MR 2018

9

Copenhagen Property Market Report 2018

compound interest on investments or the geometrical average used to measure the compound return on an investment. The risk is measured by the standard deviation of the yearly returns, that is, the average deviation from the mean return. The risk measurement applied here thus provides information on the extent to which the return fluctuates around the expected average return.

capital growth contribution of around 1.0%. Overall, favourable trends in the occupational markets are expected to continue in 2018, with rent increases in the logistics segment and in some office segments. However, as other segments remain structurally challenged, we are fairly conservative in our assessment of the net effect of occupational market recovery on capital growth. In addition, capital growth will be supported by an inflationary uptrend in 2017, prompting a 1.2% increase in NPI. Model and approach For both the Sadolin & Albæk property price index (capital growth) and the net initial yield calculations, we have used a hedonic multiple regression analysis based on empirical analysis of data collected from almost 4,600 property sales and property valuations in the Greater Copenhagen area since 1985, all involving Sadolin & Albæk. The model covers all types of commercial property, but fixed implicit prices are applied for the various property characteristics, mainly location, use, state and condition/quality, suitability/rationality and economies of scale, as a corrective measure to account for the differences between individual properties. In this context, the return applied is the average return, which denotes the most likely return or the return that investors may expect in a random year on the basis of historical returns. The average return should not be mistaken for the expected

Positive capital growth five years straight

10% 15% 20% 25% 30%

0% 5%

-15% -10% -5%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Total return Income return Capital growth Note: Total return, income return and capital growth for commercial property in the Greater Copenhagen area.

Source: Sadolin & Albæk

Commercial property investments best-in-class risk-adjusted returns

Commercial property continues to outperform bonds

100 150 200 250 300 350 400 450 500

2017 2000-2017 Return Mean return Risk

Sharpe’s ratio

MSCI Denmark, Gross Total Return Nordea benchmark, 7-year bond Commercial property, Greater Copenhagen 1

19.3% 13.1% 25.0% 0.37

0.21% 5.6% 5.1% 0.62

0 50

8.8% 9.7% 6.3% 0.69

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Note: Average return and risk on commercial property, stocks and bonds. Sources: MSCI, Nordea and Sadolin & Albæk

Commercial property, Greater Copenhagen Nordea benchmark 7-year bond MSCI Denmark Gross Total Return Index

Note: Historical returns on commercial property, stocks and bonds (Index 100 = 2000). Sources: MSCI, Nordea and Sadolin & Albæk

1 Please note that the Sadolin & Albæk property price index is based on observa- tions recorded throughout the whole year and therefore the return computed is an average across the year compared to the average across the previous year.