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Philantropic investments in property

Realdania By & Byg’s mission is to improve the quality of life through philanthropic investment and active ownership of properties and areas for urban development. Philanthropic investments in property are investments in which a certain loss or reduced return on the investment is deemed acceptable to fulfil a philanthropic purpose.

For Realdania By & Byg, any considerations regarding the purchase of a property will therefore begin with the question of whether there is a philanthropic task in terms of conserving important cultural heritage. Situations where the commercial market cannot, or will not, solve a task, and where public authorities are also unwilling to step in, may be suitable philanthropic projects for Realdania By & Byg.

Unlike traditional donations, philanthropic investments give ownership of the properties invested in – and thereby both long-term commitment and a guarantee that the properties will be continuously maintained at a stable and high level, and preserved for posterity. In some cases, philanthropic investment may be preferable to philanthropic donations to properties in private ownership. This is primarily because with ownership comes command over the property and thus the opportunity to actively pursue conservation and development ambitions for the property – provided one is willing to accept a financial disadvantage or risk. Such an ambition could be to obtain a certain level of quality in a restoration and transformation, but also to ensure the preservation of original details and qualities, to test new solutions, or to investigate operational consequences.

See our portfolio of properties

The starting point for restoration – retention or transformation

For Realdania By & Byg, restoration starts with giving a building a function to ensure that it remains in use and to help generate rental income to finance its future upkeep. Many buildings can be conserved through continued usage for the purpose for which they were originally built. Buildings created for residential purposes can continue to be used as homes, although they will often require careful updating and restoration to function as attractive homes today. This may be a matter of upgrading kitchens and bathrooms, installing more electrical outlets and internet connections, and making the building more energy efficient to improve comfort and reduce operating costs.

Other buildings require a new function to ensure continued use. This may involve a major restoration of the property. In terms of restoration and architecture, the challenge is to ensure that the building’s fundamental values remain intact. There is often greater risk associated with renovations of this scale. Often, a key consideration regards the degree to which the individual tenant should be considered when transforming a building that has been acquired as part of a portfolio of historic properties with an “infinite” lifetime. Most importantly, there is a risk of the tenant simply backing out after a short period of time. This could mean that choices in relation to architecture and restoration will need to be revised when a replacement tenant is to be found. It is therefore often be necessary to work with solutions that are reversible.

The extent to which a building is customised to individual tenants is therefore also a strategic consideration. In addition, there are the commercial considerations. Customised solutions are often costly, resulting in higher rents and therefore a higher risk for the landlord. A certain degree of caution is therefore crucial; both in relation to restoration and from a commercial perspective.

The important dialogue with tenants

Historic buildings of high architectural quality differ to some extent from the wider commercial real estate market. Space utilisation is often less effective than in new properties, and sometimes energy efficiency and operating costs cannot compete with newly constructed buildings. Furthermore, in our experience, the segment of tenants who wish to rent a historic property is more limited, given that these properties differ from new buildings in terms of floor plan, kitchen size etc. This demands that the operating organisation distinguish itself through close communication with tenants prior to move-in, as well as ongoing personal contact regarding maintenance work and outreach activities in relation to the property. For example, Realdania By & Byg includes a fixed requirement in all rental agreements regarding access to properties in connection with guided tours.

The philanthropic investor in the property market

The property market is highly cyclical, with frequent fluctuations, and clearly it will always be better to purchase property during downturns than during upturns. Access to capital is therefore crucial, also during periods of recession. Furthermore, the property market is a heterogeneous market, where even short geographical distances can have a major impact on prices. This means that strong business acumen is essential to avoid buying properties above market price. This may be particularly challenging in areas of high volatility such as major cities. Business acumen and experience are also necessary to ensure that the present-day use of a property can dampen rather than amplify market fluctuations. For example, residences and liberal professions are generally less sensitive to market fluctuations than cafés, hotels and restaurants. The property market also depends on wider trends in society such as demographics, so it is important to think long-term.

Building a property portfolio

For the philanthropic investor, it is essential to establish a robust strategy for building a portfolio that develops over time. A central consideration here is at what point the return on the portfolio will be sufficient to sustain an independent operating organisation. It may make sense to outsource parts of property management to external operators to keep fixed costs down. Another key consideration to build the portfolio with a certain degree of financial robustness. The number of properties is important, as are the function and geography of the individual property. A robust strategy also makes it possible to acquire properties with greater uncertainty.

Each year, we receive proposals for property purchases from a wide range of players, including conservation associations and estate agents, and each year many properties are rejected because they do not meet our criteria. At the same time Realdania By & Byg itself is actively engaged in the search for the right properties for the portfolio.

