Article
The rise of flexible office space makes multi-let offices in greater Copenhagen an attractive investment product
Strong occupier fundamentals are adding on the attractiveness of the office properties in the Greater Copenhagen area as an investment product.
March 2, 2020
Denmark is among the countries in Europe experiencing the highest rates of urbanisation. A development which is evident in the national accounts and makes Greater Copenhagen great for business. Over the last decade, GDP in the Greater Copenhagen area has increased more than in the rest of the country. In 2017 Greater Copenhagen accounted for approximately 34% of the country’s GDP, although only 31% of the population lives in Copenhagen. In 2007, this figure was 29%.
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The market opportunity on multi-let office
The risk-profile of multi-let office properties is characterised by more frequent exposure to the letting market than a single-let office property. However, less income is at stake when a lease terminates or expires where the vacancy rate immediately jumps to 100%. This also allows for an ongoing renovation of the property.
Despite being more asset management intensive, multi-let office properties offer great opportunities for flexible office space, as it more often makes it possible for lessees to downsize or expand their office space according to future expectations regarding their business.
Evidence from CBRE’s Occupier Survey 2018 shows that companies increasingly see flexible office space as a key element of their corporate portfolios and expect to make far greater use of this type of space over the next years than they do currently. Indeed, it is the most popular type for future expansion. Occupiers are also distinguishing between the various types of flexible space available, recognizing the respective advantages that diverse types of space can offer to companies of different types and at varying stages of maturity. Innovation and talent are increasingly mentioned as reasons for taking flexible space, again reflecting the predominant focus on user experience.
The office segment remains a popular asset class
The increased interest in office properties as an investment product is evident in the historical development in the investment yield levels. In line with the trend observed in EMEA, the Nordic Region has experienced a downward movement of investment yields.
The Danish prime office yield for Copenhagen has contracted by 100-130 over the last five years and is currently standing at 3.50%. The good secondary office yield is, on the other hand, currently standing at 4.40%. With Danish 10-year government bond yields below zero in Q2 2019, the yield spread is currently higher than the good secondary office yields.
Provided the market fundamentals remain unchanged, the office yields are expected to remain stable in the short term. The long-term interest rates continue to be low as global saving exceeds global investment. However, even when they start increasing, a direct effect on real estate is not expected, as there is still a very substantial yield gap between commercial property and the 10-year government bonds.
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