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Report of the Board of Directors

Market developments and trends


The Dutch economy continued to perform strongly in 2018, although momentum did weaken in the second half of the year. Private consumption was the primary driver of this economic performance, while the growth of exports flattened. High levels of consumer confidence in combination with low interest rates fuelled house price increases and boosted housing market related sectors.

Real GDP growth amounted to 2.6% in 2018, which makes the Netherlands one of the most flourishing economies in Western Europe. All the drivers of economic growth showed positive figures, but private consumption was clearly the strongest. The 9,3% increase in house prices had a positive impact on other economic segments. However, economic forecasts show a diverse but lower growth path for the years ahead. Firstly, a steady decline in housing affordability had affected consumer confidence by the end of the year and this is expected to have a negative impact on private consumption going forward. Secondly, higher interest rates are likely to flatten economic growth. The European Central Bank had ended its stimulus programme by the end of 2018 and this is expected to result in higher policy interest rates.

The Dutch labour market performed very well as a result of both job growth and a decline in unemployment rates to record low levels. However, a record number of job vacancies has resulted in a very tight Dutch labour market. Over the course of 2018, consumer prices increased slightly and forecasts indicate a further increase to slightly below the 2% plan rate. Although the outlook for the Dutch economy looks good, especially in a European context, forecasts signal a trend towards lower growth.

This outlook coincides with greater ambiguity due to several factors. The European economy is facing the challenge of the (still unknown) outcome and impact of Brexit, but also of political tensions and anti-European populist sentiments in specific countries. On a global scale, geopolitical tensions and protectionist policies will lead to growing uncertainty in the years to come.

The thriving economy also resulted in a further increase of employment. Most recent data shows an annual employment growth of 2.8% to 8,420,000 jobs in September 2018, while office employment increased by 9.9% to 2,779,000 in the same period (CBS). The Dutch government's economic policy analysis unit CPB expects total employment to grow by 2.2% in 2018 and by 1.5% in 2019.

Public policies

For most of 2018, the Dutch institutional investment market was dominated by the debate on the Dutch government’s plans to abolish the 15% withholding tax on dividends from shares in Dutch companies. The government’s 2019 Tax Plan stated that due to the abolition of the dividend tax, Fiscal Investment Institutions (FIIs) would no longer be allowed to invest directly in Dutch real estate. This measure would also have impacted the Dutch sector funds that Bouwinvest manages. However, the coalition parties were divided on this measure and following certain specific market developments, in October 2018 the government withdrew its plans to scrap the dividend tax. This led in turn to the immediate withdrawal of the proposed ban on direct investments by FIIs. Consequently, Bouwinvest no longer needed to adjust the structure of its Dutch sector funds.

The public policy with the largest impact on the office market is the push towards more energy-efficient buildings, which will be discussed in the next section on sustainability. At a local level, there is an ongoing trend among municipalities to facilitate the transformation of outdated offices for other uses. However, as a number of prime office locations now have almost no supply left, municipalities are now slowly including opportunities for new prime developments in their policies. These often pertain to developments with a combination of functions to ensure future use and liveability.

Sustainability and climate change 

One of the many consequences of not meeting the Paris climate control goals will be a temperature rise. If global temperatures increase by four degrees, for instance, it is difficult to predict what the consequences will be. We do know that weather conditions will become more extreme with both flooding and droughts. As a result, agriculture will be impacted and areas will become uninhabitable. This will push migration and once again increase the pressure on habitable areas. This is a scenario we will have to prepare for.

