5 Outrageous Predictions 6 Months on

Market update PULSE Q2 2021

Market update Q2 2021 5 outrageous predictions 6 months on ... Market update: 5 outrageous predictions 04 – 6 months on ...

Property market indicators 07 Q2 2021

One year post-intervention: Exit of foreign, short-term investors and less than 12 expected drop in prices

Five reasons to engage in speculative 18 industrial/logistics building Q2 MARKET UPDATE PULSEPULS Q2 Q2 2021 2021

Market update Q2 2021 5 outrageous predictions – 6 months on ...

At the end of 2020, we ventured to make five outrageous predictions for the property market in 2021 – so outrageous that we did not entirely believe in them, but still with a touch of feasibility. Inspired by Saxo Bank’s “10 outrageous predictions”, our predictions reflected scenarios that are unlikely but cannot be ruled out altogether, intended to give food for thought.

So, where are we today, six months later?

By Peter Winther, Executive Director, Partner, Colliers

4 Five outrageous predictions

In December 2020, we did some out-of-the-box thinking. We wanted to challenge consensus. And we arrived at these predictions, when we were in the midst of winter darkened by the shadow of the coronavirus threat, still without vaccines:

1. Initial yield requirements dropping below 3.00% 2. At least two hotel chains stand to face bankruptcy or reconstruction 3. Residential rents dropping, but not in Copenhagen 4. Mark-to-market taxation being abandoned 5. Transaction volume increasing by 50%

Two hotel chains facing bankrupcy 1. Net initial yields dropping 2. or reconstruction Long-term interest rates have gone up, giving rise to At the time of writing, BC Hospitality Group has undergone strong concerns of further rate hikes, also as far as short- reconstruction, the share capital is lost, and fresh capital term interest rates are concerned. Inflation is climbing, in has been injected. particular in the United States, forcing the FED to tighten monetary policies to avoid overheating. Europe too is see- With its exposure concentrated in Copenhagen and a very ing budding signs of rising inflation. substantial MICE component, BC Hospitality Group has been more severely hit by the coronavirus pandemic than Nobody knows for certain if rising inflation is a natural and most. temporary knock-on effect of the reopening of society post COVID-19, or if it is a long-term phenomenon, driven When shareholders and other stakeholders lose money, by exceptionally expansive monetary and fiscal policies. criticism invariably follows. However, Colliers is happy and Real estate, however, is perceived as an inflation-hedged proud to have assisted in raising fresh capital for a busi- asset class, with no signs of an increase in yield require- ness that urgently needed it, when a collapse would have ments, quite the opposite. had not only dire consequences for the parties directly in- volved, but near-immeasurable consequences for Copen- In the H1 2021 transactions where the net initial yield hagen’s entire hotel and MICE industry. was around 3.00%, it was possible to leverage on rent reserves or other optimisation potential to justify a lower Are more going to follow? net initial yield. However, we are convinced that today’s initial yield on top-quality properties in the residential and We certainly hope not. But with the relief packages being office segments alike stands at 3.00%, even if you dis- phased out, the Copenhagen hotel industry – unlike the count reserves or other optimisation potential. Domestic provincial hotel industry – may well be facing the most dif- buyers will hardly be clamouring to buy at such prices, but ficult summer ever. there will likely be buyers from other European countries as well as from North America and the Far East.. Given time, the Copenhagen hotel industry will undoubt- edly make a full recovery. Nevertheless, the 2021 predica- ment could take its toll in terms of further casualties.

5 MARKET UPDATE PULSE Q2 2021

Nobody knows for certain if rising inflation is a natural and temporary knock-on effect of the reopening of society post COVID-19 – or if it is a long-term phenomenon, driven by exceptionally expansive monetary and fiscal policies.

3. Residential rents down 4. Mark-to-market taxation being abandoned Investor demand is strong for residential When you try to predict the future, it is sometimes hard to distinguish properties, capital is more than abundant, faith from hope. Indeed, there seems to be a stable political majori- and residential newbuilding is exceptionally ty in favour of imposing mark-to-market taxation on property investors brisk. Mainly German and Far Eastern inves- with effect from 2023. Against such a political majority, even the most tors are aggressive buyers in Copenhagen, well-reasoned arguments – citing arbitrary taxation, lacking procedur- and when Goldman Sachs invests in hous- al fairness and the failure of expectable proceeds to match the costs of ing in provincial towns and cities like Silke- administration and control – will often be in vain. borg, Horsens, Viborg, Kolding and Randers, it is fair to say that international investors are So far, we can but urge all investors affected by the proposed mark-to- present not only in Copenhagen and Aarhus. market taxation of properties to secure the best possible proof of 2023 entry values and market values going forward. The completion of a great many new residential units tends to trigger a higher risk In the years ahead, we will no doubt see many advisors touting valua- of supply and demand imbalances. How- tion reports to serve as documentation for market values vis-à-vis the ever, we have not really seen any indica- Danish tax authorities, SKAT. However, it will hardly be wise to try to tions of more structural vacancy, nor a re- save a few thousand kroner in valuation fees if risking that the tax au- sulting drop in rental prices. Nevertheless, thorities subsequently override the valuation because the quality and the threat is latent in some markets. It will documentation are found to be wanting. not seriously manifest itself in 2021, but 2023-2024 will see a drop in rental prices in In other words: We (regrettably) believe that mark-to-market taxation will some areas and for some types of housing. be introduced. .

