The Danish Rental Market
In Denmark, there is a fairly clear distinction between the market for private sector renters and public sector renters, each with a very different set of regulations and financing possibilities.
During the 1980’ies and 1990’ies a large number of private multi-family houses have been renewed with public, financial support. This possibility still exists, but many municipalities have stopped the financial support during the last years. In stead there has been a change in the regulation, opening the possibility of financing improvements through increased rent (liberation from rent regulation by the so-called article 5, paragraph. 2 renovations).
The taxation of private owned housing, and as a part of this: the valuation of the houses is a big issue in Denmark, together with a discussion of financial support through a tax reduction for maintenance purposes. The original idea was to create jobs, but it’s also a discussion, if a special focus should be put on improving energy efficiency.
Studies have shown that it actually pays to improve the energy efficiency and lifting the house from a lower to a higher energy label. But interview investigations among private house owners show that the motivation for renovation is economical gains and tenants satisfaction. So a challenge in Denmark is to raise awareness between private house owners that renovation pays and energy renovation pays better.
Parallel to this development is raising rents, especially in the larger cities, due to raising demand. The houses are getting too expensive for a normal income, and more and more people chose a flat instead of a house. The raising prices are also part of the explanation of the fact that it pays to renovate.
Foto "Privat boligudlejning – en glemt boligsektor på vej mod afregulering", Samfundsøkonomen nr. 5, 2008"
1 Policy goals
In 2012 the Danish government agreed on a 'Strategy for energy efficiency in buildings’. The strategy aims to promote energy savings in energy consumption for heating and hot water, especially focussing on the existing building stock, which today accounts for about 35 per cent of the total final energy consumption in Denmark. The government expects that the initiatives within the strategy will lead to an energy consumption decrease in the existing building stock by 35 per cent in 2050 compared to the consumption today.
The upgrading of the Building Code constitutes an essential element in the strategy. It’s included that low-energy class should become mandatory for all new buildings. In addition, a voluntary energy class for existing buildings has been introduced. Finally, there is a revision of the demands for components in the building code, including an upgrade of the requirement for windows.
The strategy also provides for a strengthening of the Danish Energy Agency’s information on energy conservation. The website SparEnergi.dk provides information and tools targeted building owners, builders, consultants and other stakeholders. It reveals the building's energy situation and describes the savings that can be implemented. There is also an effort to make energy labels available to building owners in a clear and understandable way so that it is easier to get an overview of the costs for energy renovation, also when you buy a house
2 Housing stock typology
The Danish housing stock typology is deducted from the typology project TABULA , which shows typical model buildings by construction periods and building size. Relevant model buildings for the private rental housing sector are all multi-family houses.
The typologies is shown below.
The housing stock typology (from TABULA)
3 Structure of the Danish housing stock
The total housing stock in Denmark comprises about 1.1 million housing units. There was a high building activity before 1900, when the industrialization made people from the country move into the cities. The activity was dropping down during the first and second world war. But during the 60’ies and 70’ties a large number of pre-fabricated, concrete multi family houses were built to solve the housing problems.
In the 00’es the building activity have moved from rental housing to privately owned housing. This is also shown by the graph below. But the latest development with raising prices especially in the larger cities has arisen the demand for rented flats.
Rented housing in Denmark after year of construction (2015) (http://www.statistikbanken.dk, 26.08.2015)
4 Housing units after typology
Most people live in one family houses and terrace houses. Around 1 mill. people or a little more than 20 % live in multi family houses. See the table below.
Number of houses in Denmark after typology (http://www.statistikbanken.dk, 26.08.2015)
A smaller amount of people rent a one family house or own a flat in a multi family house. This can be seen in the graph below.
Housing units after typology and occupiers (http://www.statistikbanken.dk, 26.08.2015)
5 Energy performance data of the housing stock
The energy consumption in buildings varies with the age of the building. Studies have been made to evaluate the possible energy savings in the different typologies as a basis of evaluating the possibilities of improving energy efficiency by modernizing the buildings.
