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In an ever-changing investment landscape, international investors are looking for new opportunities when what was once a lucrative investment no longer appears profitable. As interest rates have risen, lenders have become more cautious, tightening lending requirements, and foreign investors are turning to sectors where favorable loan-to-value (LTV) ratios are still achievable.
Like the rest of the world, Denmark has felt the effects of high interest rates in recent years. As a result, the sale-to-investment ratio of international players in the Danish real estate market has increased significantly. Consequently, the allocation of foreign investors’ investments is shifting from residential to commercial real estate, especially in the industrial and logistics (I&L) sector, as LTV ratios become more favourable.
A recent research by Cushman & Wakefield | RED quantified the average investment volume by foreign investors in the residential, I&L, office, retail, and other sectors for the period spanning 2017 to 2024. The results show a clear trend: there has been a significant decline in the average investment volume in all sectors, with the exception of the I&L sector. Foreign investors have allocated a remarkable 48% of their total real estate investments in Denmark to the I&L sector in the past two years, a significant increase from the 14% recorded in the period from 2017 to 2022. In addition, investments in the retail sector have increased slightly, from 11% in the period from 2017 to 2022 to 13% in the period from 2023 to 2024.
Meanwhile, the share of investments in other sectors has decreased between 2017-2022 and 2023-2024 as follows: Residential from 53% to 32%, Offices from 13% to 5% and Other from 8% to 3%.
The different trends across property sectors are also evident in the divestment behaviour of foreign investors. Offices and retail properties have seen the highest levels of divestment, with foreign investors selling 71% and 65%, respectively, of their total investment in these sectors. On the other hand, residential and I&L properties were largely retained, with sales accounting for only 26% and 36%, respectively, of the total investment volume in these segments.
The shift in investment focus can largely be attributed to changes in interest rates. Between 2017 and 2022, interest rates were low and lenders were more willing to provide favourable LTV terms for residential real estate investment. However, over the past two years, as interest rates have risen, investors have faced greater challenges in achieving satisfactory returns in the residential sector.
This shift in interest rates has led investors to the I&L sector, where demand for logistics real estate has increased in recent years. This demand has been driven by, among other things, an increasing shift by consumers towards e-commerce, which in turn has led to a demand for warehouse space to support this trend. As a result, investors have been able to leverage their investments in the sector more effectively.
The increase in foreign investment in the I&L sector is accompanied by a slight increase in vacancy rates, according to an analysis by CBRE Denmark for Q3 2024. The analysis cites high construction activity and a slowdown in take-up as the reasons for the increase in vacancy rates.
Despite the slight increase in vacancy rates, the I&L sector continues to offer favourable LTVs and margins for senior lending and remains a preferred sector for investors in new fundraising strategies.
Gorrissen Federspiel recognises the current trends shaping the investment landscape, including high interest rates. However, we are optimistic that with the current low levels of inflation and growth in the Eurozone, interest rates will fall, which will in turn change the investment landscape.