5. Transaction volume increasing by 50% At this point, it is premature to make tors allocate substantial capital to Den- ing, and investors with an “expiry date”, a qualified estimation of the full-year mark. What is more uncertain, how- e.g. property funds to be wound up. transaction volume. However, the out- ever, is whether there are sufficient However, there will also be several in- rageous prediction – a 50% increase on investment opportunities. vestors that, with good reason, use the 2021 – is not beyond reach. market momentum to divest assets not We will not hit a record-high in the aligned with their long-term strategy. Compared to most other European transaction market if the sellside is rep- The question then remains how many property markets, Denmark continues resented only by those that are more will be tempted by prices that are at an to offer quite favourable framework or less forced to sell, e.g. financially dis- all-time high, knowing full well that the conditions. It is therefore not surprising tressed investors, project developers renewed placement of the freed-up that a great many international inves- making a living by developing and sell- capital poses a challenge in itself. n

6 MARKET UPDATE PULSE Q2 2021 Colliers Denmark

Property market indicators

Definitions Important notice First year stabilised return on investment (less deposits, less transaction The quoted market data are costs) based on rental income less operating costs. Vacancy data based on associated with some degree of supply statistics by Ejendomstorvet.dk and current market supply estimates. uncertainty due to the consequences of the current coronavirus outbreak. Prime: Prime location and quality. Either a new, modern building, or refurbished so that it is up-to-date and configured to meet future require- You may quote property market ments. Low vacancy risk relative to market conditions. indicators by providing a full source of reference. Secondary: Average location and condition. The vacancy risk is moderate and reflects current market conditions.

The number is expected to increase in a year

The number is expected to be unchanged in a year

The number is expected to be lower in a year

7 Q1 2021 Colliers Danmark MARKET UPDATE PULSE Q2 2021 Office 2020 2021 Rent levels Q1 Q2 Q3 Q4 Q1 Q2 Forecast DKK/sq m/year excluding operating costs and taxes Prime 2,050 2,050 2,050 2,100 2,100 2,100 Copenhagen Secondary 1,400 1,400 1,400 1,400 1,400 1,400 Northern suburbs Prime 1,600 1,600 1,600 1,600 1,600 1,600 of Copenhagen Secondary 1,000 1,000 1,000 1,000 1,000 1,000 Southern and western Prime 1,250 1,250 1,250 1,250 1,250 1,250 suburbs of Copenhagen Secondary 750 750 750 750 775 775 Prime 1,100 1,100 1,100 1,100 1,100 1,100 Zealand Secondary 800 800 800 800 800 800 Prime 1,450 1,450 1,450 1,450 1,500 1,500 Aarhus Secondary 950 950 950 950 950 950 Prime 1,150 1,150 1,150 1,150 1,150 1,150 Horsens Secondary 600 600 600 600 600 600 Prime 875 875 875 875 875 875 Randers Secondary 475 475 475 500 500 500 Prime 1,150 1,150 1,200 1,200 1,200 1,200 Triangle Region(1) Secondary 600 600 650 650 650 650 Prime 1,100 1,100 1,100 1,100 1,100 1,100 Esbjerg Secondary 550 550 550 550 550 550 Prime 1,000 1,000 1,000 1,000 1,100 1,100 Aalborg Secondary 750 750 750 800 800 800 Prime 700 700 725 725 725 725 Northern Jutland Secondary 575 575 575 575 575 575 Prime 1,250 1,250 1,250 1,250 1,250 1,250 Odense Secondary 750 750 750 750 750 750 Prime 900 900 900 900 900 900 Funen Secondary 550 550 550 550 550 550 Net initial yields % Prime 3.25 3.25 3.25 3.25 3.25 3.25 Copenhagen Secondary 4.50 4.50 4.50 4.50 4.50 4.50 Northern suburbs Prime 4.00 4.00 4.00 4.00 4.00 4.00 of Copenhagen Secondary 5.50 5.50 5.50 5.50 5.50 5.50 Southern and western Prime 4.50 4.50 4.50 4.50 4.25 4.25 suburbs of Copenhagen Secondary 6.50 6.50 6.50 6.50 6.50 6.50 Prime 5.25 5.25 5.25 5.00 4.75 4.75 Zealand Secondary 7.75 7.75 7.75 7.50 7.50 7.50 Prime 4.25 4.25 4.25 4.25 4.25 4.25 Aarhus Secondary 5.50 5.50 5.50 5.50 5.50 5.50 Prime 5.50 5.50 5.50 5.50 5.50 5.50 Horsens Secondary 7.25 7.25 7.25 7.25 7.25 7.25 Prime 6.50 6.50 6.50 6.25 6.25 6.25 Randers Secondary 8.25 8.25 8.25 8.00 8.00 8.00 Prime 5.00 5.00 5.00 5.00 5.00 5.00 Triangle Region(1) Secondary 6.75 6.75 6.75 6.75 6.75 6.75 Prime 5.50 5.50 5.50 5.50 5.50 5.50 Esbjerg Secondary 7.25 7.25 7.25 7.25 7.25 7.25 Prime 5.00 5.00 5.00 5.25 5.25 5.25 Aalborg Secondary 6.50 6.50 6.50 6.50 6.50 6.50 Prime 7.25 7.25 7.25 7.25 7.25 7.25 Northern Jutland Secondary 8.25 8.25 8.25 8.25 8.25 8.25 Prime 5.00 5.00 5.00 5.00 5.00 5.00 Odense Secondary 6.50 6.50 6.50 6.50 6.50 6.50 Prime 6.25 6.25 6.25 6.25 6.25 6.25 Funen Secondary 9.00 9.00 9.00 9.00 9.00 9.00 Vacancy rates % Copenhagen proper 8.20 7.70 9.20 9.20 9.40 9.70 Greater Copenhagen 10.70 9.20 9.00 8.80 8.40 8.30 Northern Zealand 7.10 7.50 8.60 8.70 7.10 7.00 Eastern Zealand 7.40 6.40 4.90 6.70 6.90 4.90 Western and Southern Zealand 5.30 4.60 4.80 6.60 7.20 6.20 Funen 9.60 9.50 9.80 11.00 11.80 11.00 Southern Jutland 6.60 6.50 7.00 6.80 6.30 6.70 Eastern Jutland 7.70 7.50 7.90 8.40 8.30 7.90 Western Jutland 4.60 4.50 4.00 4.20 4.10 3.90 Northern Jutland 6.00 6.20 6.20 6.30 6.80 7.80

