Dear stakeholders,
The Office Fund had a very busy year in 2018, on both the redevelopment and acquisition fronts, and emerged with a total return of 11.5%. The global financial crisis hit the office market the hardest and we have seen a number of very difficult years, because the office market is the most sensitive to economic cycles. But the market is now recovering strongly, as we are in an economic upswing. The Dutch economy is performing strongly and unemployment is at record lows. In fact, the office market is doing so well one of the biggest challenges is the fact that supply is lagging demand, especially in prime office locations in our core cities.
And once again, our strategy of focusing on the G4 cities and multi-functional locations with easy access to public transport and road links paid off last year, as we saw valuation increases and got our occupancy rate up to 89.2%. This despite the fact that the Office Fund could be considered a portfolio under construction, as we await the completion of a number redevelopment projects and two prime new-build projects in Amsterdam and Utrecht.
We made a lot of progress on the redevelopment front last year, despite a number of major hurdles. We furthermore reached agreement with the Dutch Heritage Agency on the listed section of WTC Rotterdam, which should speed up a number of projects in the building. We also opened the Business Center and the new coffee shop. Very encouragingly, the Rotterdam office market is showing clear signs of recovery from a vacancy rate of 20% at one point. WTC Rotterdam will help us take full advantage of the increasing demand for high-quality office space in the city.
We also faced delays and snags in the redevelopment of the former Citroen buildings Amsterdam, Building 1931 and Building 1962. We were forced to assume control of the projects and we are now back on track to deliver according to a new schedule. This obviously involved a great deal of extra time and attention, as we had to appoint a task force to deal with a wide range of issues. I am grateful for the collaboration with sub-contractors, suppliers and tenants to arrive at solutions that everyone is happy with. It was a tough job but we got it done together. Our original slogan when we started this project was ‘Aim higher’. And that is exactly what we did.
Once completed, this project will give us two unique office buildings, with high-profile tenants. Pon Holdings, with its Move mobility concept, and sports apparel firm Under Armour are a perfect fit with the ethos of the capital’s Olympic area.
And we made a second major acquisition of a new-build project after the acquisition of Hourglass in Amsterdam in 2016: the Central Park building fills a gap in our portfolio, as it gives us a prime office building in Utrecht and will give our portfolio a much better balance between the G4 cities. So while Central Park is very attractive from a return point of view, it is even more important strategically, as we now have a major asset in all the G4 cities. Central Park is in an outstanding location, right next to Utrecht Central Station in the heart of the city, and in an area that is undergoing a major transformation. It will also be built to the highest levels of sustainability in line with the Fund’s responsible investment ambitions. And on another level, this building will be a wonderful boost for Utrecht as a city, as well as for the Holland Metropole region.
Meanwhile, Hourglass is on schedule for completion in the fourth quarter of 2019. This will be an iconic building in what is rapidly becoming the busiest area in the Netherlands, the Zuidas business district.
Of course, the economy was booming in 2018 and there are now signs that we will see a slight slowdown in economic growth this year and 2020. But the demand for office space in prime locations, especially multi-functional locations with outstanding transport links, will remain strong even in an economic downturn and long into the future. This puts the Office Fund in a strong position for future returns.
The major dilemma on the office market is the fact that so much office space that is simply not fit for purpose in today’s - or tomorrow’s - office market. And it never will be again. This is why there are such high vacancy rates in certain parts of the country, or certain areas in our cities. A lot of this office space will have to be transformed for other purposes or demolished if this is not appropriate. Luckily, local and national governments have proved willing to work with the real estate industry to try to solve this problem, so there is hope for a solution to the growing mismatch in supply and demand in the office market.
One of the major issues that dominated the market for much of last year was the government’s plans to scrap the dividend withholding tax. One consequence of the abolition of dividend withholding tax was that Fiscal Investment Institutions (FIIs) would no longer be allowed to invest directly in Dutch real estate. This would have had a major impact on the Dutch sector funds that Bouwinvest manages and required Bouwinvest to restructure its investment funds to mitigate this impact. Thankfully, due to a strong lobby and certain circumstances, the government abandoned its plans to scrap the dividend tax and the proposal to ban direct investments in real estate for FIIs. This lifted the cloud of uncertainty that had hung over the Dutch real estate market and we saw an immediate uptick in interest from investors, who had been waiting on the sidelines to see what would happen.
We can now put our full focus on the continued optimisation of our portfolio. We will continue with the redevelopment projects in Amsterdam and renovation of WTC Rotterdam. We will also be devoting a lot of attention to our new-build projects in Amsterdam and Utrecht. And we will be keeping a close eye on the market for any outstanding acquisition opportunities. That said, the office market is so popular with investors right now that the competition for prime assets is likely to make it difficult to meet our hurdle plans. However, we are fully confident we will achieve our growth plan of invested capital of € 1.2 billion in the coming plan period. This will give us the synergies and scale we need to safeguard our long-term return plans for our investors.
All that remains now is for me to thank our investors for their continued faith in our strategy and all our employees for their hard work and commitment to Bouwinvest in 2018.
Dick van Hal
Chairman of the Board of Directors