Denmark Market Report Q2 2016

ECONOMY Industrial sector and private consumption increase GDP growth Preliminary calculations from Statistics Denmark show that GDP increased by 0.5 % in Q1 2016, taking seasonal variations and price developments into account. This is a significant improvement compared to the consensus expectation of a 0.1 % increase. The increase in GDP is largely due to positive growth of the industrial and constructions sectors, which both increased by 4.4 %. Additionally, private consumption has grown after several years of restraint. The economic improvement has been supported by rising employment and rising real wages as a result of very low inflation. Employment is rising and will continue to do so, especially among 60-64 year olds. As a result of the early retirement reform it is no longer possible to retire at age 60, which has increased the proportion of wage earners among 60 year olds. The key figures generally show that the Danish economy is in a period with low growth levels, at approximately 1 % in 2016, which is expected to rise to around 2 % in the coming years.

It should be noted that there are major regional differences, with Copenhagen as the largest driving force for growth. As a small open economy, Denmark is strongly influenced by the economic development of its major trading partners as well as the development of the world economy in general. International instability has caused uncertainty about global growth, which has affected the Danish economy negatively. Growth is still high in China, but the economic slowdown prevalent in recent years continues. Combined with significant declines in the stock market, this has led to general uncertainty in the financial markets. Finally, there are multiple threats lurking in 2016. In Europe, the sovereign debt crisis appears to be over, but the large influx of refugees and immigrants as well as Britain's possible withdrawal from the EU (BREXIT) have contributed to the increased uncertainty. It is expected that these reservations will gradually decrease in strength and not derail the ongoing, cautious recovery in the international economy.

Annual real GDP growth You may quote from this report provided the source is acknowledged. Decisions in relation to real estate should always be assessed thoroughly, and all parties should thus examine the market in detail. Notwithstanding that we have examined and reviewed the information in the report with great care, Colliers International Danmark disclaims any responsibility for losses based on information in this report.

Joseph Alberti Research Analyst Cand Polit. [email protected] Phone +45 58 58 38 54

% 3.8 2.4 1.6 0.8

1.2

1.1

1

1

1.6

1.8

-0.1 -0.2

-0.7

Exchange rates (June 2016) DKK per 100 units of foreign currency

EUR > 744 USD > 668 GBP > 899 SEK > 79 NOK > 80

-5.1

‘05 ‘06 ‘07 ‘08 ‘09 ‘10

‘11

‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18

Source: Statistics Denmark – statistikbanken.dk and Danmarks Nationalbank Note: 2016–2018 are based on estimates.

INVESTMENTS Transaction volume

On track for a record year 2016 promises to be another outstanding year in the investment market. The Q1 transaction volume was 14.0 billion kr., which bodes well for the rest of the year since the first quarter historically has a lower transaction volume than an average quarter. The residential sector accounted for the majority of the Q1 investments, largely due to investment from real estate companies and funds. There has also been increased interest in industrial and logistics properties and it is expected that international investors will be focused on this particular segment.

DKK bn 80 70 60 50 40 30 20

The international investors have been very active in the Danish market, and accounted for about 50% of all real estate investments in 2015. Along with international investors, institutional investors and major property funds dominate the real estate investment market. These investors are primarily interested in prime real estate portfolios and larger properties.

10

Interest rates have fallen to very low levels and the interbank interest rates have been negative since January 2015. The yield on the Danish 10-year government bond is still very low and has fallen to 0.48% during the past months. The European Central Bank (ECB) has signaled that interest rates will not be further reduced. Therefore, there is a consensus view of stable official interest rates over the next few years. It cannot be excluded that the National Bank will need to adjust interest rates slightly, but these are expected to be minor adjustments that will not have any major impact. The stable, low interest rate is one of the main reasons for the large investments in the real estate market, and several economists expect interest rates to remain below 2% until at least the end of the decade.

Danish interest rates

The very high demand for prime properties has resulted in higher market prices and hence lower yield levels. This has led more investors to seek more attractive returns in the secondary markets.

0

‘06

‘07

‘08

‘09

‘10

‘11

‘12

‘13

‘14

‘15

‘16

‘12

‘13

‘14

‘15

‘16

‘12

‘13

‘14

‘15

‘16

Source: Colliers International Note: 2016 is based on estimates.

% 8 7 6 5 4 3 2 1 0 -1

‘06

‘07

‘08

‘09

‘10

‘11

3-month money market interest rate Bond rate – 10-year government bond

Source: Statistics Denmark

Q2 transaction volume by property type

%

3%

6

19%

37%

15% 26%

Annual inflation

Residential Office Retail Industrial Other

5 4 3 2 1 0 -1

Source: Colliers International

‘06

‘07

Denmark EU

2

Denmark Market Report | Q2 2016 | INVESTMENT | Colliers International

‘08

‘09

‘10

‘11

Source: Eurostat

RESIDENTIAL The largest segment of the real estate market Investments in the housing market have increased significantly in the last quarter and now represent the largest segment of the property market. There have been several major portfolio transactions throughout the past year, which gives an indication of investor confidence in rental and sales prices, and that the strong demand for housing will continue. Institutional investors in particular have increased their capital allocation in alternative investments, including real estate investments.

