NEWS LETTER Q Commercial property market commentary

Transcription

1 NEWS LETTER Q2 Commercial property market commentary Market update by Sadolin & Albæk 2 Residential property tax reform hits major cities 5 Risk of overcapacity in the Danish grocery market? 8 Property market indicators 11

2 Market update Q2 MARKET UPDATE Q2 In the Copenhagen CBD, where registered vacancy has dropped below the 7% mark, it is today quite difficult to find large-scale, up-to-date and adjoining office premises to let. Downtrending retail and office vacancy rates serve as good indicators of Danish economy being back on track. Favourable trends help to fuel investor demand, in particular for more opportunistic newbuilding, and many investors have very ambitious expectations of substantial profit-taking. Downtrend in commercial vacancy rates Danish economy is gaining good momentum. Growth and employment rates are uptrending, the same applies to consumer spending, and the registered unemployment rate is now as low as 4.3%. This has manifested itself in fairly favourable developments in the letting market for commercial premises. The Greater Copenhagen office vacancy rate has declined from 10.3% to 8.2% over the last 12 months. In the Copenhagen CBD, where registered vacancy has dropped below the 7% mark, it is today quite difficult to find large-scale, up-to-date and adjoining office premises to let. In the market for storage and industrial facilities, the vacancy rate has seen an even sharper decline, from 3.9% to only 2.3% today. This development has helped to stabilise rental prices. In some market segments, prices are even uptrending. Due to the competition from newbuilds, the top rent remains relatively flat, but office rental prices today are seen to climb for up-to-date office lease premises in attractive locations in the midprice segment. Office, retail and industrial vacancy rates in Greater Copenhagen are downtrending 12% 10% 8% 6% 4% 2% 0% Office Retail Industry Source: Ejendomstorvet.dk 2 Published by Sadolin & Albæk. Reproduction or citation only with acknowledgement of source. Contact: Mette Lundorf, Head of Communication & HR mlu@sadolin-albaek.dk

3 Market update Q2 Secondary office rent levels climbing in Greater Copenhagen (DKK per sqm p.a., excl. taxes and operating costs) Continued downtrend in office net initial yields in Greater Copenhagen 2,000 1,800 1,600 1,400 1,200 1, % 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% % Prime Source: Sadolin & Albæk Secondary Prime Source: Sadolin & Albæk Secondary Expectations of substantial profit-taking The market for investment property constinues to attract exceptionally strong demand. The last couple of years have on all counts been plain sailing for investors in the property market: Rental prices have been constant or climbing, while vacancy rates have been downtrending as have net initial yield requirements. Increasing prices have induced numerous investors to opt for profit-taking by divesting single properties or portfolios, and the supply of investment property is fairly high. However, it is worth noting that many prospective sell-side investors today have ambitious expectations of market pricing mechanisms. Once it is a well-known fact that many investors are keen to gain exposure in a market, sellers often became very hopeful, and the combination of property agents competing for sales assignments and hearsay evidence of a few transactions sometimes gives rise to somewhat unrealistic price expectations. Nevertheless, we expect to be another year of high transaction volumes. On one hand, many owners of investment property are today tempted into profit-taking and, on the other hand, investor demand remains exceptionally strong. When pension funds in Denmark and globally are forced by very low interest rate levels to pursue other placement opportunities than the securities market, real property presents an obvious segment of choice. Property assets generate fairly high income returns relative to the bond market, and when the letting market is picking up and inflation is edging up, market fundamentals also point in a favourable direction. 3

4 Market update Q2 Growing risk-tolerance However, it is worth noting that as the prices of investment property are increasing, a number of investors are induced to pursue more opportunistic investments in new construction. In one respect, it may be argued to be a logical consequence of market movements and in reality also the intended effect of a more lenient monetary policy. Longer term, however, it will of course increase supply in the residential and commercial letting markets alike, which will curb rent increases, all other things being equal. It is especially worth noting that investors in the institutional sector, traditionally highly focused on secure investments offering stable returns, are growing increasingly more risk-tolerant. strategy comes a stronger need for specialist skills that enable you to fully assess and monitor the risks. Some investors create in-house competence centres for this purpose, others outsource the management of such high-risk investments to asset managers and other business associates. The selection of the right asset manager and business associate is therefore in many instances (almost) as important as the selection of the investment object itself. This also because the incentive structure for someone managing a property investment does not always forge a perfect scenario of shared interest with the investor that carries the risk associated with the investment. This does not imply that we are heading in an unsustainable direction. Needless to say, however, with a higher risk profile as part of your investment The market for investment property continues to attract exceptionally strong demand. 4