In mid-2018, the Dutch Social Economic Council (SER) announced the main concepts of the Dutch Climate Agreement to comply with the Paris Climate Agreement. On the built environment front: before 2050, seven million homes and one million other buildings (including office buildings) will have to be made sustainable one way or another to make them low (or even net-zero) carbon emitting. This pertains largely to existing buildings, as newly constructed buildings will have to be close to energy neutral from 2020. However, a great deal of the technology required already exists, and companies are gearing up to start the transition. One hot issue is the affordability of the measures. In a move aimed at addressing this issue, the government has said it is willing to increase the tax on natural gas and reduce the tax on electricity. This will create an incentive to insulate buildings and install sustainable heating systems. In rental situations, the issue of the split between investments and financial profit still needs to be addressed. Other challenges that will need to be overcome include: the availability of skilled workers, cutting the cost of measures, the development of new technologies, the digitalization of the building process and the availability of proven solutions and resources. 

Sustainability and the office market

Before 2021, local governments will come up with plans for the energy transition and map out the availability of sustainable heating at district level. Asset owners will embed this into their sustainability plans and also integrate the reuse of building materials and elements in the building life cycle. In addition to mitigating the effects of climate change, we recognise that climate change is already having an impact and real estate assets need to be resilient. For example, so they are able to recover following an extreme weather event.

The Dutch government recently introduced new legislation that stipulates that from 2023 all office buildings will have to have the minimum of energy label C. Listed buildings are exempted from this requirement for the time being. We expect this law to be tightened even further for offices in the future, which will have an impact on the office market. Outdated offices in mono-functional areas with poor accessibility will be particularly challenging, as it may prove difficult to make a sound business case for continued use as office space. Thankfully, there is no shortage of initiatives to convert outdated office space for other uses, although this does still depend on the location of the buildings.

At the moment, we are seeing that investors are looking for assets and pilot projects that can help them demonstrate their commitment and contribution to the delivery of climate goals. Furthermore, the industry is adopting the UN's Sustainable Development Goals (SDGs) to demonstrate their impact on society.

This is increasing the focus on sustainability in the office market. This is also in line with demand: both investors and tenants are increasingly focusing on this aspect.

Demographics and social changes

Major demographic trends within the Netherlands are population growth, ageing and urbanisation. Due to the ageing of the population, the forecast related to the working age population indicates a slow but gradual decline from 2026 onwards. At the same time, the labour force is expected to remain stable, also in the long run, as people will remain employed to a later age and the participation of women will continue to increase.

The urban regions of the country, with their influx of student and starters, show the strongest growth and are much less affected by ageing. They attract new residents due to the concentration of jobs, but also of cultural and recreational amenities.

In the office market, employers are following the trend of urbanisation and polarisation and generally opt for growing cities that enjoy a steady influx of (young) workers. Employers tend to focus on mixed-use locations with good public transport connections, which meet the qualitative requirements of the working population.

The labour market is becoming more flexible, due to more self-employed people, more companies with a flexible labour pool and an increasing number of people working in a flexible setting. As a result, demand from office users for more flexibility on the rental side is increasing substantially, especially in the largest cities. These office space providers often provide additional services and generally aim to include ‘experience’ elements in their properties.

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.

Technology and innovation

We are seeing the development of new technologies that improve the quality and productivity of business operations and people’s lives on an almost daily basis. This is also true for the real estate sector. Solutions for the current problems faced by today’s construction industry, i.e. the lack of skilled workers and the future shortage of building materials, may be found in the technology of smart robots, the development of new (bio-based) materials and improved circularity. Innovations in other industries, such as ultra-fast trains and driverless cars, could change the choices people make in terms of how and where they live, work and shop. This will have a direct impact on the quality of the locations in terms of how we value them (financially). The growing amount of (big) data may offer a solution. By using new technologies, we will be able to use this data to make more accurate predictions regarding the attractiveness of offices and locations.

Consumers are embracing technological change more and more quickly and are becoming increasingly mobile. This is driving the growing demand for smart office buildings and flexible contracts. In addition to physical office space, users expect digital service platforms that cover the likes of interior climate, health, complaint procedures and related services. This has led to enormous growth for companies such as WeWork. The addition of virtual and augmented reality are making products and services even more attractive for users.

