MR 2018

76

Copenhagen Property Market Report 2018

Foreign investors with specialist know-how dominate

operational and financial leases attractive for many businesses that view their facilities as long-term assets but would like to free up capital tied in property assets.

Great international investor demand As the market for industrial/logistics property remains characterised by owner- occupation, this segment traditionally lags behind other segments of the property market in terms of transaction activity. Broadly speaking, investor demand is increasing in the segment, fronted by international investors with specialist market know-how, typically targeting big-ticket assets or portfolios. However, such high-volume single properties or portfolios are in short supply in Denmark. Institutionals are also displaying appetite for the segment, but they generally invest via specialised funds. This was the case in April 2017, when NREP set up a fund comprising 49 up-to-date logistics assets in the Nordics with a total value of some EUR 1.1bn, intending to expand longer term. Investors in the fund set-up include domestic pension funds PFA Pension, DIP, JØP and Lægernes Pension. Other important market players in the segment include M7 Real Estate, Blackstone, Standard Life and M&G. High yield levels offer attractive returns In today’s market trading at yields of 5.75-6.25% or higher, prime industrial/logistics properties offer highly attractive returns relative to other asset classes in terms of secure and strong cash flow. Like other investment property markets, the markets for prime and secondary industrial/logistics assets have seen yield compression for some years now. Currently, the prime industrial/logistics yield is approximately 5.75% on Greater Copenhagen properties let on long leases (10+ years) and 6.75% on properties let on short leases. Yield requirements are therefore largely on a par with the yields observed prior to the onset of the financial crisis in 2008. Popular sale & leaseback transactions – further potential A significant share of current transaction activity is driven mainly by sale & leaseback transactions, allowing companies to focus on their core business and free up capital tied in property assets. In addition, they want to achieve greater flexibility by not owning the premises they operate from, pursuing an “asset light strategy”. Many of them are also aware of the fact that well-located and fully let investment properties currently fetch historically high prices, making this the perfect time to divest. For instance, in 2017, Lemvigh-Müller successfully divested three mixed-use logistics/production facilities, and DKI Logistics a logistics facility in Køge. Although we have seen an increase in the number of sale & leasebacks, we believe that the market harbours great potential for more transactions of this type. We foresee a continued increase in sale & leasebacks as flexibility and core business focus remain weighty parameters for businesses. Sustained activity and moderate yield compression We predict that prime industrial/logistics assets offered for sale in 2018 will see a further decline in prime yield requirements, although less pronounced than in recent years. The anticipated continued, but more moderate, yield compression in this segment is driven by the bright outlook for Danish economy, which has manifested itself in downtrending

Domestic

Foreign

33%

67%

Note: Industrial/logistics transaction volume by investor origin.

Source: Sadolin & Albæk.

Transaction volume dominated by value-add and opportunistic investments

61.1% Value-add 32.6% Opportunistic

6.1% Core 0.1% User

Source: Sadolin & Albæk