8 / Markedsupdate PULS 88 Colliers Danmark Q1 2021

Retail 2020 2021 Rent levels Q1 Q2 Q3 Q4 Q1 Q2 Forecast DKK/sq m/year excluding operating costs and taxes Prime 21,500 21,500 21,000 20,000 20,000 20,000 High Street Copenhagen Secondary 8,000 7,500 7,000 6,500 6,500 6,500 Prime 3,600 3,400 3,400 3,400 4,300 4,300 Copenhagen Secondary 1,800 1,700 1,700 1,600 1,600 1,600 Northern suburbs Prime 3,400 3,400 3,400 3,400 3,400 3,400 of Copenhagen Secondary 1,800 1,700 1,700 1,600 1,600 1,600 Southern and western Prime 2,800 2,600 2,600 2,600 2,500 2,500 suburbs of Copenhagen Secondary 1,500 1,400 1,400 1,350 1,300 1,300 Prime 2,400 2,300 2,300 2,300 2,200 2,200 Zealand Secondary 1,350 1,300 1,300 1,250 1,200 1,200 Prime 6,250 6,000 6,000 6,000 6,000 6,000 Aarhus Secondary 3,100 3,000 3,000 3,000 3,000 3,000 Prime 2,800 2,800 2,800 2,800 2,700 2,700 Horsens Secondary 1,400 1,400 1,400 1,400 1,400 1,400 Prime 1,700 1,700 1,700 1,700 1,700 1,700 Randers Secondary 1,000 1,000 1,000 1,000 1,000 1,000 Prime 3,100 3,100 3,100 3,100 3,000 3,000 Triangle Region(1) Secondary 1,400 1,400 1,400 1,400 1,400 1,400 Prime 2,900 2,900 2,900 2,900 2,800 2,800 Esbjerg Secondary 1,400 1,200 1,200 1,200 1,200 1,200 Prime 4,600 4,600 4,300 4,300 4,000 4,000 Aalborg Secondary 2,000 2,000 2,000 1,800 1,800 1,800 Prime 1,600 1,600 1,600 1,600 1,600 1,600 Northern Jutland Secondary 750 750 750 700 700 700 Prime 5,100 5,100 5,100 5,100 5,000 5,000 Odense Secondary 2,500 2,500 2,500 2,500 2,500 2,500 Prime 2,450 2,300 2,300 2,300 2,300 2,300 Funen Secondary 700 700 700 700 700 700 Net initial yields % Prime 3.25 3.25 3.25 3.50 3.50 3.50 High Street Copenhagen Secondary 4.00 4.00 4.00 4.25 4.25 4.25 Prime 4.25 4.25 4.50 4.50 4.50 4.50 Copenhagen Secondary 5.50 5.75 5.75 5.75 5.75 5.75 Northern suburbs Prime 4.50 4.50 4.75 4.75 4.75 4.75 of Copenhagen Secondary 6.00 6.25 6.25 6.50 6.50 6.50 Southern and western Prime 5.50 5.50 5.50 5.50 5.50 5.50 suburbs of Copenhagen Secondary 6.75 6.75 6.75 7.00 7.00 7.00 Prime 5.50 5.50 5.50 5.50 5.50 5.50 Zealand Secondary 7.50 7.50 7.50 7.50 7.50 7.50 Prime 4.25 4.25 4.50 4.50 4.50 4.50 Aarhus Secondary 5.50 5.50 5.75 5.75 5.75 5.75 Prime 5.50 5.75 5.75 5.75 5.75 5.75 Horsens Secondary 6.75 6.75 6.75 6.75 6.75 6.75 Prime 6.50 6.50 6.50 6.50 6.50 6.50 Randers Secondary 7.75 7.75 7.75 7.75 7.75 7.75 Prime 5.50 5.75 5.75 5.75 5.75 5.75 Triangle Region(1) Secondary 6.75 6.75 6.75 6.75 6.75 6.75 Prime 5.75 6.00 6.00 6.00 6.00 6.00 Esbjerg Secondary 7.25 7.25 7.25 7.25 7.25 7.25 Prime 4.75 4.75 4.75 5.25 5.25 5.25 Aalborg Secondary 6.25 6.25 6.25 6.75 6.75 6.75 Prime 6.50 6.50 6.50 6.50 6.50 6.50 Northern Jutland Secondary 7.75 7.75 7.75 7.75 7.75 7.75 Prime 5.25 5.50 5.75 5.75 5.75 5.75 Odense Secondary 6.25 6.50 6.50 6.50 6.50 6.50 Primær 6.00 6.25 6.25 6.25 6.25 6.25 Funen Sekundær 8.25 8.25 8.25 8.25 8.25 8.25 Tomgang % Copenhagen proper 4.10 4.50 4.40 4.40 4.60 4.20 Greater Copenhagen 1.60 2.00 2.00 1.80 0.80 1.30 Northern Zealand 3.70 3.70 3.90 3.60 2.70 2.80 Eastern Zealand 4.20 3.40 4.10 3.80 4.20 4.00 Western and Southern Zealand 3.70 3.60 3.70 3.70 3.60 3.00 Funen 3.60 3.30 3.20 3.20 3.00 2.80 Southern Jutland 3.90 3.70 4.00 4.20 3.90 4.10 Eastern Jutland 3.10 3.00 3.40 3.10 3.00 2.80 Western Jutland 2.90 3.20 3.50 3.00 2.90 2.60 Northern Jutland 4.20 3.50 3.50 3.50 3.20 3.00

