I OVERVIEW OF THE MARKET
The Danish real estate market is mainly dominated by institutional investors and property funds. The market for office properties is particularly dominated by institutional investors, whereas property funds and private equity firms make a large part of investments in residential and retail properties. Besides these market players, public real estate companies are also active in both the office, residential and retail markets, but to a lesser extent.
Domestic institutional investors have a significant presence in the Danish real estate market, where particularly Danish pension funds are increasing their investments in real estate. Pension funds are not only investing through property funds but are to a large extent investing directly in properties.
Recent years have seen an increasing number of foreign investors entering the Danish real estate market. Investors from Germany, Scandinavia and the United Kingdom particularly are investing in Danish real estate.
Foreign investors are most active in the retail segment focusing mainly on retail properties located in prime locations in Copenhagen. Furthermore, they are increasingly interested in residential properties, mainly larger portfolios, while they account for only a smaller part of the investments in office properties.
International investors tend to stipulate requirements to the transaction documentation deviating from what has previously been customary in Denmark. Transactions involving properties with significant commercial operations, such as hotel or retail properties, require bespoke solutions, which often entails a certain level of complexity as well as a need for thorough preparation. These transactions resemble M&A transactions more than ordinary real estate transfers in terms of structure, complexity, timing and process.
II RECENT MARKET ACTIVITY
i M&A transactions
One of the largest real estate transactions in Denmark to date took place in 2015 when Novo A/S and TryghedsGruppen SMBA acquired 49.2 per cent of the shares in the privately held real estate company DADES A/S. The value of the transaction remains undisclosed, but DADES owns a portfolio of mainly office and retail properties worth 16.9 billion kroner. The sellers were a number of institutional investors, including banks, pension funds and an insurance company. As part of the transaction, the acquirers committed themselves to contributing additional capital of approximately 1.7 billion kroner for investments in real estate.
In 2013, Rosengårdcentret, Denmark’s second-largest shopping centre, was sold to the German-based ECE European Prime Shopping Centre Fund in its first investment in Denmark. Until the transaction, the property had been owned by a large number of private investors. Though undisclosed, the value of the transaction is estimated to be around 2.9 billion kroner. Later in 2013, Danish ATP, who already had an indirect ownership interest through an investment in the ECE Fund, increased its share of ownership in the shopping centre to 25 per cent.
The most significant recent transaction by a public real estate company was Jeudan A/S’s acquisition of a property from A.P. Møller – Maersk A/S in 2015 for 585 million kroner. The property, which is under construction, was transferred under a sale-and-leaseback agreement and will, once finished, serve as the domicile for part of the Maersk Group. The transaction brought Jeudan’s total property investments in Copenhagen in 2015 to a level of approximately 1.1 billion kroner.
ii Private equity transactions
One property has attracted particular attention in the private equity market in recent years: the Illum property, located in central Copenhagen and housing a luxury department store. In 2011, the Danish private equity fund Solstra Capital Partners, which acquired the Illum property in a distressed sale in 2009, divested the real estate company owning the Illum property for approximately 1.6 billion kroner to the UK-based private equity firm MGPA. Then in 2013, Solstra sold the Illum department store (opco) to Italian retailer La Rinascente, which is part of Thai-based Central Group. In 2015, Central Group acquired the Illum property from BlackRock (who had taken over MGPA in 2014) in a deal with an estimated value of between 2.5 and 3 billion kroner.
Solstra was also involved in another significant transaction when the Magasin property, also housing a major department store, was sold in 2013 to the Danish pension funds ATP and PensionDanmark. The value of the transaction is estimated to be around 2 billion kroner.
Residential properties have also been in focus in the private equity market with transactions involving larger portfolios. The most significant transaction was UK-based Coller Capital’s acquisition of the former PFA portfolio containing 22 residential properties in 2015 at an estimated total value of 2.2 billion kroner. The seller was the Norwegian bank DNB that had taken over the portfolio as part of the previous owner’s bankruptcy.
III REAL ESTATE COMPANIES AND FIRMS
i Publicly traded REITs and REOCs – structure and role in the market
Currently, REIT structures are not used in Denmark, but there are a number of publicly traded real estate companies of varying size. The largest one by some distance is Jeudan, with a market capitalisation of around 7.7 billion kroner, total assets of 20.3 billion kroner and annual revenue of 1.2 billion kroner.
