The first few months of the year were bright, but as the year progressed, concerns about war, climate and crisis grew. With the New Year often comes reflections on the past year and expectations of the year to come. In this column, Jacob Lund, Partner and CEO, provides an update on the Copenhagen market development in 2022 and the mechanisms expected to affect the property industry in 2023.

Last year at this time, most of us expected another strong year in the property market, but that is not how it turned out. 2022 was the year of extremes – the early months were promising, but the year ended on a much bleaker note. Financial markets were, and continue to be, hit hard by the negative spill-over effects of war, inflation, and a significant shift in the monetary policy climate. Combined, all the above have caused investment activity to drop significantly in 2022.

In the first half of the year, we registered property transactions of around DKK 54 billion, which is a reasonable level considering the market at the time, which had already started to show signs of uncertainty. However, in 2022 Q3, transaction activity decreased notably to DKK 14.8 billion, equalling about half the transaction volume in 2021 Q3, which reached DKK 29.1 billion.

New economic agenda
The Danish market for real estate investments has been a safe haven for domestic and foreign investors over the past several years. Low interest rates, good financing terms and competitive yield levels compared to our neighbouring countries have contributed to pushing up the prices of Danish properties. Although the Danish investment landscape remains favourable, Denmark is unlikely to escape the price correction that is emerging. Pricing has been under pressure and the new economic agenda has created a wider gap between buyer and seller. The price decreases have started to materialise in Copenhagen, and right now the market is working to find the new equilibrium.

While we, for now, expect to have seen the most significant price drops, it's still possible that a potential recession could push down prices even lower.

Overall, the Danish market for real estate investments has proven to be both agile and resilient in upturns as well as downturns. The professional investors that currently represent a significant share of the Danish market for real estate investments plan their investment strategy and financial governance to ensure that their property portfolios are proportionally geared to withstand different risk scenarios – even as now, in the occasional economic storm.

For the same reason, we do not expect that a possible recession will result in a crisis scenario like the one brought about by the financial crisis, where the bottom was knocked out of the property market and trophy properties could be bought at greatly reduced prices. The pace has slowed down in the market and we see a tendency towards more caution in terms of risk appetite, but at the same time, investors show resourcefulness and well-considered efforts to invest the large amounts of capital allocated to real estate investments.

More transactions at lower prices
We are looking towards a more stable period, but expectations for transaction activity is a big punch in the gut early in 2023, which will then slowly subside as inflation and interest rates are brought in check and the market regains momentum towards the summer of 2023.

We expect the 2023 transaction volume to reach a significantly higher level than it did in 2022. With our pipeline and what we know in general about the market, we expect to see a market with significantly more transactions at comparatively lower prices than in 2021, which overall will push up the transaction volume in 2023. 

More capital for the property sector 
Government bonds and real estate investments are historically known as financially strong asset classes with low risk and good return potential. However, 2022 has been a difficult year for government bonds, with return on bonds lagging significantly behind. This may raise hopes that even more capital will be allocated to the property sector in the future, which, despite market volatility, maintains relatively stable return levels.

It is also a possibility that some investors, due to equity losses after several months of turmoil in the stock and bond markets, may be compelled to reduce their portfolio exposure to real estate to maintain a sound balance in their total investment portfolio. Moreover, investors who prepare to refinance their loans may find it necessary to sell off some of their properties. These factors may potentially generate a larger supply of investment opportunities for financially strong investors who are willing to move further out the risk curve in the hope of obtaining discounts.

Beds and sheds in a strong position
Especially, the housing and logistics segments will continue to prove remarkably resilient. E-commerce continues to drive the logistics sector, despite the risk that a potential recession might lead to lower demand. Customer demand for more frequent and faster deliveries requires city-near last mile facilities and this has created a whole new market for logistics facilities.

Residential properties are once again the preferred property segment for investors. Crisis or not, people need a place to live. This is combined with a continuously increasing population and a considerable shortage of housing in the country's largest cities. 

Residential properties are typically characterised by offering good, stable terms and generating stable cash flows. Overall, residential assets are the least risky, partly because they are inflation-proof. The option to periodically adjust rent levels means that, compared to other property types, residential properties are relatively well-equipped to withstand the current high inflation. This is despite the adoption of the temporary Act that for a period of two years caps annual rent increases at 4 %.

The interest rate hikes we have seen in recent months have made it difficult to borrow money for purchasing private homes. Consequently, rented housing continues to appear comparatively more attractive than the overall costs of owning a home. This dynamic is likely to help sustain demand for rented housing, and accordingly multifamily properties, despite the inflationary pressure on rents.

Slowdown in construction
Although prices on materials have begun to stabilise and construction activity is slowly resuming after a year where several planned and ongoing projects were put on hold, we will most likely see the existing supply chain issues drag on into 2023. Combined with a continued highly unpredictable interest rate development, we expect developers to be cautious about launching new projects. This will naturally lead to a reduction in the supply of new properties of all types, which will expectedly strengthen the robustness of residential as well as warehouse and logistics properties because the underlying letting demand is anticipated to remain high.

Steadily increasing activity
The current market turmoil is not expected to further impact investor appetite for property investments over time. Losses in the property market have not yet been felt to the same extent as losses incurred in other asset classes, and at the same time, there are significant amounts of capital allocated to the property sector. The modest start of 2023 will reflect that few investors are in a hurry to buy properties in the midst of an obviously nervous market, even if they have the capacity to do so.

We expect to see a more positive atmosphere in 2023, with transaction activity steadily increasing over the course of the year. We will likely see a few minor dips along the way, but we do not expect a plunge. And finally, we can welcome the new government's repeal of the mark-to-market taxation on properties – an excellent first step in the right direction for a long time.