Note: Ejendomstorvet updated its vacancy statistics in Q4 2020 based on changes to the usage codes for commercial properties in the Danish Building and Housing Register (BBR). As a result, the building stock statistics are now more accurate, which means that the actual supply percentages have changed. Markedsupdate Historical trends remain PULSunchanged. / 9 1. Triangle Region refers to Vejle, Kolding and Fredericia. 99 Q1 2021 Colliers Danmark MARKET UPDATE PULSE Q2 2021 Industrial* 2020 2021 Rent levels Q1 Q2 Q3 Q4 Q1 Q2 Forecast DKK/sq m/year excluding operating costs and taxes Prime 700 725 725 725 725 725 Copenhagen Secondary 425 425 425 425 425 450 Northern suburbs Prime 525 550 550 550 550 550 of Copenhagen Secondary 400 400 400 400 400 400 Southern and western Prime 650 650 650 650 650 650 suburbs of Copenhagen Secondary 425 425 425 425 425 425 Prime 550 550 550 550 550 550 Zealand Secondary 325 325 325 325 325 325 Prime 450 450 450 450 450 450 Aarhus Secondary 325 325 325 325 325 325 Prime 375 375 375 375 400 400 Horsens Secondary 250 250 250 250 250 250 Prime 300 300 300 300 300 300 Randers Secondary 200 200 200 200 200 200 Prime 450 450 450 450 450 450 Triangle Region(1) Secondary 275 275 275 275 275 275 Prime 300 300 300 300 325 325 Esbjerg Secondary 225 225 225 225 225 225 Prime 400 400 400 400 425 425 Aalborg Secondary 275 275 275 275 275 275 Prime 325 325 325 325 325 325 Northern Jutland Secondary 225 225 225 225 225 225 Prime 425 425 425 450 450 450 Odense Secondary 275 275 275 275 275 275 Prime 375 375 375 375 400 400 Funen Secondary 175 175 175 175 200 200 Net initial yields % Prime 5.00 5.00 4.75 4.75 4.75 4.25 Copenhagen Secondary 7.25 7.25 7.00 7.00 7.00 6.50 Northern suburbs Prime 5.50 5.25 5.25 5.00 5.00 4.75 of Copenhagen Secondary 7.75 7.50 7.25 7.00 7.00 6.75 Southern and western Prime 5.25 5.00 5.00 4.75 4.75 4.25 suburbs of Copenhagen Secondary 7.50 7.25 7.00 6.75 6.50 6.25 Prime 5.75 5.50 5.50 5.25 5.25 5.00 Zealand Secondary 8.00 8.00 8.00 7.75 7.75 7.50 Prime 6.00 6.00 6.00 6.00 6.00 5.75 Aarhus Secondary 7.25 7.25 7.25 7.25 7.25 7.25 Prime 6.00 6.00 6.00 6.00 5.50 5.25 Horsens Secondary 8.50 8.50 8.50 8.50 8.25 8.00 Prime 7.00 7.00 7.00 7.00 6.75 6.75 Randers Secondary 9.50 9.50 9.50 9.50 9.50 9.50 Prime 6.00 6.00 6.00 6.00 5.50 5.25 Triangle Region(1) Secondary 8.50 8.50 8.50 8.50 8.00 7.75 Prime 6.50 6.50 6.50 6.50 6.25 6.00 Esbjerg Secondary 8.75 8.75 8.75 8.75 8.50 8.25 Prime 6.50 6.50 6.50 6.25 6.25 6.25 Aalborg Secondary 8.50 8.50 8.50 7.75 7.75 7.75 Prime 7.50 7.50 7.50 7.50 7.50 7.50 Northern Jutland Secondary 9.25 9.25 9.25 9.25 9.25 9.25 Prime 6.00 6.00 6.00 5.75 5.50 5.25 Odense Secondary 8.00 8.00 8.00 8.00 7.75 7.50 Prime 6.25 6.25 6.25 6.25 6.00 6.00 Funen Secondary 9.00 9.00 9.00 9.00 9.00 9.00 Vacancy rates % Copenhagen proper 2.40 3.00 1.80 3.50 3.70 3.10 Greater Copenhagen 4.60 4.70 5.60 5.40 5.40 4.10 Northern Zealand 2.70 2.30 3.00 3.10 2.50 2.20 Eastern Zealand 4.90 4.00 3.40 2.50 3.10 2.90 Western and Southern Zealand 1.90 1.60 2.10 2.40 2.00 1.70 Funen 2.80 2.40 2.70 2.80 2.70 2.70 Southern Jutland 3.00 3.00 2.90 3.20 3.10 2.20 Eastern Jutland 2.20 2.10 2.20 2.30 2.20 2.00 Western Jutland 1.90 2.10 1.80 1.60 1.50 1.60 Northern Jutland 1.90 2.10 1.90 1.90 1.80 1.50

*) Industrial includes production, storage and logistics facilities, but not built-to-suit or airside logistics facilities