Besides Jeudan, only smaller real estate companies are traded publicly, of which none has a market capitalisation exceeding 300 million kroner or revenue exceeding 200 million kroner. These smaller companies do not play roles of any significance in the real estate M&A market, and only Jeudan is of a size to engage in larger transactions.
Jeudan owns both commercial and residential properties in the Copenhagen area. Its portfolio primarily consists of commercial properties, including mainly office properties but with a small part in retail properties. Jeudan’s business strategy is to continue investing in primarily office properties in Copenhagen with a long-term investment horizon.
ii Real estate PE firms – footprint and structure
The real estate private equity market in Denmark is dominated by a few local players together with a group of foreign private equity firms. The main local players are Solstra Capital Partners and Nordic Real Estate Partners (NREP), which are both based in Copenhagen. In recent years, NREP has developed to become a pan-Nordic player whereas Solstra Capital Partners has focused on developing a large portfolio of hospitality operations including the Marriott hotel, the Crowne Plaza hotel and the Bella Sky Copenhagen hotel in Copenhagen. Also the Danish operation of German fund Patrizia has been very active in recent years, most recently with the acquisition of the large Gallery K shopping area in Central Copenhagen (transaction value of approximately 1.4 billion kroner). Among the UK-based firms involved in recent major transactions are BlackRock, Coller Capital, Aberdeen, Standard Life, Cubic Properties and Tristan. From Sweden, Niam and Sveafastigheter have recently been party to significant transactions. Private equity investors are focusing their investments on significant retail properties, logistics and larger portfolios of residential properties but have not yet directed their attention towards office properties to any great extent.
i Legal frameworks and deal structures
Typically, a real estate transaction in Denmark is structured either as a direct investment in the form of an asset deal or through a limited liability company or limited partnership in the form of a share purchase. However, limited liability companies are most frequently used for investments in real estate in Denmark as a result of the advantages attached to this structure.
Choice of deal structure depends on various factors, with tax or registration duty aspects being predominant, and which structure is most preferred depends on the circumstances of each specific transaction.
When structured as a share purchase, all the assets and liabilities in the company are transferred to the buyer. On the contrary, when structured as an asset purchase, only the assets and liabilities comprised by the purchase agreement are transferred. The consequence of this is that any latent liabilities and risks, including pollution of the property, are, as the principal rule, not transferred to the buyer. However, in an asset purchase, transfer of any contracts requires consent from the contracting party, which is not necessary in the case of a share purchase with the exception of contracts containing change-of-control clauses. The consent requirement in asset deals can be prevented by a demerger of the assets and liabilities to be transferred, as the Danish Companies Act prescribes mandatory debtor substitution in such cases. Subsequently, the demerged company can be transferred as part of a share deal.
As a result of these factors, the deal structure will often involve a prior corporate restructuring in the form of a demerger or contribution of assets where the relevant property or portfolio of properties is transferred to a separate entity.
A share purchase requires consent from the selling shareholders, whereas an asset purchase can be resolved by the management of the selling company – typically the board of directors – without involving the shareholders. This is presumably the case even if the property in question is the only substantial asset of the company.
An important aspect when structuring a transfer involving residential properties is the tenants’ mandatory right of pre-emption according to the Danish Rent Act. For properties with a minimum of 13 residential tenants, or six residential tenants if the property contains only residential tenancies, the tenants have a pre-emption right. Thus, unless the property has been divided into owner-occupied flats according to the Danish Rent Act, the owner must offer the property to the tenants on a cooperative basis before disposing of it to a third party. The tenants must be offered the opportunity to purchase the property on the same terms as any outside purchaser has offered.
The right of pre-emption applies both when the property is transferred, including by merger, and if there is a change of control of the limited liability company owning the property. However, a change of control of a parent company (the holdco) to the property owning company (the propco) will not trigger the tenants’ pre-emption right. The shares of the holdco may thus be transferred freely, whereas transfer of the shares in the propco triggers the pre-emption right if there is a change of control (i.e., the majority of the voting rights is transferred). It is a requirement for triggering the pre-emption right for the majority of the votes to be transferred to the same transferee. According to case law, a transfer of all the votes in the propco to three or more separate transferees, whereby none of them acquire control of the company, will thus not trigger the pre-emption right.
