Economy & politics
Positive outlook Dutch economy
In the course of 2017, the Dutch economy gained additional positive momentum. GDP growth was dominated by strong export figures, private investments and increased household spending. Housing market-related sectors have flourished in recent years, largely thanks to the very strong rebound in the housing market following the 2008 financial crisis.
Real GDP growth is expected to be around 3.2% and 3.1% in 2017 and 2018 respectively, according to forecasts from the Netherlands Bureau for Economic Policy Analysis (CPB). This is expected to be followed by lower growth rates in the subsequent two years (1.9% in 2019 and 1.5% in 2020). Unemployment has declined steadily to the current level of about 4.5% and is expected to decline further in the years ahead. Job growth is forecast to be positive in a whole range of sectors. Inflation is expected to increase somewhat, to a maximum level of about 2%, but will remain low from a historical perspective. Persistent low inflation is expected to boost consumer spending by an additional 1.5 - 2% annually. All in all, the economic outlook for the Netherlands is solid for the next few years, despite some international political uncertainty.
Brexit and ECB’s monetary policy
The overall impact of the Brexit is still difficult to assess. So far, the direct consequences seem to be positive for the Netherlands, as we have already seen a string of announcements by international companies and institutions planning to move at least some of their offices to the Netherlands, with the relocation of the European Medicines Agency from London to Amsterdam being the most noteworthy. This will have a direct impact on the office real estate market, and possibly the residential and retail markets.
With respect to the European Central Bank’s monetary easing policy, the previous programme to purchase a total amount of € 60-80 billion of public and private debt on a monthly basis in order to achieve an inflation level of 2%, was tapered off in early 2018, when the ECB cut its monthly purchases to € 30 billion.
New coalition introduces policies that could harm institutional investors
Following the Dutch general election in March 2017, a four-party coalition government, consisting of the Liberal VVD, the centrist D66, the Christian Democrat CDA and the Christian conservative CU party, was formed in October. The new coalition will have a majority of just one in the highly fragmented 13-party Dutch parliament.
In the coalition agreement, the newly-formed government announced that fiscal investment institutions (FIIs) will no longer be allowed to invest directly in real estate. The change is supposed to come into effect from the financial year 2020 onwards. Bouwinvest, together with other institutional investors, is currently trying to persuade the government not to implement this regulation. Additionally, Bouwinvest is investigating the potential consequences of such a change in fiscal legislation for the funds it manages and is assessing alternative structures to minimise the negative fiscal impact on investors in these funds.
Political impact on the residential market
With respect to the residential market, the government’s new policies included a substantial set of new housing policies, including plans to remove obstructive legislation regarding housing developments, the provision of housing opportunities for mid-income households and special groups, such as the elderly, refugees, starters, students and the disabled. Other policies include the accelerated reduction of the rate at which mortgage holders can deduct interest from their tax bills. By 2023, home owners will be limited to a deduction of 37%, down from the current rate of 49.5%. As this will be compensated by a reduction of taxes levied on imputed income from home ownership, the net impact on the rental market and investments is expected to be zero.
On a local level, Amsterdam has put specific policies in place to encourage the construction of affordable housing, with more cities expected to follow, especially in the Randstad conurbation. The new policies state that 40% of homes built through 2025 are supposed to be rented out for a maximum of approximately € 970 (minimum € 711) or sold for mid-market prices. In addition, rent increases are restricted, while investors have an obligation for long-term commitments. Utrecht is following in Amsterdam’s footsteps and in December 2017 also introduced a policy to support the construction of affordable rental homes.
Amsterdam has a long tradition of granting land subject to ground leases. Until recently, these transactions were executed subject to a system of continuous ground lease, under which the amount of the ground rent was adjusted in line with the actual land value every fifty or one hundred years. The new ground lease, mandatory for new developments and optional for current leasehold home owners, is a perpetual ground lease.