Square meters living space per person as of 1 January 2016 40.2–46.9 47.0–53.9

m2 boligareal pr. person 54.0–60.9 61.0–65.9 66.0–73.1

The total housing construction rose by 8% in Q1 2016 compared to Q4 2015. The development reflects a 24% increase in multifamily buildings being built, and a 2% decline in single-family, semidetached or terraced houses. Net initial yields continue to fall as a consequence of demand for housing being substantially greater than the supply in cities. For properties with modernization potential, or old buildings with cost-regulated rental amounts, net initial yields are now as low as 0%. For prime properties with no potential for improvement the net initial yield is 4%. It should be noted that the net initial yield for properties with improvement potential is not very meaningful, since other factors are more relevant. The Danish Financial Supervisory Authority has kept a watchful eye on housing price increases in Copenhagen and Aarhus and has increased regulation in the housing market. Subsequent to regulations bring implemented, price increases have been reduced. It is expected that these regulations will further strengthen the rental market, because all things being equal, regulation will increase demand for rental housing.

DEAL OF THE QUARTER

Source: Statistics Denmark

The Carlsberg Foundation has sold six large Copenhagen properties to three Danish pension funds, PFA Pension, Juristernes og Økonomernes Pensionskasse (JØP) og Danske Civil- og Akademiingeniørers Pensionskasse (DIP) for DKK 1.1bn. The property portfolio consists of over 700 apartments, and is expected to achieve a yield of 6 %.

Price index for sales of real property in ordinary free trade

House price index 120

120

(2006=100)

(2010=100)

100 100 80

60

‘06

‘07

‘08

‘09

‘10

‘11

‘12

‘13

‘14

‘15

‘16

3

‘06

‘07

‘08

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‘15

Denmark

Condominiums Single family homes

80

Source: Statistics Denmark

EU

Denmark Market Report | Q2 2016 | RESIDENTIAL | Colliers International

Source: Eurostat

Mindste

OFFICE

Højeste

Vacancy per region in Denmark (%)

Increased demand The net initial yields for prime office properties in Copenhagen are still under downward pressure and are now down to 4.25%, in some cases even lower. This is due to increased interest in investing, particularly from international investors. In the rest of the country we are seeing a trend that investments are increasingly moving out of the city centers. Investors are increasingly looking for modern and new properties which are typically not available in the city centers. There has been increased interest in sale and leaseback transactions. This might be explained by the difference between the market rent and sales price. Currently, there is a relatively large distance between the sales price and rent, which means that it is relatively advantageous for a business that owns their own offices to carry out a sale and leaseback transaction. We expect an increase in the number of sale and leaseback transactions in 2016. Employment numbers continue to grow, and have increased by approximately 75,000 people since late 2012, creating increased demand for office space. Unemployment levels have continued to fall the past six months, and net unemployment is currently just over 90,000 people.

7.6

Office vacancy rate, April 2016

1.0 8.9

4.9

7.7

4.3

8.9

13.5 5.8 7.9

7.7

Total office vacancy rate (%) 12 10 8

The vacancy rate for office space dropped nationwide by 0.4 percentage points and was at 8.4% as of 1 April 2016. The fall in vacancy has been most pronounced in the capital region where the vacancy rate fell from 10.4% to 9.5%, which corresponds to approximately 1.08 million m² vacant office space.

6 4 2 ‘06

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PensionDanmark has purchased BDO’s HQ in central Aarhus and Company House from C.W. Obel Properties for DKK 555 m. The properties comprise an overall office area of approximately 23’600 m² and 4’600 m² basement. The investment is PensionDanmarks first direct investment in the commercial real estate market in Aarhus.

‘15

1,800

Copenhagen 1,350

Aarhus

Aalborg

Employment in thousands 2.900

1,100 1,000

Vejle

1,100

Esbjerg

1,100

Office yield, April 2016

2.850

Copenhagen

2.800

Aarhus

2.750

Odense

4.25%

Aalborg

2.700 2.650 ‘06

‘07

‘08

‘09

Source: Statistics Denmark

‘10

‘11

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‘16

0

Market rent for office space, April 2016

DKK per sqm a year – operations not included

Odense

4

‘14

Source: Oline-ED Statistikken

DEAL OF THE QUARTER

2.600

‘13

‘13

‘14

‘15

4.75% 5.75% 5.50%

Vejle

5.75%

Esbjerg

5.75%

‘16

Source: Colliers MarkedsPULS Note: Modern and old properties in prime locations

Denmark Market Report | Q2 2016 | OFFICE | Colliers International

Mindste

RETAIL

Højeste

Vacancy per region in Denmark (%)

A divided market In general, the market has been very active the past quarter. The market rent for high street areas is increasing in Copenhagen and Aarhus, and stable to increasing in other major cities. International investors are very active in the market for high street stores, especially in Copenhagen. This has helped to maintain the downward pressure on net initial yields for prime properties. The net initial yield has decreased from 4.00% to 3.75% and is even lower in some cases.

