Market-Report-2017-Issue-I

MARKET REPORT - RED PROPERTY ADVISERS ISSUE I 2017 RED Property Advisers facilitated the sale of CBY8 - a selection of retail stores in Carlsberg City District

EXECUTIVE SUMMARY TRANSACTION VOLUME REACHED A NEW POST-CRISIS HIGH We are settling in after a fantastic 2016 Looking into 2017, we expect that many INVESTMENT MARKET for commercial real estate, as the invest- of the underlying trends that have driv- ment market reached a new post-crisis en the investment volume in 2016 will OFFICE 2016 Q1 2016 Q4 CHANGE high with DKK 64 bn, surpassing last continue to do so in 2017. As a result, Prime yield (Copenhagen City) 4.25% 4.00% -25 bp 490 € year’s transaction volume by approx. we expect to see a continuously high ac- Investment volume in million 8.30% 1,113 € +623 € 7.80% -50 bp Vacancy (Copenhagen City) DKK 10 bn. In Q4 alone, we registered tivity of sale & leaseback transactions, transactions of approx. DKK 25.6 bn, an increasing amount of investments in providing an extremely strong finish to suburban cities and high activity among RETAIL 2016 Q1 2016 Q4 CHANGE last year’s volume. the foreign investors. However, due to an Prime yield (Copenhagen High Streets) 3.50% 3.00% -50 bp 4.50% -25 bp Secondary yield (Copenhagen Side Streets) 4.75% anticipated lack of willing sellers, prime Investment volume in million 254 € 451 € +197 € Especially the residential and office seg- yields are likely to be pushed even low- ment have received a lot of interest from er and activity might be tempered given both Danish and foreign investors. To- the shortage of alternative opportunities gether these two segments comprised available. 66% of the entire investment volume of 2016, with Heimstaden and Castel- TRANSACTION VOLUME (BN DKK) lum being the two largest investors and Enjoy the report! Q1 2016 - Q4 2016 - DKK 64.1 BN ~ EUR 8.5 BN DADES with an extremely active year coming in third. 25 The increased interest from investors have 19 contributed to a further yield compression across all segments. Consequently, prime yields have reached a level of 3.60% with- in the residential segment, 3.00% within 8 8 the retail segment and 4.00% within the 4 office segment – with a few office trans- Nicholas Thurø actions even breaking the 4%-band. Managing Partner Residential Office Retail Industrial Other ISSUE I 2017 2 / 27

CONTENT ISSUE I FOCUS .............................................................. 5 MACROECONOMICS .......................................................... 9 INVESTMENT MARKET OFFICE .................................................................... 12 RESIDENTIAL ............................................................. 13 RETAIL .................................................................... 14 TRANSACTIONS ........................................................... 15 OCCUPIER MARKET OFFICE .................................................................... 20 RETAIL .................................................................... 21 RETAIL - FOOTFALL ANALYSIS ............................................ 22 APPENDIX - DANISH TRANSLATION DANSK VERSION AF FOKUS ARTIKEL ..................................... 25 ISSUE I 2017 3 / 27

EUROMONEY 2016 - WINNER OF 4 AWARDS Best Advisors and Consultants Best Advisors and Consultants Overall in Denmark for Agency & Letting in Denmark Best Advisors and Consultants Best Advisors and Consultants for Valuation in Denmark for Research in Denmark ISSUE I 2017 4 / 27