5 Residential property tax reform RESIDENTIAL PROPERTY TAX REFORM HITS MAJOR CITIES When the Danish Government s recently adopted residential property tax reform becomes effective in 2021, real property in the largest cities will be subject to substantial hikes in overall residential property taxes. Land taxes will soar when the future taxation basis is to increase in step with the actual market price of land unless the municipalities decide to cut the land tax rate. On 2 May, the Danish Government succeeded in negotiating a new taxation regime for Danish ownership housing. The new regime proposes to make the taxation of ownership housing subject to progression like the taxation of labour. Both property value tax and land tax (grundskyld) will be affected by the residential property tax reform. The general idea of the reform is to better align overall residential property taxes and the actual market value of a given property. Consequently, the reform is to be viewed in the context of the introduction of a new public property valuation system. Because of the new valuation system, Danish homeowners will receive new public property valuation notices as from The new residential property tax reform reduces the basic property value tax rate from 1% to 0.55%. In addition, the progression limit is changed to the effect that ownership housing valued in excess of DKK 7.5m is subject to 1.4% marginal tax. As an admission that public property valuations may in some instances be flawed, a principle of caution is introduced. The taxable value of a property is therefore calculated at 80% of the public property valuation. Accordingly, the taxation basis of a property with a public property valuation of, say, DKK 7.5m, is DKK 6m. The property value tax reform becomes effective end-2020/start-2021, when the present freeze on residential property taxes lapses. To shield existing homeowners from a sudden tax shock, it was decided to grant them a tax discount to the effect that they will not be required to pay higher property value taxes than they do today. However, the tax discount expires when a homeowner vacates the dwelling in question. Similarly, an automatic freeze is introduced on tax increases driven by higher land taxes, with these increases not being triggered until the dwelling is sold. Land tax is not comprised by the existing residential property tax freeze effective in 2018, 2019 and As from 2019, when the new public property valuation system is introduced, land tax will effectively increase in step with the current market value of the land. Dwellings acquired in or after 2021 are automatically covered by a tax freeze on all increases in both land tax and property value tax. Thus, the actual tax burden will not increase for as long as you own the dwelling in question. In short, the higher taxes are imposed only in connection with a sale. 5

6 Residential property tax reform Sharp increase in land tax for apartments looming ahead Irrespective of the change in tax rates and the progression limit, the crux of the matter is that future taxation will be based on a public property valuation rate intended to reflect actual market value. Today, property value tax is determined on the basis of the lowest of the following three values, (A), (B) or (C): A. Public property valuation from 2001 plus 5% B. Public property valuation from 2002 C. Effective public property valuation According to the Danish Customs and Tax Administration (SKAT), some 95% of all homeowners today pay property value tax based on (A) or (B), with the residual 5% mainly constituted by owners of properties constructed after the introduction of the freeze on residential property taxes. Today, the land tax is also determined based on the lower of the following two values, (1) or (2): Effective land value 2. Previous year s land value regulated by a specific percentage (land tax ceiling) SKAT data show that some 90% of homeowners nationwide pay land tax according to (2). Based on SKAT s data on public property valuations of owner-occupied flats in Copenhagen and Frederiksberg, we have calculated the actual average tax burden, distinguishing between land tax and property value tax. Our calculations included owner-occupied flats subject to property value tax (A) and land tax (2), as these apply to most owneroccupied flats. FREDERIKSBERG, AS IS COPENHAGEN, AS IS Public property value 2001 plus 5%, DKK per sqm* 15,683 14,435 Share of value in excess of progression limit, estimate** 3.6% 4.2% Property value tax, low 1.0% 1.0% Property value tax, high (>DKK 3,040,000) 3.0% 3.0% Public land value, DKK per sqm (2001)* 1,154 1,051 Public land value, DKK per sqm (adjusted)*** 2,422 2,206 Land tax rate 2.475% 3.40% Land tax, DKK per sqm p.a Property value tax, DKK per sqm p.a * Based on SKAT s property valuation statistics plus 5% ** Estimate by Sadolin & Albæk *** Subject to adjustment at the adjustment rate applicable in For instance, the calculations above show that the owner of an average 100 sqm owner-occupied Copenhagen flat today pays some DKK 7,500 p.a. in land tax and some DKK 15,600 p.a. in property value tax, or a total of some DKK 23,100 in annual property taxes. Pursuant to the new residential property tax reform, a buyer of an owner-occupied flat in Copenhagen or Frederiksberg will be required to pay dramatically higher overall residential property taxes. 6