8.4

2.3

The consumer confidence indicator has been positive since June 2013 and the most recent development shows a slight decrease from 5.5 in April 2016 to 3.2 in May 2016. The average for the past six months is 4.5, and the current level can be considered on par with the average. According to Statistic Denmark’s survey, the Danish population assesses both the family's and Denmark's economic situation as better now than it was a year ago. In addition, there is confidence that the economic situation in one year will be better than it is today.

5.5

5.9

5.3

For secondary locations, the picture is somewhat less clear. On the one hand high market rents for prime locations are pressuring some shops to seek slightly cheaper leases. On the other hand, the increased e-commerce as well as the urbanization of the population is increasing vacancy rates for secondary leases. Nationwide, the vacancy rate for retail space is unchanged at 6.0%. There have been changes regionally however, vacancy rates fell by 0.4 percentage points and 0.2 percentage points in the Central Denmark Region and the Capital Region, respectively. Conversely, the vacancy rate rose by 0.2 percentage points in the Region of Southern Denmark as well as the North Denmark Region.

Retail vacancy rate, April 2016

6.9

9.1

7.0

2.8 2.6

5.1

Total retail vacancy rate (%) 7 6 5 4 3 2 1 ‘06

‘07

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DKK per sqm a year – operations not included

Nordic Real Estate Partners (NREP) has sold the 45’705 m² large shopping center “BIG” built in 2015 to CBRE Global Investment Partners and Portus Retail in a joint venture. BIG Shopping contains 28 stores and restaurants as well as a movie theater. The shopping center cost DKK 1.1bn to build.

Consumer confidence

22,000

Copenhagen Aarhus Odense Aalborg

7,500 5,500 4,500

Vejle

3,300

Esbjerg

3,300

Retail yield, April 2016

20 15

Copenhagen

10

Aarhus

5

3.75% 4.00%

Odense

5.25%

Aalborg

5.25%

-10

Vejle

5.25%

-15

Esbjerg

5.25%

0 -5

‘06

‘07

‘08

‘09

Source: Statistics Denmark

5

‘10

‘11

0

Market rent for retail space, April 2016

DEAL OF THE QUARTER

-20

‘16

Source: Oline-ED Statistikken

‘12

‘13

‘14

‘15

‘16

Source: Colliers MarkedsPULS Note: Retail properties, for example, in pedestrian zones with premises suitable for durable consumer goods in prime locations

Denmark Market Report | Q2 2016 | RETAIL | Colliers International

Mindste

INDUSTRIAL

Højeste

Vacancy per region in Denmark (%)

Supply and demand imbalance Modern industrial and logistics properties are in high demand in investment as well as rental markets. International investors are keen on larger properties and portfolios, however, supply is very limited. Sale & leaseback transactions are becoming more popular, especially for larger customers with financial solidity.

1.7

–

In general, the industrial and logistics segment has seen growth this past quarter. Industrial production experienced a slight decrease of 1.9% in the past quarter, but there is a strong expectation of increasing production the next three months, according to industry sentiment.

4.0

3.0

4.5

1.9

2.5

5.1 0.3 3.1

3.1

Total industrial turnover has been increasing since 2009 and has risen to 184.6 billion kr. in the first quarter of 2016. Thus, revenue increased by 1.8% Q/Q and 5.9% Y/Y. Vacancy rates in industrial and logistics properties have been steadily declining since April 2012. The vacancy rate nationwide is now at 2.9%, equivalent to just under 3 million m² vacant industrial and logistics facilities. The vacancy rate is expected to continue the slight downward trend in the coming year.

Industrial and logistics vacancy rate, April 2016

Total industrial and logistics vacancy rate (%) 5 4

In recent months, Denmark's Purchasing Managers' Index (PMI, a sentiment indicator for the industry) has been above 60, which is well above the long term average of 55 and can thus be regarded as extremely positive. Eurozone PMI has been slightly positive the past 4 months.

3 2 1 ‘06

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0

Source: Oline-ED Statistikken

DEAL OF THE QUARTER VKR Holding, the owner of Velux, has sold one of Koldings largest and most distinctive logistics properties. The 24’622 m² large property is used by Velux as their central warehouse. The buyer is Logicenters, a leading developer and owner of modern logistics properties in prime locations in the Nordics with over one million m² of space.

Manufacturers' sales

Market rent for industrial and logistics space, April 2016 DKK per sqm a year – operations not included 450

Copenhagen Aarhus Odense

375 300

Aalborg

325

Vejle

350

Esbjerg

300

DKK bn 200

Industrial and logistics yield, April 2016

190 180

Copenhagen

7.00%

170

Aarhus

7.00%

160 150 140

‘06

‘07

‘08

‘09

Source: Statistics Denmark

6

7.50%

Aalborg

7.25%

Vejle

130 120

Odense

‘10

‘11

‘12

‘13

‘14

‘15

‘16

Esbjerg Source: Colliers MarkedsPULS Note: Modern properties in prime locations

Denmark Market Report | Q2 2016 | INDUSTRIAL | Colliers International

7.00% 7.25%