July 2020
The Danish Property Federation’s Market Statistics – Consensus Forecast • Historically low expectations to properties. • The business expects decreasing capital value, occupied space and market rent. • In 2021, the growth in market rent is expected to be positive again. • Industrial properties are expected to survive the crisis.
Corona crisis The expectations to the total yield has never been lower in this survey, which started in 2011. A total yield of 3.5 percent shall be part of covering the risk, interest expenses and inflation and as the 3.5 percent is only an average, it can be expected that about a third of the investment properties may have negative total yields in 2020. The many negative total yields are especially expected to affect retail properties. Fortunately, property companies are generally well prepared for the Corona crisis. In 2019, Denmark’s Central Bank concluded that the granting of credit is tighter than it was right before the financial crisis. Therefore, property companies can survive some time, although the total yield minus risk, interest expenses and inflation are negative. The uncertainty of the total yield in 2020 is also historically large and has not been bigger since 2011. Therefore, there is a considerable uncertainty in the business about how 2020 is going to develop. 50 percent of the participants expect that the total yield will be between three and five percent, but there are also some whose expectations are both higher and lower. Read two of the participants’ considerations in connection with answering the survey: ”My expectation at the time was that there will be a small correction in property values together with a reasonable operation profit in 2020. Thereby 0% in total yield. Regarding 2021 and 2022, I have a general expectation that we shall see a standard total yield of 7%, of which the majority is operational profit and a smaller part is inflation-driven value increment. Therefore, I do not expect a significant value increment in the form of yield compression or large decrease as a consequence of yield expansion.” Anonymous participant
The total yield in 2020 cannot cover risk, interest expenses and inflation. A total yield of 3.5 percent means negative total yields for around a third of the properties.
Expectations of a deficit After risk, interest expenses and inflation, there is a deficit of 3-4 percent with a total yield of 3.5 percent. Currently, there is an efficient interest rate of 1.6 percent, and with an average mortgaging percentage of 55-60 percent, there will be interest expenses of 1.0 percent on average per property. The last couple of years, the inflation has been 0.5 and a normal average risk premium on investment properties is 5-6 percentage points
Expectations to both 2020 and 2021 have never been lower Table 1
2020
2021
2022
2020-2024
3,5
4,7
5,1
4,9
Quarterly change
-1.9
-0.5
0.1
-0.3
Annual change
-1.7
-0.4
New
New
Total yield
Historic 2019 7,8
Source: The Danish Property Federation’s market statistics. See remarks on page 5.
1