In such a case, the amount of ground rent is determined only once (and changes solely on the basis of inflation) and the leaseholder is allowed to buy out his payment obligations in a lump sum. The underlying idea behind the revision of the current system is to remove uncertainty about leasehold costs due to market unpredictability. Bouwinvest is assessing to what extent this will affect the value of the Fund’s investments in Amsterdam. At year-end 2017, the Fund had exposure of € 1.6 billion in Amsterdam for a total of 6,531 residential units.
Continuing population and household growth
On a national level, both the total population and the number of households are expected to continue to grow in the coming decades. The total population is set to increase by over 700,000 in the 10 years leading up to 2025. In this period, the number of households is projected to rise by almost 600,000 to 8.3 million. This demographic growth, however, will be very much concentrated in the 20 largest municipalities in the Netherlands, especially the main cities of the Randstad region. While household growth in the four largest cities of the Randstad conurbation will be a cumulative 11% in the years to 2025, the figure for the country as a whole is expected to be 7.7%.
Urbanisation and ageing major drivers
The growth in the number of households will be largely driven by the growth in one and two-person households, which in turn will be dominated by the growing number of elderly households. The number of people older than 75 years is expected to double over the next 25 years. As a result of this trend, the working population in the Netherlands will show virtually no growth over the coming years. However, the major Dutch cities will not be affected by this demographic trend, as the healthy and growing availability of employment opportunities will lead to a steady influx of (young) working people, especially in the cities of the Randstad region.
Demographic shifts in population, urbanisation and ageing are trends that will continue to have an impact on living, shopping, working, mobility and leisure. These trends make it even more important to align the products in the real estate investment market with the future demands of both users and investors.
Strong increase in investment volumes
Given the low interest rate environment and the yield spread offered by real estate, investors’ capital inflow into real estate markets remains strong. In 2017, around € 21.0 billion was invested in the Dutch real estate market, significantly more than the € 14.1 billion invested in the previous year. This increase in investment volume was driven by both domestic and international investors, although the market share of the latter group increased. A year-end breakdown is not available yet, but midway through the year international players had accounted for 67% of total investments, compared to 60% for the full year 2016. Strategies among investors differ. Domestic institutional investors largely prefer core fund investments, while US investors target more opportunistic funds (even without seed assets) and Asian investors focus primarily on large single asset deals. European investors tend to concentrate on existing assets, preferably combined in a portfolio, which enables them to achieve acquisition targets more quickly.
We expect investors’ appetite to remain high for real estate investments, despite the expected rise in interest rates. This is due to the fact that real estate continues to prove its value in terms of adding diversification to investment portfolios and the attractive yield and total return it offers compared to interest rates and other asset classes. The highly transparent Dutch property market will remain a major destination for international investors eyeing European property markets.
Investment volumes increase further
Since the financial crisis, the residential market has been among the best performers in the real estate sector. While mostly driven by a strong capital growth, residential investments deliver solid returns at low risk, with stable income returns. The housing market recovery and strong investor appetite for residential investments led to high indirect returns across the market in 2017.
Preliminary data for 2017 indicates that the residential sector accounted for an investment volume of close to € 5 billion, or around a quarter of total real estate investments. This is a further increase on the € 3.6 billion invested in residential property the previous year.
While residential investments are generally more dispersed over the Netherlands than other property categories, often instigated by portfolio sales, institutional investors continue to focus on the largest cities.
As the fundamentals for the Dutch residential market will remain strong, given the housing shortage in the Netherlands, the continuing interest from investors will put further downward pressure on initial yields, as long as interest rates remain low. Amsterdam leads the way with prime yields as low as 3.3%, approximately 50bps lower than other key cities like Utrecht and Rotterdam.
Nowadays, almost all transactions in the main cities are executed through tender processes, while 1-to-1 transactions are still possible in other, more regional, areas. This is a situation that favours domestic real estate players, like Bouwinvest, with a strong local network, local market know-how and a development background.
Liberalised rental segment most attractive
In the Netherlands, the liberalised rental sector accounts for just 10% of the housing stock. Properties in this sector are not subject to maximum rental levels and annual rent increases are also freely determined. Together with its very low vacancy levels, this makes the liberalised residential rental sector a very attractive market for institutional investors. While it may be a small segment of the market right now, demand is growing steadily as a result of the price increases in the owner occupier market. Additionally, rent increases imposed in the government-regulated (social housing) sector are slowly driving tenants towards the liberalised sector. Consequently, demand for liberalised sector rental homes is expected to double in the coming next decades, especially in the larger cities.
