REAL ESTATE - Yield compression drove returns for Danish real estate up to 17.8% in 2006, according to property data group IPD. This is the second highest return since the index launched in 2000.

Overall, yields on Danish real estate fell by 60 basis points in 2006. Capital growth remained at 12%, the same as in 2005, but income growth fell to 5.2% from 5.5% the previous year.

Only equity returns outperformed property at 32.3%. However, total equities did not reflect poor returns on property equities at 0.5%. Bonds returned 0%.

IPD Denmark managing director Christina Gustafsson said the figures reflected the solid returns delivered by real estate, without the volatility associated with equities.

Sector-wise, residential turned in the highest performance for the fourth year, delivering returns of just over 24%. However, the whole-year figure masks a slight stagnation in the second half of the year as a result of falling house prices in the owner-occupied segment.

Offices also performed well as a result of a nationwide rental recovery in 2006. Commercial and retail real estate delivered 15.1% and 15.4%, respectively.

IPD analyst Elin Magnusson told IPE Real Estate that the spread between sectors was lower in 2006 than the previous year – which saw highest IPD-recorded returns to date.

"The trend is that the market is becoming more liquid and increasingly attractive to international institutional investors," she said.

However, she acknowledged that the Danish market is beginning to reflect Swedish supply dynamics – with demand for property portfolios outstripping supply.

"Yields are low, and investors are having trouble finding property with yields high enough for them," said Magnusson.

In addition, tax proposals currently under consideration will, if passed, likely dent debt-funded domestic investor demand. "Quite a few companies in Denmark are highly geared," said Magnusson.