Residential** 2020 2021 Rent levels Q1 Q2 Q3 Q4 Q1 Q2 Forecast DKK/sq m/year excluding operating costs and taxes Prime 2,100 2,100 2,100 2,100 2,150 2,200 Copenhagen Secondary 1,675 1,675 1,675 1,675 1,675 1,700 Northern suburbs Prime 1,950 1,950 1,950 1,950 1,950 1,950 of Copenhagen Secondary 1,425 1,425 1,425 1,425 1,425 1,450 Southern and western Prime 1,550 1,575 1,575 1,575 1,600 1,650 suburbs of Copenhagen Secondary 1,325 1,350 1,350 1,350 1,375 1,400 Prime 1,500 1,500 1,500 1,550 1,550 1,550 Zealand Secondary 1,275 1,275 1,250 1,250 1,250 1,250 Prime 1,625 1,625 1,625 1,625 1,625 1,625 Aarhus Secondary 1,400 1,400 1,400 1,400 1,400 1,400 Prime 1,250 1,250 1,300 1,300 1,300 1,300 Horsens Secondary 1,000 1,000 1,050 1,050 1,050 1,100 Prime 1,100 1,100 1,100 1,100 1,125 1,125 Randers Secondary 800 800 800 800 800 800 Prime 1,350 1,350 1,350 1,350 1,350 1,400 Triangle Region(1) Secondary 1,050 1,050 1,050 1,050 1,050 1,100 Prime 1,150 1,150 1,200 1,200 1,200 1,200 Esbjerg Secondary 950 950 1,000 1,000 1,000 1,000 Prime 1,250 1,250 1,250 1,250 1,250 1,250 Aalborg Secondary 1,075 1,075 1,075 1,075 1,075 1,075 Prime 1,150 1,150 1,150 1,150 1,150 1,150 Northern Jutland Secondary 850 850 850 800 800 800 Prime 1,450 1,450 1,450 1,450 1,450 1,450 Odense Secondary 1,100 1,100 1,100 1,100 1,150 1,150 Prime 1,200 1,200 1,200 1,200 1,200 1,200 Funen Secondary 850 850 850 850 850 850 Net initial yields % Prime 3.25 3.25 3.25 3.25 3.25 3.00 Copenhagen Secondary 3.50 3.50 3.50 3.50 3.50 3.50 Northern suburbs Prime 3.50 3.50 3.50 3.75 3.75 3.50 of Copenhagen Secondary 4.00 4.00 4.00 4.00 4.00 4.00 Southern and western Prime 3.75 4.00 4.00 4.00 4.00 3.75 suburbs of Copenhagen Secondary 4.00 4.25 4.25 4.25 4.25 4.25 Prime 4.25 4.25 4.25 4.00 4.00 4.00 Zealand Secondary 4.50 4.75 4.75 4.50 4.50 4.50 Prime 3.75 3.75 3.75 3.75 3.75 3.75 Aarhus Secondary 4.25 4.25 4.25 4.25 4.25 4.25 Prime 4.50 4.50 4.25 4.25 4.25 4.25 Horsens Secondary 5.50 5.50 5.25 5.25 5.25 5.25 Prime 4.75 4.75 4.75 4.75 4.50 4.50 Randers Secondary 5.50 5.50 5.50 5.50 5.50 5.50 Prime 4.25 4.25 4.25 4.25 4.25 4.25 Triangle Region(1) Secondary 5.50 5.50 5.25 5.25 5.25 5.25 Prime 4.75 4.50 4.50 4.50 4.50 4.25 Esbjerg Secondary 5.50 5.50 5.25 5.25 5.25 5.25 Prime 4.00 4.00 4.00 4.00 4.00 4.00 Aalborg Secondary 4.50 4.50 4.50 4.50 4.50 4.50 Prime 5.00 5.00 5.00 5.00 5.00 5.00 Northern Jutland Secondary 5.75 5.75 5.75 6.00 6.00 6.00 Prime 4.00 4.00 4.00 4.00 4.00 4.00 Odense Secondary 4.75 4.75 4.75 4.75 4.50 4.50 Prime 4.75 4.75 4.75 4.75 4.50 4.50 Funen Secondary 6.25 6.25 6.25 6.25 6.00 6.00

**) Rent levels and net initial yields quoted for newly built residential units of 80-100 sq m, discounting ground-floor and penthouse units. 1. Triangle Region refers to Vejle, Kolding and Fredericia.

Definitions: Copenhagen: City of Copenhagen and City of Frederiksberg. Northern suburbs of Copenhagen: Municipalities and cities north of Copenhagen in the Capital Region of Denmark, eg. Lyngby, Hillerød and Hørsholm, albeit excluding Hellerup, which is part of the Municipality of Gentofte but where data for Copenhagen are valid. Southern and western suburbs of Copenhagen: Municipalities and cities south and west of Copenhagen in the Capital Region of Denmark, eg. Hvidovre, Glostrup, Herlev, Ballerup. Zealand: Large towns located on Zealand, eg. Slagelse, Ringsted, Næstved and Roskilde. Prime residential location: e.g. Langelinie and Havneholmen in Copenhagen; Lyngby and Rødovre in Copenhagen suburbs. Secondary residential location: e.g. Valby and Ørestad Syd in Copenhagen; Brøndby/Glostrup/Albertslund in Copenhagen suburbs. Note that residential vacancy rates are not included as units in residential properties subject to market rent are virtually fully let.

Markedsupdate PULS / 11 1111 MARKET UPDATE PULSE Q2 2021

One year post-intervention Exit of foreign, short-term investors and less than expected drop in prices

The residential market intervention aimed at section 5(2) of the Danish Housing Regulation Act has clearly taken its toll in terms of lower prices, a slowdown in activity and a nar- rower field of buyers, today almost exclusively counting investors with a long-term investment horizon.

By Emma Stubberup, Associate, Colliers

Flashback to 2019. Media headlines are unequivocal: They read that seemingly greedy foreign investors are taking over old-stock residential properties to subsequently raise the rent payable by new tenants to exorbitant levels as soon as the properties have been modernised.

