On August 26, the Danish government agreed on the introduction of a temporary cap on residential rent increases for unregulated rental properties.
Under the current system, annual rent increases are permitted according to changes in the local consumer price index, referred to as the net price indexation (NPI). The government has agreed to implement a cap on these rent adjustments of up to 4% over the next two years (i.e., for all lease agreements that follow the NPI for 2022 and 2023). An exception will however be introduced where landlords can raise the rent by more than 4% if they can prove that any of their operating expenses have increased by more than the 4% cap.
The NPI indexation of the rent was first introduced in the Tenancy Act in 2015, with the argument that it reflects changes in landlords' operating costs. However, the Danish government is now of the opinion that the current inflationary spikes in NPI will lead to disproportional rent indexations in comparison to landlords' real costs for property management. As a result, they have agreed to implement the following initiatives:
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A 2-year ceiling for rent increases of 4% is introduced. However, there is a possibility for landlords to raise the rent by more than 4% if they can prove that they have increases in operating expenses that exceed the 4% cap.
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After 2 years, a new index will be introduced to regulate the rents (effective from January 1, 2025). Although the format has not been agreed yet, there have been some discussions around an index that possibly omits the impact of energy costs and food products.
Although the introduction of a rent regulation cap is new in Denmark, a very similar situation can be observed across several other European markets:
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In France, there is a temporary cap on rental indexation for residential and retail at 3.5 %. This is part of a bigger package of measures aiming at mitigating the inflation impact on household budget.
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In The Netherlands there is currently a cap on rent increases for unregulated rental homes of CPI +1% (for 2022 this is 3.3%), but because of the high inflation, the government has already indicated the possibility of an adjustment before the end of the year. Therefore, the government will determine the maximum rent increase in the unregulated sector at the end of 2022.
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In Ireland rent increases are restricted to the lower of HICP or 2% per annum. This has been in place since 2021. Previously, there was a 4% per annum restriction in place (since 2016). These restrictions are applied to properties in designated ‘Rent Pressure Zones’. All Irish cities are designated RPZ’s at present including all of Dublin.
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In Spain there is a limitation to the application of the CPI in the update of the rent of 2%. The limitation was initially only foreseen until June 2022 but has now been extended until the end of the year.
Capping the rent was also briefly discussed in Belgium (at a maximum indexation of 2%), but no consensus was reached. One of the reasons for not reaching consensus was that landlords would likely stop signing standard lease contracts (at 3+ years) and revert to short-term 1-year contracts (which would allow landlords to revise rents every year or change occupants). This would be worse for tenants and possibly more expensive. Also, salaries are indexed to inflation in Belgium, so indexed rents should remain affordable.
Valuation perspective
A key reason for thinking that commercial real estate provides good inflation protection is that the rental income it generates is typically linked to some form of price index.
However, in cases when high inflation is a result of late cycle economic growth, additional risks must be considered. Currently, inflation is cost-push rather than demand-driven, resulting in lower economic growth forecast. Additionally, in line with interest rates rising, the spreads between real estate and fixed income are narrowing. As the new interest rate environment and a downgrade in rental growth expectations must be priced in, this may translate in some upward pressure on yields for real estate.
Additional reading:For further information, please contact:
Per Alexandar Weinreich, Managing Director, per.weinreich@cbre.com, +45 31 62 50 15
Christopher Bailey, Head of Valuation & Advisory, Denmark and Nordics, christopher.bailey@cbre.com, +45 28 87 12 39
Dragana Marina, Head of Research & Data Intelligence, Denmark: dragana.marina@cbre.com, +45 31 35 74 84
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