Energy consumption in buildings after building types and age registered in energy labels (from: POTENTIELLE VARMEBESPARELSER VED LØBENDE BYGNINGSRENOVERING FREM TIL 2050, SBI 2014:01)
6 Modernisation activities
The maintenance problems in the private rental sector have been significantly reduced in recent years. In 68 percent of the properties with 78 percent of the flats, landlords believe that there is no particular need for improvement of the whole building. There is still some need for improvement inside the properties, but only a few homes, there is a great need, and only in very few properties penetrates all homes much to improve. The need is greatest in the major cities and in the regulated properties.
7 Ownership structure
In Denmark there is a total amount of 2.6 mill. housing units (2015). About 50 % are privately owned houses 7,4% are cooperative housing, 20 % are social housing organisations and another 20 % are privately rented houses. The tendency is up going. See the graph below.
% of population in DK in rented housing (http://www.statistikbanken.dk, 26.08.2015)
8 Rental markets
Rental housing in Denmark serves different social groups, from low income to medium income levels. Nevertheless, rental housing is a mere urban phenomenon.
Although renting is not restricted to low income households, it is often the only accessible choice, with ownership being restricted to upper middleclass income households, given the usually considerably high down payments and transaction costs. Especially in urban markets with restricted land resources and strict zoning regulations, housing shortages drive up rents and reduce accessibility to the social housing - with long waiting lists - and private rental housing sector for low income groups.
9 Financing and regulatory environment for energy efficiency measures
Compared to many other countries, there are a relatively large proportion of more professional landlords on the Danish market, which feed on property management and operates properties based on economic motives. However, there are many landlords, who are less professional and have other motives for acquisition of property and property operations. This is very important for private rental housing stock price, economy and quality.
The professional landlords prefer larger properties in major cities, while smaller farms and small towns are dominated by other landlords. The professional landlords are investing, however, more in their properties and have much higher operating and maintenance costs.
The economic return on investment in private rental properties have been high in the last 10 years, but this is mainly due to increases in value, while direct net return of operations has been low. This applies especially to the professional landlords, who have had a low dividend, but higher increase in value. The other professional landlords have had a greater excess of the operation, but it is mainly because they have saved expenses to maintenance - possibly by do-it-yourself work. For the time being, increase in value costs has stalled, making the economic future of the private renting sector less attractive.
There is still a large part of the private rental housing that is subject to strict rent regulation. Regulation usually means that rents are below market rent and the direct profits of the properties are reduced. However, the regulation also means that there are no rental problems and that there are no uncertainties and risks in the property economy, and that landlords can pick and choose between people looking for housing. The negative side of this is that the less desirable tenants - immigrants and disadvantaged - can be disqualified. Investigations show that there are large differences in strategies between regulated and unregulated property. It shows that there has been considerable investment in the improvement and maintenance of the regulated properties. But it is uncertain whether this will continue.
But there are indications that the regulation is on track to break apart. There is some uncertainty in the numbers, but studies suggest a quite extensive so-called article 5, paragraph. 3 renovation in recent years leads more and more homes to be exempted from the rules on cost-related rent. Following this the rental market in the regulated properties in major cities has increased somewhat, and that the owners expect only minor increases in rents by deregulation.
Another trend that reduces the number of private rental housing is that more and more private rental housing is sold as cooperative housing. Prices of housing cooperatives has gone up so high that in many cases it is possible for a landlord to sell the property at a higher price to the tenants as cooperative housing than as rental property.
The trend towards deregulation of the private rental sector is perhaps one of the reasons why there is a great demand from the owners of the private renting properties to get out of the market and especially among those who have regulated property. But it is due to the fact that they are mainly located in major cities. It is especially in the smaller towns with a weaker and more risky market that the owners would like to sell.
As in many other countries, the private rental sector in Denmark has been reduced in recent decades - both absolutely and especially as a proportion of the total housing stock. The reasons are that the private rental sector in Denmark had an impaired competitiveness because it has not achieved the same direct or indirect subsidization through the tax system as the other forms of ownership, and that it has been subject to restrictive regulation.
("Privat udlejning - motiver, strategier og økonomi", Hans Skifter Andersen og Morten Skak, SBI/AAU, 2008:01)