Europe

Something sweet in Denmark

Successive studies have rated Denmark as the happiest place in the world; and in the 2016 OECD Better Life Index, the Danes were judged to benefit from the best work-life balance. By all accounts it is a good place to be.

Underpinning the country’s positive characteristics, are solid economic fundamentals. In 2012 Denmark had the second highest nominal per capita GDP in the EU; and a somewhat lofty target of 5% annual GDP growth by 2020 has been set for the Municipality of Copenhagen. It is also anticipated that around 60,000 new jobs will be created nationally by 2018. The country is one of only nine with a triple A rating from the leading credit agencies; and Denmark currently enjoys stable monetary policy with low interest rates and cost of debt.

Eight years ago, the real estate market in Denmark was unpalatable for outside investors. The financial crisis prompted the collapse of 67 banks, triggering other business failures. Soaring office vacancy rates ensued, leaping from around 3% to about 10%. Since then, however, the skies have lightened considerably and the narrative has become discernibly upbeat.

Prime yields have compressed in line with other European markets, to around 4-4.5% for prime offices, while some aspects of risk are lower in Denmark than elsewhere. Outside of core standing investments, there are short-term opportunities to add value through modestly riskier strategies. Improving business confidence has eroded vacancy rates, meaning investors can capitalise on opportunities to buy and fix assets with leasing problems or quality issues with a much greater degree of confidence. Being a fast mover and creating the right product in the right location is key, and when delivered, can add substantial value to previously under-funded schemes.

In terms of market liquidity, Denmark has gradually improved. According to Real Capital Analytics, all commercial real estate transactions reached €5.5bn over the year to June 2016 – the highest level since 2007. Based on positive sentiment, reflected in Copenhagen’s rise to the fifth spot in the PWC Emerging Trends in Europe 2016 ranking, Denmark could achieve similar levels of deal flow over the next two years.

Danish investors have seen their domestic market steadily morph into a compelling story. From earlier targets of between five and seven percent, Danish pension funds are now targeting allocations to real estate of between 10% and 15%, adding to an increasingly diverse pool of capital.

The UK’s decision to leave the European Union will also have enhanced Denmark’s appeal as a feasible alternative for capital. A modestly positive economic environment and tightening labour market, political stability, the rule of law and the ease of doing business are all attractive attributes. Little wonder, then, that the momentum for Danish real estate is rapidly gaining outside Denmark too. Total foreign investment in Danish real estate has steadily crept up. Over the year to June 2016 it hit around €2.8bn – an uptick of 25% over the year before. With UK, Swedish, US and German investors having committed significant capital to the Danish market in recent years, cross border investment is expected to remain healthy through 2017.

Standard Life Investments, an early entrant to the Danish market and now arguably one of the most significant non-domestic investors in Denmark, has committed around €500m since 2013. The strategy has been straightforward: invest in the best quality assets – with the potential for further enhancement through development and/or smart asset management – in core locations. A reasonable proportion of the investment has been focused on the capital, but not exclusively. Aarhus – Denmark’s second city and the de facto centre of the important East Jutland metropolitan area – has also received attention; as well as slightly more peripheral locations such as Odense, the country’s third city, and Hilerød, just north of Copenhagen. In the case of Aarhus, the prospect for even stronger economic performance will likely be enhanced by its impending status as the 2017 European Capital of Culture, with an obvious positive knock-on impact on real estate.

Major unexpected macro-economic or geopolitical shocks aside, all the present signs indicate a continuing positive prognosis for Danish real estate. To borrow from the country’s most celebrated writer, Denmark currently looks more like a swan than ‘the ugly duckling’. Given the cyclical nature of real estate, it would be prudent to ask how long can Denmark’s revival last? But in a low growth and loose monetary policy environment, it still feels like early days.

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