The old residential building stock offers particularly attractive investment opportunities: Properties often enjoy a good location in major Danish cities, and as many are also comprised by the rules of cost-regulated rent control, so-called cost-regulated properties, the segment is associated with exceptionally low vacancy risk.

Pursuant to section 5(2) of the Housing Regulation Act, it is possible to raise the rent of such properties to match utility value, provided residential units are com- prehensively modernised as they become vacant. As a result, investments in old- stock residential properties also offer lucrative excess returns. This has truly whet- ted the appetite for this property type among foreign private equity funds in particular, fronted by Blackstone.

The 2019 headlines soon reached the Danish Parliament, Christiansborg, creating a political stir due to a massive acquisition spree based on business plans targeting quick modernisation of rental units for the purpose of raising rents. The unrest fed through to the investment market in terms of uncertainty and a wait-and-see atti- tude in the investor community. In January 2020, a political majority therefore agreed to amend section 5(2) of the Housing Regulation Act, effective as from July 2020.

12 The key elements of the intervention are:

1. A five-year qualifying periodbefore new owners may raise the rent having carried out comprehensive modernisations 2. Stricter energy-efficiency requirements in connection with modernisations 3. A cap on future rent increases by abolishing the substantiality criterion 4. The position of tenants is strengthened in disputes before local housing rent tribunals

Colliers’ expected the following effects:

Complexity and future uncertainty make investors adopt a wait-and-see attitudee

• The intervention exacerbates the complexity in an already regulated market. This may prompt investors to zoom in on less complex markets, and also cause a drop in transaction volume

• The intervention demonstrates a preparedness to amend regulations, which may cause uncertainty concerning future measures. This could make investors remain on the sideline, and result in a drop in transaction volume

Structural downward price correction, buyside and sellside

• Energy-efficiency requirementsmay incur a rise in non-essential costs. This prompts a downward price correction that structurally impacts both the buyside and the sellside

• The abolishment of the substantiality criterion puts a cap on utility value. Uncertainty about the cap and the role of the housing rent tribunal triggers a downward price correction

Diverging market valuations, buyside vs. sellside, reduce the number of actual sales

• The introduction of a 5-year qualifying period upon a change of control serves to create a mismatch in market valuations by the buyside versus the sellside

• The gap between buyside and sellside price expectations serves to reduce the number of realised sales, due to lack of consensus on how to bridge the pricing difference

• The pricing difference is to be somehow splitbetween the buyside and sellside, all other things being equal prompting a downward price correction

13 MARKET UPDATE PULSE Q2 2021

How amendments have affected the market Investor composition Although the political agreement helped to clarify the new Shift towards long-term investments: We have seen a rules, there were diverging views as to its long-term effect on shift from long-term investors with high yield require- both investor composition, prices, and transparency in the ments, mainly property funds, towards long-term inves- market. It is only now that we are starting to garner the first tors whose pricing practices are less affected by the post-intervention experiences. implications of the qualifying period.

Pricing Whereas the investment strategy of short-term inves- Capital abundance and demad: In the past 12 months, tors typically used to involve an aggressive business the property market in general, including the market for res- plan targeting quick modernisation of properties to idential properties subject to cost-regulated rent control, achieve higher returns, there is now a sharper focus on has experienced massive demand due to substantial capital a longer holding period to achieve additional returns. placement requirements in the wake of a dramatic drop in in- Finding it difficult to reconcile a longer investment terest rates along with large amounts of capital being injected horizon with their current business plans, short-term into the market in response to the coronacrisis. Seen in iso- investors driven mainly by high yield requirements are lation, the resulting improvement of the market is estimated zooming in on other segments. to have driven up prices by 2-4% in the period from the effective date of the amended legislation to date, due to yield com- Fewer foreign investors: Whereas 2018 saw a predom- pression. inance of foreign investors in this segment, the period following the intervention has seen a shift almost exclu- Drop in prices of cost-regulated properties: Judging by sively in favour of domestic investors. a review and analysis of realised transactions involving One of the main explanations may be that many in- properties subject to cost-regulated rent control, pric- vestors used to be foreign private equity funds with es have dropped by 5-10%. A downward correction of a short-term investment horizon, and as they exit the old-stock residential property prices was anticipated, in market, the number of foreign investors drops accord- particular on properties with a large share of rental units ingly. In addition, the political instability in an already not yet modernised and therefore covered by the rules complex and regulated market may in the short term of cost-regulated rent control. Nevertheless, the realised have contributed to deterring foreign investors. sales indicate a less than originally expected drop in prices, all other things being equal, which is also to be held up against the market recovery.

Transaction volume, DKKbn Investor types

Note: Trades involving cost-regulated properties, data for Note: Buyers of cost-regulated properties, data for Greater Copenhagen and the City of Aarhus. Source: Colliers Greater Copenhagen and the City of Aarhus. Source: Colliers

14 Although the key elements of the intervention have been clarified, we are still left with prospects of very few sales, many of them involving cooperative housing properties, which are not subject to a qualifying period.