A different right of pre-emption applies when transferring residential properties reserved for senior citizens. Such properties must be offered to the municipality prior to a transfer to anyone else, but this pre-emption right does not apply in a transfer of shares in a limited liability company owning the property.
Another important factor in the choice of deal structure is registration fees. Registration fees are payable on the registration of change of ownership and security rights over real estate. A transfer of the property in question will thus trigger a registration fee of 1,660 kroner plus 0.6 per cent of the highest amount of the purchase price or the latest public property value. Registration of a mortgage triggers a registration fee of 1,660 kroner plus 1.5 per cent of the mortgage sum; however, it is generally possible to make deductions corresponding to the value of the mortgages being replaced. By way of contrast, a share transfer of a limited liability company owning a property does not trigger any registration fee. In a change of ownership as part of a corporate restructuring (i.e., merger, demerger, transfer of assets or exchange of shares), the registration fee is reduced to a fixed amount of 1,660 kroner. Hence, the variable part of the registration fee can be avoided by transferring the property in question to a separate company (a special purpose vehicle (SPV)) by way of a demerger or transfer of assets and, subsequently, transferring the shares in the SPV instead of transferring the property directly. This is commonly referred to as the ‘drop down’ model.
If a transaction involves a real estate company with securities listed on a regulated market in Denmark or another EU Member State, the company may have a duty to disclose the transaction to the market in accordance with the Danish Securities Trading Act. Such a duty to inform the market arises if information about the transaction constitutes inside information.2 If information on a real estate transaction constitutes inside information the company is required to disclose such information immediately upon relevant circumstances coming into existence or the occurrence of a relevant event, albeit not yet formalised.
ii Acquisition agreement terms
Generally, it can be noted that agreements in Danish real estate M&A and private equity transactions are becoming more detailed and thorough. This is probably due to influence from the increasing number of foreign investors now in the Danish real estate market. Further, there is to a large extent no law regulating such transactions, thus requiring a more thorough description of each party’s rights and obligations within the agreement itself.
Consideration is typically cash payment and, if relevant, the buyer’s payment of any intercompany loans provided by the seller to the target company. The types of representations and warranties vary to a certain degree depending on whether the transaction is a share deal or an asset deal.
A share purchase agreement will usually contain a number of representations and warranties regarding various corporate matters. These can include the assertion that both the seller and the buyer represent and warrant that they have the requisite power and authority to execute and perform the transaction, and that the transaction will not conflict with any other agreement, applicable law or judgment.
With regard to the shares to be transferred, the seller represents and warrants that it owns and has full title to the shares, that they are duly issued, paid and registered as well as fully paid up and freely transferable, and not subject to any encumbrances. Additionally, with regard to a property company to be transferred, the seller represents and warrants that it is duly incorporated and existing, has never been declared insolvent or bankrupt, has no outstanding equity securities, for example, warrants or convertible debentures, and that no resolution has been passed to change the company’s share capital, articles of association or other statutory documents other than as provided for in the share purchase agreement.
In respect of the property, a share purchase agreement will usually contain a representation and warranty to the fact that the company owns and has full and unrestricted title to the property in question. Similarly, an asset purchase agreement usually contains a representation and warranty to the fact that the seller has such ownership and title to the property.
Both share and asset purchase agreements generally contain representations and warranties with regard to the property. Typically, these include that the seller represents and warrants that the property is free from all material encumbrances, easements and mortgage deeds other than as set out in the purchase agreement. Further, they may require that all due payments relating to the properties have been paid at the time of closing, including property taxes, and that all lease agreements relating to the properties have been disclosed and are legally binding.
With respect to the property in question, it is customary for the seller to represent that to the seller’s knowledge its construction and utilisation is in accordance with applicable law, and also that it is built in accordance with all regional and local development plans applicable to as well as easements registered on the property, and that there are no hidden defects.
With regard to insurance, the seller may represent and warrant that the property is insured at full value and that such insurance policies are and remain in full force and effect and cover the properties in accordance with their terms until closing. Furthermore, the warranty may include that all insurance premiums have been paid when due and there has been no breach of any material terms or conditions.
