, but it cannot be ruled out that the market will see a few office property transactions trade at yields below the 4.00% mark, should circumstances warrant it. The fact that recent years’ stagnating trend in rent levels might have ended, with prospects of short-term increases in top rents, could put yields under downward pressure. Will demand spill over to other markets? Due to the prevailing record-low net initial yields on prime office properties, investors increasingly tend to move further out the risk curve to achieve attractive returns. We therefore expect investors to zoom in on and compete for properties in the vicinity of Copenhagen. This shift is supported by improving market conditions, including de- clining vacancy rates and stronger growth momentum, but also represents spill-over demand from the central Copenhagen office market, where undersupply, high prices and fierce competition prevail. Favourable trends in the occupational market serve to make investors more risk-toler- ant, today more readily investing in partly vacant or functionally obsolete properties, always provided the properties meet certain criteria. In the market outside Copenha- gen, such criteria include easy access by both public and private transport, as connec- tivity has become a key parameter supported by recent years’ tenant relocation trend away from properties with poor accessibility. Like 2016, 2017 saw domestic pension funds in particular zooming in on office markets outside Copenhagen. In accordance with its investment strategy, PensionDanmark continued to acquire properties in decentralised locations. Similarly, Sampension and Industriens Pension increased their exposure to this segment in 2017. All in all, we anticipate sharper price increases percentagewise in the secondary market than in the prime market over the next couple of years, and mainly in areas benefitting from good accessibility and mature office markets. Properties in more decentralised locations are not expected to benefit from spill-over effects on the same scale.

Favourable trends in the occupational market serve to make investors more risk-tolerant, today more readily investing in partly vacant or functionally obsolete properties, always provided the properties meet certain criteria.