ISSUE I FOCUS ISSUE I 2017 5 / 27

DANSK VERSION PÅ SIDE 26 ISSUE I FOCUS THE MAIN TRENDS OF 2016 AND OUTLOOK FOR 2017 The Danish transaction volume reached a DANISH INVESTMENT VOLUME new post-crisis high in 2016, surpassing last DKK BN year’s transaction volume by approx. DKK 10 70 BN bn. This increase was especially driven by 64.1 BN 60 BN foreign investors, investments in the Copen- 54.1 BN hagen area and second-tier cities as well as 50 BN 41% sale & leaseback transactions. With expec- 40 BN 36% tations of increasing demand alongside a 32.9 BN 35.1 BN shortage of willingly sellers, 2017 might be 30 BN 31% 30% 20.1 BN a year of slightly less transaction activity 20 BN 20% 64% 59% combined with a continued compression of 10 BN 80% 69% 70% yields for prime properties. 0 BN 2012 2013 2014 2015 2016 TRENDS OF 2016 Domestic investors Foreign investors Source: RED Property Advisers During the last couple of years, the Da- nish transaction volume has increased this equals an increase of 5%-point. have reached a level of 4.00% within the significantly, and this year’s volume of Looking closer at the top foreign investors office segment, 3.60% within the resi- approx. DKK 64.1 bn almost reached of the past year, Heimstaden, Standard dential segment and 3.00% within the the same level as we observed in 2006 of Life and Castellum are by far the largest retail segment. In the year-end a few sub- approx. DKK 67 bn – an all-time high. investors - constituting approximately 4.00% transactions were regi- stered in In a market where the European transac- 40% of the foreign investment volume. the office segment. tion volume faced a significant decline, especially driven by lower investments in Over the last five years, foreign inves- London, the Danish transaction volume tors have dominated the retail segment, AALBORG – A GROWING MARKET within commercial real estate actually and 2016 was no exception. However, In line with previous years, Greater Co- rose by a total of 18%. But which factors during 2016, the residential and office penhagen area was by far the location that actually drove this increase in the Danish segment also experienced increasing in- attracted the largest part of the investment transaction volume? terest from foreign investors, and all together, these three segments account- volume in 2016 – accounting for approx. ed for approx. 85% of the entire foreign 74% of the total investment volume. As a FOREIGN INVESTORS GAINING MARKET SHARE investment volume in 2016. Indeed, the matter of fact, the Copenhagen area has foreign investors have contributed to an more or less cemented its dominance, With several uncertainties in the macro- even further yield compression than what taking the top spot in all five of the main economic environment, including the we experienced in 2015. This is partic- segments. However, the city that proba- consequences of Brexit and the impact of ularly evident within the above-men- bly has experienced the highest volume the new U.S. administration led by Do- tioned segments, where prime yields growth during the last couple of years is nald Trump, more and more investors are Aalborg. From 2015 until 2016 the city turning to the stable cash flow and infla- experienced a growth of 96%, reaching a tion hedging merits of real estate. Conse- ...more investors are total investment volume of approx. DKK quently, it is not only the Danish investors “ also likely to be asking 1.5 bn. This increase was essentially dri- who are active on the Danish commercial themselves whether the time ven by foreign investors, where NIAM’s real estate market. During 2016, cross is right to take on more risk residential transactions accounts for an border capital gained further market in the strongest core cities or, estimated amount of approx. DKK 750 whether they should expand share, and now comprise 41% of the total their horizons to other markets M. This was by far the largest investment transaction volume. Compared to 2015, in search of higher returns. in Aalborg in 2016. ISSUE I 2017 FOCUS MACROECONOMICS INVESTMENT MARKET OCCUPIER MARKET APPENDIX 6 / 27

SALE & LEASEBACK TRANSACTION VOLUME transactions between foreign investors, as ALMOST DOUBLED IN 2016 In a market where the European some of the foreign value-add funds will The positive development in the Danish “ transaction volume faced a exit and therefore most likely sell to other significant decline, especially real estate market - with increasing pri- driven by lower investments in funds that focus on a more core profile. ces and further yield compression across London, the Danish transaction Finally, yet importantly, we expect to see a all segments - has led to even more sale volume within commercial real continuous increase in investments in sub- & leaseback transactions in 2016. For estate actually rose by a total urban cities like Køge, Kolding, Roskilde of 18%. the majority of owner-occupiers the pre- etc. - cities that are currently experiencing dominate motive behind engaging in a sale a high construction activity. & leaseback agreement is to unlock value. expected to continue in 2017, the terms However, as mentioned previously there This gives them the ability to invest the are favorable for further sale & leaseback are several uncertainties that will affect raised proceeds into their core busines- activity in the coming year. the investment market in 2017. Especially ses, generating a potentially higher return considering the current market, which is on capital. From the investor’s point of extremely sensitive towards any increase in view, the benefits obtained by letting to OUTLOOK FOR 2017 interest rates. In those segments, where we high credit worthy tenants with long lease Looking forward, global uncertainty will observe low prime yields, small increases commitments are often one of the main continue to affect investors, and with in the interest rates will have high impact motivational drivers. In the past year, cor- changes to society and business only on the investment activity. As a result, porations have been executing more and accelerating, real estate will stand out as while investors will remain focused on the more sale & leaseback transactions, and the traditional and tangible asset class threats around them, more investors are these transactions accounted for approx. compared to other more volatile asset also likely to be asking themselves whether DKK 7.2 bn of the total investment vo- classes. the time is right to take on more risk in lume in 2016. the strongest core cities or, whether they The role of real estate in portfolio diver- should expand their horizons to other Compared to 2015 this is almost double sification is underpinned by sustained the amount. Especially Top-Toy, Danske low interest rates, expectations of higher markets in search of higher returns. Bank, and Nykredit’s sale & leaseback inflation, and volatility in all asset classes. agreements are some of the most remark- With expectations of rising liquidity and able and largest sale & leaseback transac- demand alongside a lack of willing sellers, tions of 2016. Standard Life’s acquisition prime yields are likely to be pushed even of the Top-Toy-portfolio was mainly lower and activity might be tempered gi- driven by their strategy to target prime ven the shortage of alternative opportu- commercial properties in core European nities available. Across all asset classes the markets, which includes building on their premium compared to bonds is still high presence across the Nordic region. Simi- and leaves room for another yield shift in larly, the mixed-use portfolio that H.I.G. the market in the short term. Capital & M7 Real Estate acquired from Danske Bank was driven by the motive For 2017, we expect sale & leaseback ac- to secure a portfolio with high quality tivity to continue, both in terms of regular income, where it is possible to add value sales processes and off market transactions. through various asset management initia- Additionally, we expect the high activity tives. among the foreign investors to follow the same trajectory as last year, in which we Taking into consideration that the attrac- also anticipate to see new entrants cap- tive pricing and low cap rates of quality real ture a part of the transactions volume. estate assets located in prime locations are Likewise, we expect to see even more FOCUS MACROECONOMICS INVESTMENT MARKET OCCUPIER MARKET APPENDIX ISSUE I 2017 7 / 27

