Ørestad – a partial success

Helped along by a red hot housing market and almost insatiable investor interest, Copenhagen’s new city area Ørestad has been the main driver of the latter day building boom in the Danish capital. In this sense, Ørestad has been a success – although only a partial one. The Copenhagen market for owner-occupied flats has now been hit by a sharp downturn in prices and falling turnover. This has left many investors and developers with a large number of new flats on their hands – and with the challenge of phasing in the new flats in a slowing market, while securing an acceptable profit. This could prove difficult.

BIG PRICE INCREASES BOOSTED BUILDING ACTIVITY – ESPECIALLY IN ØRESTAD
Construction starts of owner-occupied flats normally increase when the price of existing flats increases relative to the cost of building new homes. Therefore, the sharp rise in prices in recent years has helped boost construction starts in the market for owner-occupied flats. For instance, in 2007 alone, the construction of 4,000-5,000 new flats began in Copenhagen City, of which an estimated 60% is in the new city area Ørestad. This is one of the reasons why newbuilt flats account for an increasing share of flats for sale. Hence, one flat in four for sale at the moment was built in 2004 or later, although flats built in 2004 or later account for only 3-4% of the total stock of owner-occupied flats in Copenhagen City. So, roughly 1,000 relatively new flats are for sale now, most of which are in Ørestad.

THE MARKET HAS BEEN HIT BY FALLING PRICES AND SALES…
The Copenhagen market for owner-occupied flats has had a rollercoaster ride, with initial price increases of 20-30% a year being followed by an average drop in prices of 21% since prices peaked in Q3 06. Not surprisingly, the fall in prices has hit Ørestad, where a large number of flats are for sale already and many flats are still under construction. This has left many investors and developers with the huge challenge of having to mark down their expected sales prices, while, at the same time, trying to secure the profitability of their building projects. This could prove difficult. After all, a drop in expected sales prices of 20-30% is quite significant.

…AND RENTING IS COMING INTO FASHION
This situation calls for new thinking, and we are now seeing signs of sellers treading water and renting out their flats rather than having to cut the price to a level that would tempt buyers.

During the period from Q3 06 to Q1 08 alone, almost 9,000 sellers of flats in Copenhagen City chose to either leave the market or change to a new estate agent because they could not sell their home at the desired price. With more sellers now giving up selling or choosing another estate agent – while the influx of new flats for sale is slowing down in spite of a large number of new flats still being finished – many sellers of relatively new flats now seem to prefer letting to selling.

This might be an attractive solution in a market where renting seems to be coming into fashion. Many – not least firsttime buyers – have taken stock of the uncertain price outlook and have rented a flat instead of buying one while waiting for the market to stabilise.

However, we are confident about the housing outlook in the slightsly longer term. With the large expansion of Ørestad, Copenhagen can now put the significant shortage of homes seen earlier behind it. Short term, the market will have to absorb a large number of new homes, though, and this will take time – not least when the housing market is slowing.