Colliers Copenhagen Property Market Report 2019

Property price index – Market Report 2019

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Risk-adjusted commercial property returns outperform returns on stocks and bonds

Given a 1.2% increase in the net price index (NPI, basis for most minimum rent adjust- ments) in 2017, uptrending rents in the occupational markets have had a negligible net effect on capital growth. At first glance, this seems surprising as Greater Copenhagen occupational markets have improved in terms of climbing prime office rents in some loca- tions as well as a thriving industrial/logistics segment. However, in 2018 the retail invest- ment property market continued to struggle with increasing vacancy rates and decreasing rent levels, especially in secondary locations. In addition, office vacancy rates edged up in late 2018. Property vs. stocks and bonds When assessing the performance of Copenhagen commercial property, the return to risk reward offered by commercial real estate assets compared to other asset classes is a factor to consider. We have compared the performance of commercial property to that of stocks and bonds by analysing total return indices for each of the asset classes, i.e. including reinvested income yields for the respective asset classes. For a gross index of the Danish stock market, we use total return data compiled by MSCI, and for bonds we use Nordea’s 7-year benchmark return. For the total return on commercial property, we use the Colliers property price index, in which total return is comprised of average net initial yields and capital growth. Having rallied to unprecedented highs in 2017, stock markets took a tumble in 2018 as the MSCI Denmark Gross Index plummeted by 10.4% as the year wore on. Stock markets witnessed substantial volatility on several occasions with both the Italian election, the trade war between the US and China and challenging conditions in emerging markets causing significant volatility. Although bond markets continue to be affected by low and stable interest rates, bond returns rebounded in 2018 to a level of 1.99% at year-end 2018. By analysing time series dating back to 2000, the total return on stocks has on average outperformed commercial property and bonds by approximately 230 and 650 bps, respec- tively. Accordingly, in this period, commercial property has produced an average total return outperforming Nordea’s 7-year benchmark by some 420 bps. While the average return on stocks exceeds the average returns on commercial property and bonds, stocks also carry considerably higher return risk. When calculating risk, measured as the standard deviation on each time series, the total return on stocks proves to carry more than four times the risk of commercial property and nearly five times the risk of bonds. Computing the Sharpe’s ratio, a measure of risk-adjusted returns, for the three time-series indicates that commercial property has largely outperformed both stocks and bonds over the past 19 years. Among other things, this indicates that there is a considerable illiquidity premium on commercial property investments. Are yields set to increase in 2019? Looking ahead, we predict that capital growth will slow in 2019. Over the past six years, annual average capital growth has been 5.7%, driven mainly by yield compression across all segments of the investment property market. Although the occupational markets remain fairly healthy, we are starting to see slowing rental growth in some segments,

Total return on commercial property investments in 2019 is estimated at around 5-6%

Stable income return expected throughout 2019, supported by an inflationary uptrend