By Peter Winther, CEO, Partner, Colliers International Denmark
In 2013, it was decided to suspend the public valuations on which property taxation is based because many valuations were flawed. The plan was to launch the new valuations now, but a further delay was recently announced.
Next public valuation of commercial and investment property due in 2022
The Danish Ministry of Taxation recently announced that the suspension of public valuations will remain in force for some time to come. The explanation is that a new system, intended to provide more accurate public valuations, is not yet in place.
In all fairness, it is commendable that the Ministry has acted on its failure to establish a system that will ensure the required degree of precision. As a result, until 2023, when property tax assessments will be based on new public valuations as of early 2022, public valuations and, by extension, land tax and special municipal charges levied on commercial and investment property (in Danish dækningsafgift) will in principle remain unchanged.
What will property taxes be like from 2023 onward?
Effective from 2023, the basis for calculating property taxes will be the new valuations, which are expected to be truer and fairer than previous valuations. In most cases, we assume that the valuations, at least in Copenhagen, will be much higher for a number of reasons:
- In a historical context, public valuations have typically been substantially below market value in Copenhagen.
- In recent years, while public valuations have been suspended, the market prices of commercial and investment property have surged.
In general, it is therefore fair to expect a substantial increase in public valuations in 2022.
However, this does not automatically imply that property taxes will increase accordingly.
Firstly, future property tax assessments will become subject to a new precautionary principle, that is, property tax is calculated on the basis of the public valuation sum less 20%.
In addition, land tax rates, in Copenhagen in particular, are expected to drop sharply. To prevent an increase in the aggregate property tax burden, it is therefore assumed that the land tax rate in the City of Copenhagen will be lowered by as much as 63% – from 34 per mille to 12.6 per mille.
Now is the time to factor in future property tax assessment principle when investing
As property tax increases are generally recoverable from tenants, the net effect from a landlord perspective is therefore in theory zero. However, it is worth bearing in mind that, from a tenant perspective, the gross rent, i.e. the rent inclusive of taxes and other operating costs and utility charges, is the relevant benchmark. Increases in the property taxes levied on a property may therefore have a long-term negative effect on the rent (exclusive of taxes) that a tenant is prepared to pay.
Today, there are properties where the public site value is substantially below its market value – and there are properties where the public site value matches or even exceeds its market value.
As far as the latter group is concerned, it must be assumed that the public site value will not increase, all other things being equal, when the new valuations are introduced in 2022. However, as this is accompanied by the introduction of a precautionary principle entailing a 20% allowance, and as the land tax rate is expected to be lowered quite substantially, the property tax burden of such a property will ease quite considerably. On the other hand, there may be properties with an exceptionally low public site value, where even the introduction of a 20% allowance and the lower land tax rate will not be sufficient to compensate for the much higher public valuation.
Although the new property taxes are not expected to be introduced until 2023 – or later in the event of a further delay – it may make good sense already today to carry out a calculation of future developments in the property tax burden of a given commercial or investment property and to consider how this may impact on the achievable market rent, excluding taxes, over time.