Colliers Copenhagen Property Market Report 2019

Office – Market Report 2019

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Foreign investors take the lead

It is important to emphasise that the effects of ownership composition are most pronounced in central Copenhagen districts. Like in 2018, we therefore expect transaction activity to be driven mainly by non-CBD transactions in the next 12 months. Record-low yield requirements As 2018 wore on, we started to see an increasing number of transactions at yields around the 4.00% mark, a few even below, typically involving properties offering value-add potential mainly because of untapped rent reserves. Low office vacancy rates, and by extension virtually non-existent vacancy risk, have encouraged investors to base their bids on lower yield requirements. Prospects of possible hikes in top rents in the CBD have also made investors reconsider the risk assessment of up-to-date properties in central locations, similarly driving down yield levels. Although sales comparables are scarce in the segment, prime office CBD yield require- ments are estimated at 3.75%, marking an unprecedented low. Non-CBD office locations see record-low yield levels too, currently standing around the 4.25% mark. Mounting interest for multi-user office properties In today’s market, office tenants increasingly demand flexibility. This trend has fed through to the investment market, whetting investor appetite for multi-user properties. This marks a change from previous strong investor preferences for single-tenant head-of- fice buildings, let on leases carrying long non-terminability periods. Such core assets offer attractive return-to-risk ratios and are less management-intensive. In addition, exposure to temporary fluctuations in the occupational market is minimal as vacancy risk is correlated with the financial standing of the tenant as opposed to changing market conditions. Nevertheless, single-tenant buildings usually also pose a potential diversification risk due to the strong exposure to individual tenants and their performance. Multi-user properties offer diversification gains and are more aligned with market trends and rent level, thereby preventing major fluctuations in the market value of the properties in question, even if one tenant should decide to terminate a lease. Multi-user buildings may well require more intense management and resources, due to higher churn rates, etc., but they also offer an upside: When units are vacated and need to be relet, the property owner is able to gradually align asking rents with prevailing market trends. Although leases with long non-terminability are associated with high cash-flow security, they often serve to lock in rental prices, regardless of market rent movements. As a result, the owner/landlord misses out on the upside of potential market rent increases. In response to this, owners/landlords are increasingly seen to demand a relatively high asking rent of head-office tenants.

46% Domestic

Foreign

54%

Note: Office transaction volume by investor origin. Office transaction volume, Greater Copenhagen. Source: Colliers International

Core investments predominate

64% Core 29% Value-add

7% User

Note: Office transaction volume by investment type, rounded figures. Office transaction volume, Greater Copenhagen. Source: Colliers International