7 Residential property tax reform FREDERIKSBERG, 2021 COPENHAGEN, 2021 Actual market value, DKK per sqm* Share of value in excess of progression limit, estimate** 0,3% 0,8% Property value tax, low 0,55% 0,55% Property value tax, high (>DKK 7,500,000) 1,40% 1,40% Public land value, DKK per sqm** Land tax rate 2,475% 3,40% Land tax, DKK per sqm p.a Property value tax, DKK per sqm p.a.*** Property value tax, DKK per sqm p.a * Based on the statistics of the Danish Association of Mortgage Banks, average market prices in the municipality in Q ** Estimate by Sadolin & Albæk *** Allowing for the principle of caution In the same scenario, the residential property tax reform will have the effect that a new homeowner will be required to pay some DKK 20,400 p.a. in land tax and some DKK 15,700 p.a. in property value tax, or a total of some DKK 36,100 p.a. in overall residential property taxes. The calculations show that the property value tax, from an aggregate average perspective, remains largely unchanged for owner-occupied flats in Copenhagen and Frederiksberg. However, the new residential property tax reform will drive up land taxes quite considerably because taxation will be based on the current market value of the land unlike today when 90% of land tax calculations are determined by the land tax ceiling. Unless the City of Copenhagen and the City of Frederiksberg decide to lower the land tax rate, homeowners here are facing strong hikes in land taxes. 7

8 Market for grocery shop properties Styrket kontorudlejningsmarked RISK OF OVERCAPACITY IN THE DANISH GROCERY MARKET? The Danish grocery shop market has undergone dramatic changes over the last ten years. This has great bearing on the market for properties used for grocery retailing. The last ten years have seen a boom in the Danish low-budget market for groceries. A change in consumer behaviour has caused a preference shift in favour of the low-budget market, resulting in fiercer competition in this segment. The low-budget market share of aggregate grocery sales has therefore increased from 29% in 2008 to 42% in Until the exit of the Kiwi discount chain, there were six major players in the Danish low-budget market, namely Netto, Fakta, Rema 1000, Lidl, Aldi and Kiwi. Danish low-budget shops have gained market share of aggregate grocery sales 43% 41% 39% 37% 35% 33% 31% 29% 27% 25% Source: Retail Institute Scandinavia A/S Denmark has more than 1,500 low-budget supermarkets NO. SHOPS Netto Fakta Rema Aldi Lidl Kiwi IN TOTAL 1,264 1,297 1,365 1,423 1,491 1,558 1,593 1,588 1,578 Source: Retail Institute Scandinavia A/S In , the number of low-budget shops increased by approximately 25%. The steepest relative increases were seen in the ranks of the two latest newcomers to the Danish low-budget market, Lidl and Kiwi. 8

9 Market for grocery shop properties Total sales area has doubled In the same period, the total sales area of lowbudget shops increased by 53%, which underpins the trend towards increasingly bigger shop sizes in the low-budget sector. Despite a reduction in the sales area of the remaining part of the grocery sector, the total sales area of the Danish grocery sector has seen an increase by almost 9% nonetheless. Evident increase in the sales area of Danish grocery shops (quoted in 1,000 sqm) 3,000 2,500 2,000 1,500 1, Low-budget Other In total Source: Retail Institute Scandinavia A/S Turbulent with red bottom lines Fierce competition and massive investments to gain market share have had strategic consequences for several of the low-budget chains that have all struggled with red bottom lines in recent years. In April, Kiwi announced plans to close all its shops in Denmark, having concluded that it is unable to run the chain at a profit. Aldi is closing 32 shops, following another year of substantial deficit. The 32 shops include mainly small-size shops at secondary locations. In, Coop, which owns e.g. the Fakta chain, was forced to close 27 shops because they were unprofitable. In addition, Coop invested in the upgrade of some 100 other shops. However, any market players with hopes that Kiwi s closure would ease competition, making it possible to achieve higher revenue per sqm and better profitability, are in for a disappointment. The largest and best-performing Kiwi shops are taken over by competing chains to further expand their shop network. In, Coop, which owns e.g. the Fakta chain, was forced to close 27 shops because they were unprofitable. 9