See our portfolio of properties

Our business model

Realdania By & Byg purchases properties at market value and on the basis of local estate agent valuations. Subsequently, given its aim to conserve and develop buildings, we typically invest more money in a property than private buyers would have done. On average, 30%-50% of restoration costs are written off as a philanthropic grant. Over time, in by far most cases, devalued properties will increase in value with inflation. Hence, in theory, over several years the direct investment will be offset by an increase in value. This has been the case for many of the properties we have purchased and restored over the past fifteen years. However, there are also a few properties where very large write offs have been made and where depreciation and appreciation in value does not balance out.

A steady return

Right from the beginning, Realdania By & Byg has had the principle that a steady return on an individual property is necessary to ensure that the building can be maintained in the future. In other words, the individual building must as a minimum be able to generate a rental income sufficient to ensure its ongoing upkeep and operation. Before a property is purchased, the estimated average annual expenses and rental income are calculated. If the result is negative, the property will not be bought. In very exceptional cases, a near-zero return on the property value after completion of restoration is accepted. The average rate of return over the years has been approx. 2% of gross investment at portfolio level.

Property rents also follow market trends, and we therefore obtain an external valuation of the rent level for the specific property from local estate agents. There are several reasons why rent prices are set at market rates. Firstly, our main mission is to conserve architectural heritage. Rental income should also support this objective, and not be artificially low to subsidise organisations, special causes and the like. Secondly, we do not wish to influence the rental market downwards.

So, while both acquisitions and rents are at market levels, restoration and the associated costs are typically higher than the value appreciation after restoration. The loss is considered a grant consisting of the difference between the cost of restoration and the increase in property value.

As a philanthropic player in the commercial property market, it is therefore vital to have a clear strategy, access to patient capital, a comprehensive understanding of the property market, and a long-term perspective.

Lessons learned from managing a property portfolio

There are many advantages being a philanthropic investor with a wide-ranging property portfolio. One advantage is that, over time, a wealth of knowledge is acquired and retained regarding restoration and the specific solutions chosen. This also applies for the subsequent operation of the buildings.

1. Maintenance is cheaper than restoration

One of the most important lessons is that it is economically advantageous to do a comprehensive restoration immediately after acquiring a property and before it is rented out. This helps to reduce overall costs by consolidating expenses for consultants, construction site, workers etc. at one time. In addition, subsequent maintenance becomes easier to plan. Furthermore, it is not necessary to rehouse tenants or have frequent tenant turnover because the property does not meet a certain standard.

2. Energy efficiency matters

We have also found that energy costs must conform to market levels to maintain rental prices. Very high utility costs, e.g. for heating, are not sustainable – environmentally or financially. Over the years, we have therefore had special focus on this in our engagements with conservation authorities, and we have developed a number of solutions that we have subsequently recommended to other owners. In the most recent evaluation of the organisation, this was highlighted as a positive impact of our work.

3. Impact on surrounding buildings

A third lesson is that restorations have a rub-off effect on surrounding buildings. An example of this is the restoration of the old town hall in St. Heddinge, a small Danish provincial town, which led to the restoration of surrounding privately owned properties. This gave the otherwise languishing main street a boost at a time that was critical for the town’s retailers. A philanthropic investor making a long-term investment in an area can have considerable impact, helping to inspire optimism for the future and a belief in the possibility of pushing development in a positive direction.

Sustainable development and CSR

Sustainability in the broadest sense of the word permeates everything we do, and in recent years we have taken new steps to ensure that we achieve the highest possible level of sustainability in our projects. This is important to us, as cities and buildings have a huge carbon footprint and as buildings highly influence health and the quality of life.

The property and urban development business has many people working across national borders, so through our philanthropic investments and active ownership of properties and urban development projects, we can make a difference in relation to what others in the market can do and want to do, and we can inspire others to benefit current and future generations.

Our efforts for social responsibility

Carbon reductions

  • Life cycle analysis of our property portfolio
  • Implementation of energy management

Sustainable urban development

  • DGNB-screening of our urban development projects
  • Certification of new buildings in our urban development projects

Securing reasonable employment and wage conditions

  • Implementation of a new system
  • Join charter for social responsibility
  • Implementation of internal guidelines

Code of Conduct

  • We reduce our carbon emissions
  • We reduce our consumption of resources
  • We build to ensure a healthy indoor climate

We monitor the effect of the solutions we choose and we share our experience and knowledge with our peers.