Other representations and warranties by the seller may concern lease agreements, pending cases or environmental matters relating to the property, and that there are no agreements or rights for sale, options or rights of pre-emption affecting the properties other than the purchase agreement.
Closing conditions will typically include the buyer’s obtaining of the necessary external financing, either fully or partially, as well as both seller and buyer documenting board approval of entering into and execution of the agreement. The seller may further be required to present an updated shareholders’ register displaying the transaction, whereas the buyer must document the unconditional transfer of the purchase price to the seller’s bank.
A mutual closing condition relating to a transaction involving residential properties may be that the tenants of the residential property in question do not exercise their pre-emption right according to the Danish Rent Act. When transferring a portfolio of residential properties, the pre-emption right applies to each individual property. Hence the purchaser will normally require a contractual right to stand down from the entire agreement or benefit from a price reduction if the pre-emption right is exercised for one or more properties.
The purchase agreement may contain an indemnification clause requiring a party to the agreement to hold the other party harmless from and against any loss subject only to the limitations set out in the agreement. The clause may preclude claims regarding consequential and indirect losses, including loss of goodwill, business, anticipated profits and similar losses. Typically, such loss would be determined in accordance with general principles of Danish law, including the principles regarding mitigation of loss and limitation of losses resulting from acts by the party bringing the claim.
Liability may be limited to claims being within agreed time limits or exceeding a certain amount either individually or in aggregate, and there may be a limitation on the aggregate liability, including a limitation of the amount to the total consideration or a percentage thereof. The party may be liable for either the full amount or the excess amount only.
The purchase agreement may exclude liability for certain claims, for example, defects in the property, environmental and pollution matters, and the accuracy of particulars registered with public authorities.
iii Hostile transactions
Hostile transactions rarely occur in Denmark. This is also the case for public real estate companies.
The only recent hostile bid for a public real estate company was William Demant Invest A/S’s (WDI) tender offer to purchase all the shares in Jeudan in 2012. The tender offer was a consequence of WDI obtaining control of Jeudan, thus triggering the mandatory bid rule requiring the acquirer to make an offer for all the shares in the company. Hence, WDI had no intention of acquiring all the shares in Jeudan and made the tender offer only because it was legally obliged to do so. Therefore, the offer was not at a premium to the market price, and it was thus only hostile in the sense that the board of directors of Jeudan was recommending that the shareholders not accept the offer. Under these circumstances, the result of the tender offer was that WDI further acquired an insignificant number of shares in Jeudan, bringing its total holding to 41.6 per cent of the share capital.
iv Financing considerations
The prevailing way of financing real estate transactions is by way of loans secured by mortgages over the property in question. However, there are certain limits as to how much of the transaction it is possible to finance through mortgage loans. With regard to commercial properties, including office and industrial properties, it is only possible to finance up to 60 per cent of the property’s value with mortgage loans according to the Danish Act on Mortgage Loans and Mortgage Bonds. The limit is 80 per cent for residential properties and 40 per cent for other properties, including undeveloped properties.
The rest of the transaction value must be financed in other ways. This will often be through either equity contributions or ordinary second-tier bank financing on less favourable terms than mortgage loans but still with security in the property. In addition to security in the property, lenders may also require other security instruments such as negative pledges, account pledges, share pledges, assignments of receivables and springing mortgages (mortgages initially not registered with the Land Register in order to save registration fees), but this depends on the will of the lender.
When structuring the transaction as an asset purchase, the buyer may legally provide the property as security to the lender that is providing the financing for the transaction. However, this is not necessarily a possibility in the case of a share purchase. Under Danish law, a limited liability company is subject to limitations in terms of financing an acquisition of shares in the company itself. According to the Danish Companies Act, a limited liability company may not, directly or indirectly, provide, inter alia, security for a third party’s acquisition of shares in the company or its parent. Thus, the target company cannot put up the property as collateral for the buyer’s financing of the acquisition. However, subject to certain conditions, the target company is allowed to provide financial assistance. Such legal financial assistance requires shareholder approval and must be provided at arm’s length, and the board of directors of the target must issue a statement ensuring that the recipient is credit rated. Finally, the financial assistance may not exceed the funds that can be distributed as dividends, and it must be reasonable having regard to the target company’s financial position.