10 Market for grocery shop properties Overcapacity in the Danish grocery sector? The last ten years have seen a relatively stable, slightly upward trend in the retail revenue per sqm of Danish grocery shops. Nevertheless, property investors in this market should be aware of the very substantial structural changes in the Danish grocery sector, which have affected and will continue to affect both vacancy rates and rental prices in the years ahead: Although the grocery sales area per capita is relatively large in Denmark by western European standards, there are no signs to suggest that overcapacity has increased in the span of the last ten years. Sustained keen competition for market share in combination with accelerating online sales are, however, exacerbating the risk of an increase in overcapacity. Retail revenue, Danish grocery shops (DKK per sqm p.a.) 47,000 46,500 46,000 45,500 45,000 44,500 44,000 43,500 43, Source: Retail Institute Scandinavia A/S In the last ten years or so, the total retail area in the low-budget sector has increased by some 350,000 sqm, while the total sales area of other grocery shops has shrunk by almost 150,000 sqm. The sales area of a standard-size low-budget shop increased by more than 20% in the same period. In structural terms, this translates into higher vacancy rates and lower rent levels in small-size shops. Urbanisation poses a considerable risk of structural vacancy in the retail market in some parts of Denmark. Finally, the market is affected also by political initiatives, most recently the amendment of the Danish Planning Act, which limits the future sales area of grocery shops to a maximum of 5,000 sqm in town or city centre locations and in the centre of city districts (compared with 3,500 sqm today). 10

11 Newsletter Q2 PROPERTY MARKET INDICATORS Office Change Q1-Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Rent levels - DKK/sqm/year excluding operating costs and taxes - - % - Copenhagen Prime 1,800 1,800 1,800 1,775 1,750 1,750 1,750 1,750 1,750 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1, % Secondary 1,100 1,100 1,100 1,100 1,100 1,075 1,075 1,075 1,075 1,100 1,100 1,100 1,100 1,150 1,150 1,150 1,175 1, % Aarhus Prime 1,350 1,350 1,350 1,350 1,350 1,350 1,350 1,350 1,350 1,350 1,350 1,350 1,350 1,350 1,400 1,400 1,400 1, % Secondary % Triangle Region Prime 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,050 1,050 1,050 1, % Secondary % Net initial yields Copenhagen Prime Secondary Aarhus Prime Secondary Triangle Region Prime Secondary Vacancy rates Greater Copenhagen Greater Aarhus * Triangle Region Retail Change Q1-Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Rent levels - DKK/sqm/year excluding operating costs and taxes - - % - Copenhagen Top 20,500 20,500 20,500 21,000 21,500 21,500 22,000 22,500 22,500 22,500 23,000 23,000 23,000 23,500 24,000 24,000 24,000 24, % High 15,500 16,000 16,000 16,500 17,000 17,000 17,000 17,000 17,000 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17, % Average 7,500 8,000 8,000 8,500 8,500 8,500 8,500 8,500 8,500 8,500 8,500 8,500 8,500 8,500 9,000 9,000 9,000 9, % Aarhus Top 5,300 5,300 5,400 5,400 5,400 5,500 5,500 5,500 5,500 5,600 5,600 5,800 5,800 6,000 6,300 6,300 6,300 6, % Average 2,900 2,900 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3, % Triangle Region Top 2,900 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3, % Average 1,200 1,200 1,200 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1, % Net initial yields Copenhagen Prime Secondary Aarhus Prime Secondary Triangle Region Prime Secondary Vacancy rates Greater Copenhagen Greater Aarhus * Triangle Region Industrial Change Q4-Q1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Rent levels - DKK/sqm/year excluding operating costs and taxes - - % - Copenhagen Prime % Secondary % Aarhus Prime % Secondary % Triangle Region Prime % Secondary % Net initial yields** Copenhagen Long Short Aarhus Long Short Triangle Region Long Short Vacancy rates Greater Copenhagen Greater Aarhus * Triangle Region * Today in terms of administration part of Region Midtjylland (Central Denmark Region) ** Long and Short denotes the lease term SADOLIN & ALBÆK A/S COPENHAGEN: Palægade 2-4, DK-1261 Copenhagen K AARHUS: Skovvejen 11, DK-8000 Aarhus C sa@sadolin-albaek.dk sadolin-albaek.dk CVR ISSN