RED Property Advisers facilitated the sale of this retail condominium at Fiolstræde 3-5 on behalf of NIAM. The buyer is the norwegian hotel owner - Peter Stordalen, who owns First Hotel Skt. Petri on top of the condominium. ISSUE I 2017 FOCUS MACROECONOMICS INVESTMENT MARKET OCCUPIER MARKET APPENDIX 8 / 27

MACROECONOMICS ISSUE I 2017 9 / 27

MACROECONOMIC OVERVIEW THE OVERALL ECONOMIC UPTURN IS EXPECTED TO CONTINUE The Danish economy is currently expe- riencing an upturn. Even though some of the underlying drivers in the eco- nomy have somewhat weakened late- ly, the upturn is expected to continue. MACROECONOMIC VARIABLES The outlook on our export markets has KEY VARIABLE A YEAR AGO MOST RECENT TREND worsened slightly and the effective val- GDP Growth Rate y/y 1.2% 1.2% ue of the Krone has increased, resulting Inflation Rate y/y 0.5% 0.1% in a weaker competitive position. Ac- Unemployment Rate - Denmark 6.3% 6.5% cording to the Danish National Bank, Unemployment Rate - Copenhagen Region 7.1% 6.5% clear signs of lack of workers exist in the 10 year Government Bond -0.71% -0.34% economy, and consequently slightly low- Short Term Mortgage Rate - 1 and 2 year bonds -0.10% -0.40% er demand forecast is considered healthy Long Term Mortgage Rate - 30 year bonds 2.95% 2.26% at this point in the economy’s cycle. Source: Statistics Denmark, Association of Danish Mortgage Banks and The Danish National Bank During the fourth quarter of 2016, Sta- tistics Denmark made a significant back- ward revision to its GDP growth figures, which shows that the Danish Economy in REVISED GDP - GROWTH IN REAL TERMS recent years has grown much more than earlier anticipated (see graph to the right). 2.5% 2.0% 1.9% The revision was met with satisfaction 1.7% 1.6% among economists, as many, at least 1.5% 1.3% retrospectively, had found it difficult to 1.0% 0.9% explain the low GDP-growth numbers 0.5% while at the same time observing evi- 0.2% dence in other key figures showing an 0.0% improving Danish economy. The revi- -0.5% sion also means that Denmark’s GDP 2010 2011 2012 2013 2014 2015 already in 2014 topped the previous top from before the financial crisis. Be- Outdated GDP - real growth % Revised GDP - real growth % fore the revision, this was not expected to happen until 2017, which high- lights the significance of the revision. The annual growth rate in the private The Danish National Bank estimates real estate market has also slowed mar- GDP growth in 2016 to be 1.0%, due ginally, but is still considered to be high, to the slightly lower demand in the and according to the Danish National underlying components of the econo- Bank the price level of condominiums my. GDP-growth is expected to grow in Copenhagen is currently relatively 1.4% and 1.5% in 2017 and 2018, high compared to income and inte- respectively. Especially private con- rest levels. The bank also estimates that sumption is expected to drive GDP the real estate market in Copenhagen in the near future, while export is is more vulnerable to interest rate in- also expected to contribute positively. creases than the rest of the country. ISSUE I 2017 FOCUS MACROECONOMICS INVESTMENT MARKET OCCUPIER MARKET APPENDIX 10 / 27