Transaction activity Brisker transaction activity: Transaction activity is start- Institutional investors and property companies taking ing to brisk up, rebounding from a slump in 2019 when un- the lead: In the past, property funds were aggressive on certainty was mounting. Although the key elements of the in- pricing, and as they have exited the market, they have made tervention have been clarified, we are still left with prospects room for investors pursuing a longer investment horizon and of very few sales, many of them involving cooperative hous- lower yield requirements, mainly institutional investors and ing properties, which are not subject to a qualifying period. property companies. Long-term investors are generally more This may indicate that the market is yet to reach some kind of open to discussing how to bridge the gap between their own broad consensus on the issue of the discrepancy in buyside price expectations and those of the sellside. This negotiation and sellside price expectations – a discrepancy arising due preparedness mainly ties in with the long investment horizon to the implications of the qualifying period. Nevertheless, we on the buyside, with the buyer able to spread possible loss- see an increasing normalisation process in the market as the es over multiple years. Furthermore, the properties are rare- unrest has subsided and investment activity picked up. ly earmarked for re-sale in the span of few years. All other

Store Mølle Vej, Copenhagen S

15 MARKET UPDATE PULSE Q2 2021

things being equal, the shift in investor composition has had gap likely narrows as an increasing number of cost-regulated a small, but favourable effect on investment activity. rental units are modernised over time. By the same token, investors looking to reallocate are likely to modernise as many Pipeline of new transactions units as possible prior to divestment to best align the price despite intervention expectations of the parties. Despite the relatively sluggish post-intervention investment market, we expect investment activity to pick up soon in the Nonetheless, we believe that old-stock residential properties segment. The old residential stock continues to offer attrac- in the short term will be susceptible to a market downturn tive low-risk investment opportunities and the possibility of as a downward adjustment of prices, all other things being achieving higher returns via proactive asset management. equal, will expose the discrepancy between buyside and sell- In a market characterised by uptrending prices on alterna- side pricing, potentially putting transactions on hold. In addi- tive low-risk property investments as well as massive capital tion, the uncertainty in terms of possible future regulations placement requirements, we fundamentally expect to see an in an area where politicians have proved willing to make leg- increase in transaction volume. islative amendments may well serve to keep investors on the sideline, although in our opinion with only short-lived effect. Not only does the segment experience mounting demand, but supply is also set to increase when uncertainty in the sell- Short-term investors will remain passive in the segment, and side community subsides even further, and investors pursu- those active will mainly be long-term investors with lower ing a divestment strategy learn that more long-term investors yield requirements, e.g. institutional investors. We expect for- are prepared to pay fair prices. This may be another factor eign investors to return to the segment but to increasingly that helps to compensate for the gap between buyside and join forces with domestic asset managers to make the right sellside pricing due to the qualifying period. In any event, the decisions in the market. n

16 Summary:

Investment activity

• Strong activity, driven mainly by foreign property funds

• Slowdown in activity and low supply • Transactions to a large extent involve cooperative housing properties

• Prospects of activity picking up, driven by increase in supply and increase in demand

Sales prices

• Sales prices driven by aggressive pricing by foreign property funds

• Market recovery lifts sales prices, preventing the price decline originally expected • Decline in prices estimated at 5-10%

• Long-term investors generally prepared to pay fair prices, which may potentially narrow the gap between buyside/sell side price expectations • The gap will narrow as more units are modernised • Market downturn will expose the mismatch in buyside/ sellside pricing, potentially with detrimental effect

Investor composition

• Mainly short-term investors • Predominance of property funds • A large share of foreign investors

• Mainly long-term investors • Predominance of institutional investors and property companies, including private ones • Almost exclusively domestic investors

• Mainly long-term investors • Predominance of institutional investors and property companies, including private ones • A mix of domestic and foreign investors

Pre-intervention Post-intervention Future outlook

17 MARKET UPDATE PULSE Q2 2021

Five reasons to engage in speculative industrial/ logistics building

A cocktail of historically low vacancy and If you are in search of an economic bellwether of the com- accelerated demand is currently providing mercial property market, you would do well to take a look a favourable basis for speculative building at industrial and logistics facilities. Both in Denmark and abroad, the market for this property type has traditionally of storage and logistics facilities. been quick to reflect general economic trends.

The market currently powers ahead on the back of the coronavirus outbreak, which provides a particularly favourable basis for speculative building. Among the trends currently By Peter Lassen, Director, and driving the market, mainly two stand out. Alexander Rønholt, Associate, Colliers Mounting e-commerce drives demand On a global scale, consumers have shopped more online in recent years, with multiple studies in fact ranking Denmark among the countries with the highest online sales. In 2010, e-commerce accounted for only 5% of aggregate Danish consumer spending. In 2020, the share had grown to 15%

18 [...] Due to e-commerce growth, the configuration standards required of storage and logistics facilities have become higher, a trend set to continue.

according to Statistics Denmark and Figure 1: FDIH (The Association of Danish Inter- Online sales account for growing share of consumer spending net Trading). 1,100 16% Due to the repeated lockdowns of 1,050 14% most physical shops, except for grocery 1,000 12% shops, Danes have increasingly chosen 950 10% to do their shopping from home. Habit- 900 8% ual digital consumers have purchased more online than before, also buying 850 6% a wider range of goods than before. In 800 4% addition, e-commerce has accelerated 750 2% because new user groups, including 700 0% the elderly, have started to shop online. 10 11 12 13 14 15 16 17 18 19 20

E-commerce, share (r.a.) Consumer spending, DKKbn (l.a.) Moreover, the stronger demand has literally reshaped the industrial/logistics Source: Statistics Denmark, FDIH - The Association of Danish Internet Trading landscape: Due to e-commerce growth, the configuration standards required of storage and logistics facilities have Figure 2: become higher, a trend set to continue. Vacancy, industrial/logistics The higher the flow of goods, the more important is it to have state-of-the-art 10% facilities, including automated systems, 9% efficient high-ceilinged premises and 8% ramps to facilitate access for trucks. 7% 6% Stricter supply chain control 5% In addition, the pandemic has revealed 4% how vulnerable global supply chains are 3% and how much they depend on open 2% borders, efficient means of transport 1% and well-functioning production chains. 0% Limited air traffic, port closures, insuffi- 10 11 12 13 14 15 16 17 18 19 20 21 cient manpower, stricter border control Greater Copenhagen Triangle Region Aarhus and redirection of routes have seriously impinged on the transportation of Source: Ejendomstorvet.dk