Due to the limitations in the target company’s ability to provide financial assistance, the financier of a share purchase will often obtain security in the shares in the target company. Such pledging is not subject to limitations according to the Danish Companies Act.
v Tax considerations
There are significant differences in the tax aspects of a transaction depending on the deal structure.
In an asset deal the seller, domestic or foreign, is taxed on the profit of the sale of the property and there is a right of deduction for losses incurred in this respect; however, the deductibility is limited to other profits on sales of property with the possibility of carrying the loss forward to subsequent income years. Furthermore, the seller is taxed on any recovered depreciations.
In a share deal the seller is not taxed on any profit of sale of the property and, consequently, incurred losses are not deductible. Furthermore, a transfer of shares will not trigger any capital gains tax if (1) the seller is a Danish limited liability company; (2) the transferred company is not listed on a stock exchange; and (3) the selling company holds at least 10 per cent of the shares in the transferred company. If these conditions are not met, the capital gain is taxed at the corporate tax rate of 22 per cent if the seller is a limited liability company.
If the seller is a foreign investor not subject to full tax liability in Denmark, any capital gains from the sale of shares will not be subject to taxation in Denmark. This is as a result of capital gains from shares not being subject to limited tax liability according to Danish tax law.
As a main rule, interest related to commercial activity in a company is tax deductible, but certain limitations apply with regard to the ability to deduct interest, inter alia, by thin capitalisation rules. If these rules apply it may be preferable to make a direct investment or invest through a tax transparent entity, for example, a limited partnership.
Corporate restructurings, including a demerger or transfer of assets, made prior to a transaction can be tax-exempted either with or without permission from the Danish tax authorities. However, certain conditions will apply to such tax exemption, including a ban on selling the shares in the demerged or receiving company within three years of the restructuring.
Generally, a transfer of property does not trigger any VAT; however, a sale of building land or newly constructed property is subject to VAT at a rate of 25 per cent of the transfer sum. VAT is not levied on such a transfer if it is part of an entire or partial transfer of business.
No VAT is due on the sale of shares in a company owning real estate, and a share deal does thus not trigger any VAT.
vi Cross-border complications and solutions
Denmark has some firm purchasing restrictions on foreigners’ investments in real estate. These restrictions render it practically impossible for many foreign investors to make direct investments in real estate in Denmark without obtaining permission from the Danish Ministry of Justice. It is unlikely that such permission will be granted if the targeted property is purely an investment.
However, the purchasing restrictions do not apply to Danish legal entities owned by foreigners. Hence, foreign investors generally choose to invest in Danish real estate through a Danish company or subsidiary. This can be done even if the sole purpose of the establishment of the company is to acquire the property in question.
V CORPORATE REAL ESTATE
There has been a slight trend to separate corporate real estate from operating companies by way of opco/propco separations. This has primarily been done by companies owned by private equity firms. In real estate-heavy companies such as in the retail sector, private equity-owned companies have tended to separate the company’s real estate from the operating company in order to divest either the propco or the opco, or as part of a complete exit from the investment through sales of both to different acquirers. Typically, the separation takes place by way of a demerger or a transfer of assets.
Furthermore, sale-and-leaseback transactions are becoming increasingly popular. Several of the largest Danish companies have engaged in sale-and-leaseback transactions disposing of domicile properties in order to release capital and focus resources on the core business. The acquirers are typically institutional investors and private equity firms.
An example of a significant sale-and-leaseback transaction is DONG’s disposal of its largest domicile to Danish ATP in 2013 for 1.9 billion kroner, including a 15-year, non-terminable lease agreement. DONG’s disposal of the domicile was part of a plan to divest non-core activities and reduce the company’s net interest-bearing debt.
It is expected that the increasing focus on M&A and private equity transactions in the real estate market will continue. Additionally, the significant number of foreign investors in the Danish real estate market is expected to increase with the entrance of several investors in the form of both private equity firms and property funds.
Until now, retail and residential properties have been the main focus of investments, particularly by foreign investors. Domestic institutional investors have begun directing their attention towards office properties and this trend is expected to continue with foreign investors also shifting focus to such properties. Another trend is the conversion of office properties to residential properties as a result of increasing required rates of return and decreasing rent levels for certain office properties.
The number of transactions involving properties in prime locations is not expected to remain at the same high level because of the lower supply of such properties.