A gold-plated investment

There is a rift about Danish housing rental properties at the moment. If you can handle them, it's also a very attractive investment. But it's a window of opportunity that can soon slam again.

Sten Thorup Kristensen // bbm@berlingske.dk

It sounds like an adventure, but it is not. There is an investment object where you can get a return of 10-15 percent per year, although the risk is significantly less than if you buy for example shares. This investment object is housing rental properties centrally located in Copenhagen and Aarhus, and the explanation for the phenomenon is quite simple.

It's about gearing. Investors who buy housing rental properties benefit from the yet very low mortgage rate.

Centrally located in the metropolitan areas, mortgage banks generally want to give loans up to 80 percent of the real estate value. And there will still be a profit from operations even when the interest is paid. This means that the real return on the 20 percent of the investment, which the investor himself has to offer, may come well over ten percent. It is an option that is open as long as the interest rate is ultra low. It will hardly ever be.

But conversely, if you buy now and show only margin of caution with the loan, you will not be bitten in the halls by an increasing interest rate. The only word "gearing" may cause it to run cold down the back. But in this case it is possible to lock the interest rate for a long time. At the same time, there is little risk that the property suddenly lacks operating income.

Because so many Danes move into the big cities, homes in these areas are not allowed to be left empty for a long time. For investors there are several variants of the same. One can finance the even lower interest rate adjustment loan and get a higher immediate return, but at the same time a greater risk, as it is no longer guaranteed against interest rate hikes. The same is the effect if you buy residential rental properties outside the metropolitan areas: Higher immediate return, but also higher risk. In addition, mortgage banks are less likely to provide funding at the full retail price outside the metropolitan areas.

But here too, there is demand from investors, says Hans Vestergaard, owner of business broker Colliers with five offices around the country.

Urbanization But the major cities attract most interest. In addition to the low interest rate, urbanization is the factor that has opened the window for this investment opportunity that has attracted buyers from home and abroad. For example, the forecast states that in three decades there will be a quarter of a million more inhabitants in Copenhagen and Frederiksberg than today.

"The interest of the buyer is massive in the big and liquid cities, and there is also great interest in the smaller cities. Demography is an essential element when investing in real estate today. If you are a place where population growth is positive, it looks better than if it drives straight or down, "says Hans Vestergaard.

Residential rental properties are favored by the fact that they are not immediately traded in price, such as stocks do when there are many buyers on the market. After all, there is a risk and it is not an investment that you can easily escape if it should start to go bad. Everyone in the industry - including mortgage banks - has a fresh memory, how wrong it can be if you forget that wisdom.

Complicated operation In addition, there is a business page that can be quite complicated. "There is no doubt that you must be profoundly professional to buy a housing rental property when considering operations, including financing and the complicated rental law. If a man buys a smaller property, one can say that it is learning by doing and you can get help here and here. There are also many professional private investors who have complete control over care, administration, development and so on.

But on a larger scale, it is a passive payment, where a management agreement often accompanies, "says Hans Vestergaard. Even with all the knowledge, investment in a rental property is also not risk free. Most nearby, problems of physical nature may arise with the property itself or with the tenants.

The latter can go up to a hint if you get caught up in the comprehensive and restrictive Danish legislation that will protect tenants. "You must know what you buy, and if you do not have the professional insight, you should support someone who has this insight. A well-organized housing rental property that controls all details will typically be somewhat more expensive and have a lower starting return than a less well-organized property, "says Hans Vestergaard about the risks to be taken into account before buying. When does it turn?

One of the open questions is how long the migration to the big cities continues. Right now people are flowing to the cities, but for decades ago traffic went the opposite way. When investing in properties, one also has to think about ten-year horizons. Someday, the property must be sold again. Hans Thor Andersen, Research Director of the Danish Building Research Institute, has been involved in the connection between demography and urban development.

He points out that Copenhagen until about 1960 was home to more than half of Denmark's industry, after which a massive relocation began, which sent the capital on a proper horseracing trip. However, Hans Thor Andersen finds it difficult to see such a development repeat and his immediate bid is that you can safely buy real estate in Copenhagen.

"Looking back in the newer story, we can see that there has been some shift. In some periods there has been a concentration around the big cities, and there have also been periods of decentralization. The last was what happened in the 1970s after the municipal reform, which moved a lot of activities into the small municipalities. But at the moment we have got a new municipal reform, which collapses in some larger units, and it is not the public sector that draws the load.

It is private companies, especially service-based. They predominate in the big cities, "says Hans Thor Andersen.

"There is nothing that guarantees that it will not be different in 20 years if we want something else in terms of energy consumption or quality of life, for example. But as long as it is in the direction of more and more advanced service and a larger division of labor, opportunities are not particularly great in the small towns. Then it's the big city community that counts, "concludes Hans Thor Andersen