The Dutch residential real estate market is characterised by marked regional differences in housing demand, with the strongest demand concentrated in regions with a healthy economic and demographic outlook. Population growth and the increase in the number of households is expected to be well above the national average in certain regions, such as the Randstad urban conurbation (Amsterdam, Utrecht, Rotterdam and The Hague), the Brabantstad conurbation (Breda, Eindhoven, Den Bosch and Tilburg) and the Arnhem-Nijmegen conurbation. On the other hand, population and housing demand is expected to fall in some peripheral regions in the north and east of the country. On balance, the quantitative housing shortage will continue to increase, partly due to the relatively small number of new homes being built and the continuing decline in average household size. The resultant gap between supply and demand will continue to put pressure on the market.
Another trend that is changing housing demand is the ageing population. Between 2017 and 2030, the number of elderly is forecast to grow by some 875,000 households, an increase of 44%. Many retirees, especially those living in the larger cities, are expected to sell off their existing properties and rent smaller, higher-quality and low-maintenance homes. These so-called lifecycle-proof housing developments are built or refurbished according to a wide range of sustainability-related criteria, including energy use and general liveability. They are also future proof in terms of providing the right amenities when residents need assisted living or healthcare services.
Overall, the rising number of younger single-person households and the effects of the ageing population are creating a growing awareness among municipalities, developers and investors that demand for liberalised rental homes is set to grow rapidly in these city centres.
Sustainability and climate change
The Paris Climate Agreement (COP21), the United Nations 2030 agenda for sustainable development and the Dutch Energy Agreement all marked the start of the race to curb global greenhouse gas (GHG) emissions in order to keep the global temperature rise below 2 degrees Celsius by 2050. At that point, all major business sectors should be operating in what will essentially be a zero carbon emission environment.
The built environment consumes around 40% of the world’s energy and accounts for up to 30% of the world’s annual GHG emissions. Additionally, the building industry is a large user of raw materials. It is therefore essential that the companies and people who manage global real estate assets play a significant role in finding solutions. This means that the building and construction sector has to move towards a completely zero carbon built environment by 2050. The Energy Performance of Buildings Directive (EPBD) applicable to European countries requires all new buildings to be near zero-energy by the end of 2020.
Sustainability and the residential market
In the coalition agreement, the new Dutch government announced it would be taking steps to improve the sustainability of the country’s housing stock, with a particular focus on current housing stock. Multiple market initiatives focused on reducing the consumption of non-renewable energy (including gas) have already been launched, in part because future owner-occupiers and tenants are increasingly demanding these solutions.
Technology and innovation
Property and technology
Proptech is an overarching term used for technological innovations in the property sector. Innovative proptech concepts include the creation of digital platforms for improved information and knowledge exchange, the use of virtual reality or augmented reality in the design and marketing of properties, the addition of sensors to buildings to obtain more insight into their usage and performance, advanced (big) data analytics for property selection, as well as the possible use of blockchain technology for smart rental contracts to speed up and simplify processes and cut overheads.
New construction process and materials
New materials are opening up possibilities and helping to increase sustainability. Overall, the trend is towards the re-use of building materials when redeveloping and constructing buildings in line with the circular economy concept. Additionally, we are seeing the rise of new building methods, sometimes on-site, such as 3D printing, but more often off-site. Drones can be used for inspection purposes, while robots can pour concrete and lay bricks.
Smart homes will increase efficiency and living comfort
Via the use of innovative technology, homes will increasingly collect their own energy, have near zero (or zero) GHG emissions, adapt to changes in the environment and communicate with tenants and society. This trend will boost tenant satisfaction and sustainability, plus financial performance. Additionally, blockchain technology will boost trust in smart rental contracts, which will speed up and simplify processes and cut overhead costs, while IT solutions are being developed to improve the community-tenant-landlord relationship for the benefit of all parties.