19 MARKET UPDATE PULSE Q2 2021

Figure 3: The low vacancy has affected the Market rent, industrial/logistics (DKK per sq m p.a.) trend in rental prices, too. Although climbing rent levels may be a posi- 700 tive sign, indicating stronger market 600 activity, the development in rents is

500 driven largely by the combination

400 of a shortage of lease opportunities and strong competition. 300

200 Pipeline of newbuilding 100 in Copenhagen, 0 but subject to letting 10 11 12 13 14 15 16 17 18 19 20 21 An analysis of future supply outside Brøndby/Glostrup/Herlev, prime Brøndby/Glostrup/Herlev, secondary Copenhagen, along the E20 corridor South corridor, prime South corridor, secondary stretching from Høje-Taastrup down Avedøre, prime Avedøre, secondary to Køge, the so-called “south corri- Note: Rent quoted exclusive of operating costs dor”, currently indicates a pipeline of Source: Colliers some 230,000 sq m new industrial/ logistics space for completion in the years ahead, mainly next year. Figure 4: Future supply, industrial/logistics, the south corridor (sq m) This may well increase supply, but a large portion of the premises have 180,000 already been pre-let. As a result, 160,000 market dynamics will remain largely 140,000 the same, with the new space being 120,000 earmarked mainly for the expansion 100,000 of existing lease premises as op- 80,000 posed to relocations. In addition, the 60,000 south corridor potentially harbours 40,000 a development pipeline of just shy 20,000 of 500,000 sq m, albeit subject to 0 pre-letting before construction start. 2021 2022 2023 2024 As the delivery period is rarely less Source: Byggefakta, Ejendomstorvet.dk than 12 months, however, newbuilding is often not an option for many businesses in urgent need of space.

This is why speculative goods, forcing businesses to rethink how to secure their future supply chains. building may be lucrative We believe that increased diversification of the supplier network as well as We have on previous occasions increased domestic production and storage are some of the solutions that will ventured the assertion that multiple be implemented in the short to medium term. More than anything, increased market drivers indicate that now is domestic production and storage are expected to spur demand for industrial/ the time to engage in speculative logistics properties. building, in particular of logistics facilities. We see no indications of Shortage of premises stunts growth the demand for logistics premises During COVID-19, many businesses with an online platform have in a matter of tapering off any time soon, and even months experienced growth on a scale you would normally see over a number if speculative construction is asso- of years. This has also affected the logistics market, where we currently see in- ciated with higher risk than pre-let tense competition for efficient and up-to-date lease premises in attractive geo- building, we believe that this added graphical locations. Although an analysis of vacancy levels across Denmark risk is at a 10-year low. seems to indicate a vacancy level that has remained largely unchanged in recent years, this is not entirely true. A large portion of vacancies are found in outdated At the same time, recent years have premises that fail to meet today’s tenant demands. seen logistics property prices rally

20 due to the competition in the occupational and investment It is always wise to exercise prudence when drawing up and market alike, a trend that has continued in 2021. Despite executing a business plan for speculative building, but in view increasing construction costs, we therefore now see that of the existing substantial demand for new and up-to-date the capitalised market values of existing properties greatly logistics premises, along with the massive investor demand exceed construction costs, rendering speculative building for this property type, we believe that investors should now less susceptible to market fluctuations. consider moving further out the risk curve by investing in speculative construction in this segment as it may very well prove exceptionally lucrative. n

Figure 5: Five factors in favour of speculative building

Record-high occupancy rates Climbing rent levels

• Current vacancy leve reflects • Strong demand and short supply have structural vacancy driven up rents to an unprecedented high • Virtually no vacancies in up-to-date • Prospects of further rent hikes on logistics facilities up-to-date logistics facilities • Prospects of sustained low vacancy • Old-stock rent levels coming under pressure rates in up-to-date logistics facilities due to added supply of new facilities

Hidden demand Strong investor demand

• Several tenants occupy facilities • Substantial capital placement requirement that fall to match actual requirements • Mounting foreign invester demand • Limited supply makes it difficult to relocate • Denmark offers higher yields than its • Several tenants ready to relocate neighbouring countries once supply starts to pick up • Investors prepared to move further out the risk curve

Lack of development sites around Copenhagen

• Multiple prime sites have been sold off and development activity has started • Former industrial areas are converted for residential use • Both factors limit future supply

Source: Colliers

21 CONTACT

Copenhagen Toldbodgade 33 DK-1253 Copenhagen K

Aarhus Søren Frichs Vej 38A DK-8230 Åbyhøj

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Vejle Research Peter Winther Dandyvej 3B Executive Director | Partner | MRICS DK-7100 Vejle Capital Markets Editors +45 28 19 66 76 Jakob Hagen Schmidt [email protected] Editor-in-chief Head of Communications Peter Lassen +45 61 70 11 36 Director | Partner [email protected] +45 20 45 30 53 [email protected] Thora Nielsen Editor Emil Helmsøe-Zinck PA | Senior Project Coordinator Director, Head of Valuation +45 33 43 25 25 & Advisory, Copenhagen [email protected] +45 30 23 96 41 [email protected] Graphic design Brian Pleidrup Emma Stubberup Graphic designer Associate, Valuation & Advisory +45 24 67 06 45 +45 24 48 12 29 [email protected] [email protected]

Nana Keiding Alexander Rønholt Graphic designer mDD Associate, Valuation & Advisory +45 22 21 75 12 +45 29 28 30 92 [email protected] [email protected]

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