Strong basis for demand for Danish hotel apartments

Denmark has a shortage of hotel apartments, also known as serviced apartments. At a time when Danish businesses face a lack of qualified labour and therefore seek to attract manpower from abroad, this situation poses a challenge to the business community. Foreign specialists in need of housing are therefore the main target group of this type of apartment.

 

Relatively new concept gaining momemtum
Due to the limited supply of prime investment property, investors are increasingly zooming in on alternative property investments, including student, senior and other types of housing. A relatively new concept in a Danish context is hotel apartments or serviced apartments, which are typically furnished apartments that come with shared facilities and services.

Hotel apartments can be let for periods of a few days and up to 12 months. As a rule, these apartments are available with traditional residential leases, but with the option of hotel-like services and facilities such as a reception desk, room service, housekeeping and laundry services as well as shared facilities, including fitness facilities. Increased globalisation and growing workforce mobility require a more flexible housing market to accommodate the mounting demand of both domestic and foreign workers in need of housing for very short periods or for longer stays, typically in the largest Danish cities but primarily in Copenhagen. We therefore see budding signs of expansion in the Danish market for flexible housing. So far, this has not been a particularly widespread phenomenon in Denmark by European standards, especially compared to Germany and the UK.

 

Demand driven by foreign labour
Hotel apartments typically appeal to foreign specialists working in Denmark on secondment or working in Denmark for short periods. On the other hand, hotel apartments also appeal to tourists who prefer a more homely setting to a traditional hotel stay.

Foreign specialists often work on a project basis, assisting Danish businesses for relatively short periods of time, but many also work for Danish businesses on longer contracts.

In line with the free movement of labour within the EU, citizens of the EU and Switzerland who wish to stay in Denmark for work-related activities are free to sign up and apply for a residence permit.

In 2017, 19,283 applicants were granted a residence permit on the grounds of paid employment or secondment. In addition, there is a relatively large number of citizens from the other Nordic countries, and they are free to work and stay in Denmark with no special permission required.

For third-country nationals (i.e. non-EU citizens) several schemes have been devised to give businesses access to highly qualified labour. As far as Danish businesses are concerned, three arrangements are believed to impact on the demand for flexible housing options:

  • Pay limit scheme: Individuals who are offered a job with an annual salary of DKK 417,794 (2018) or higher. These individuals may be granted a residence permit for a four-year period with a possible option to extend their stay.
  • Fast-track scheme: Individuals who are offered employment with a certified company are eligible for a quick and flexible job start as well as the option of alternating postings in Denmark and abroad.
  • Researchers and lecturers: Individuals who are offered employment as a researcher or a lecturer with a university or company.

In 2017, 5,393 individuals were registered under one of these three schemes, slightly less than in 2016.

According to an estimation by the Confederation of Danish Industry, there are some 46,000 foreign nationals working full-time in Denmark at management or senior management level, corresponding to 23% of the total foreign workforce in Denmark.

Against the backdrop of Denmark’s currently low unemployment rate and sound economic fundamentals, the precursors of demand for flexible housing options such as hotel apartments are believed to be strong, both now and in future.

 

 

Few and dominant market players
In terms of hotel apartments run by professional operators, the Danish market remains limited.

Clearly the largest player in the market is Stay, with about 280 apartments distributed on four prime-quality properties in Copenhagen. Stay offers a full-service concept, mainly associated with luxury and high-end facilities.

Adina Apartment Hotels at Amerika Plads, on the Copenhagen waterfront, offers some 60-70 apartments in an 8-storey building built in 2005. Adina offers a full-service concept with 24-7 reception desk services.

Apart from ordinary rental housing, Charlottehaven at Strandboulevarden in the Copenhagen district of Østerbro houses 44 hotel apartments, offering e.g. workout facilities, function rooms and a café.

Today’s supply of fully serviced hotel apartments is concentrated mainly in the high-end segment, whereas the supply in the mid-market segment is somewhat more limited. Considering current demand, potential, supply and market maturity, we believe there is room for substantial market expansion and the entry of new players in the years ahead.

Additional market players not offering fully serviced but only furnished apartments include Q Living Copenhagen, which rents out about 2,000 private homes, and City Apartment, managing some 2,000 apartments mainly located in Copenhagen.

Similarly, Movinn has 150-160 apartments in Copenhagen, Aarhus and Odense, respectively. They offer furnished apartments and optional services such as cleaning, insurance, bike rentals, etc. at an additional charge.

 

Immature investment market with potential
The Danish investment market for hotel apartments and serviced apartments is still very small. In 2017, US insurance company AmTrust acquired the property known as “A-huset”, located on the Copenhagen waterfront, at Islands Brygge, with Stay as tenant. The property traded at a yield of about 3.25%, which in our opinion indicates a substantial rent potential.

However, we do not believe that the low transaction activity indicates a lack of investor demand, but rather highly limited availability of investment opportunities in this segment. A closer look at transaction data from Germany, like the UK one of the largest European markets for serviced apartments, reveals that this segment accounted for 2-5% of the total transaction volume for hotel properties in 2018.

At some point, when the Danish market for serviced apartments has matured, we believe that the yield requirements for serviced apartments operated by professional players will be somewhere between the yield requirements of residential and hotel properties, this being a hybrid product. However, we also believe investors may initially demand a risk premium when investing in this segment.

 

 

Legislation a barrier to development and continued market professionalisation
Danish legislation in this field is believed to be one of the greatest barriers to growth in the market for flexible housing, including hotel apartments, as it imposes restrictions both in the current market and for future market development.

A provider of serviced apartments needs to be able to offer both short and long-term leases as this is one of the very factors defining the concept. This conflicts with planning restrictions, which distinguish sharply between commercial use on the one hand, such as hotel use proper, and actual residential use on the other, the latter being subject to a requirement for permanent residence and registration with the Danish national register.

The legislative definitions hail from a distant past, when the workforce was far less mobile than is the case today. In today’s world, much more flexible residence and housing options are required to accommodate the business community’s demand for international specialists, including external consultants and project workers on very short contracts and in connection with short or long-term postings.


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Muhamed Jamil Eid

Manager

Copenhagen

Muhamed is Deptuty Head of the Valuation & Advisory team in Copenhagen and has vast experience with the investment requirements of international clients as well as major Danish pension funds. Areas of expertise include preparing detailed market analyses and valuations and sale of commercial and investment properties as well as advising clients on strategic investment decisions.

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