Blockchain technology holds the potential for self-executing contracts, due to the fact that it can be used to settle financial transactions without the intervention of a single person and it is completely trustworthy. This could be interesting for the likes of rental contacts and the outsourcing of work.

To continue to attract (new) tenants to deliver added value to all stakeholders, it is essential to integrate new technologies and innovations in offices and any ancillary services provided in conjunction with the office space. This makes it important to work with new market entrants who are developing these applications.

Occupier market

The economic growth and positive outlook means that companies are anticipating (further) growth, are more inclined to relocate and are more willing to invest in their office accommodation. The Netherlands in general and Amsterdam in particular consistently score high in terms of quality of life, level of education, innovative strength and infrastructure. In the struggle to attract and retain talent, companies see an attractive office at a representative and thriving location with excellent access as an essential asset.

Over the course of 2018 take-up of office space remained fairly stable and totaled 1.4 million square metres, while national vacancy dropped from 13.1% to 9.6% at year-end 2018. At the best locations in the Netherlands, vacancy is currently so low that moving there can be very challenging, while available supply is also dropping substantially in more secondary locations. The latter is also partly due to the ongoing trend of converting empty offices to other uses. 

Vacancy rates in the office market are expected to continue to decline in the coming years. The office market will, however, remain primarily a replacement market at national level and an expansion market only in the strongest cities.

Prime rents continued to increase in 2018, especially in top locations and are currently well over € 400 per m2 in the Amsterdam city centre and the city's Zuidas business district, and well over € 250 per m2 in the Utrecht city centre. In all cases, these are previously unheard of rent levels. In a number of good, alternative locations, we are also seeing increasing upward pressure on rental prices. These locations tend to appeal to companies that do not want to be situated in an expensive 'corporate' location. In more tertiary areas, on the other hand, the downward pressure on rents in recent years has now largely come to a standstill.

For the coming plan period, we expect the best locations to continue to benefit from the high demand and shortage of good office supply, even if economic growth declines somewhat. Especially since a substantial part of growth will stem from the fast growing IT sector, which generally aims for high quality urban office locations. Other regions will have to continue to transform outdated office space to other uses.

Investment market

Given the low interest rate environment and the yield spread offered by real estate, investors’ capital inflow into real estate markets remained strong over the past year. In 2018, around € 21 billion was invested in the Dutch real estate market, just short of the record high € 21.9 billion invested in the previous year. This large investment volume was driven by both domestic and international investors, although the market share of the latter group remained dominant. In 2018 international players accounted for 59% of total investments, compared to 76% for the full year 2017.

On the buy side of the investment market, we are seeing a clear shift. Opportunistic and value add funds used the positive momentum in the market and moved towards the sell side, most notably in the residential market. In contrast, institutional investors remain among the most notable buyers, although they remain active on the sell side too, as they dispose of non-core properties and continue their roll-over strategies.

However, potential threats are looming over the real estate investment market. Prices are high for all financial assets, including real estate, while the ECB's quantitative easing policy has come to an end and the ECB is expected to raise interest rates from mid-2019 onwards. On top of this, the impact of Brexit and unfolding trade wars might prove stronger than expected.

Still, we expect investors’ appetite for real estate investments to remain high, due to the fact that real estate continues to prove its value in terms of adding diversification to investment portfolios and the total return it offers compared to interest rates and other asset classes.

The appetite for Dutch real estate was also visible in the office sector, where the total investment volume reached around € 5.8 billion in the full year 2018, around 24% lower than the record high € 7.7 billion invested in the previous year. The share of office investments in the total real estate investment volume dropped to 28% from 35%, as investments in other categories increased more rapidly, especially in the residential and hotel markets.

Buyers of office properties are often foreign investors, especially in the prime office market segment. In the core areas of the largest cities, the vast majority of the office buildings are now owned by foreign investors.

Most (international) investors remain focused on cities and locations with strong employment, large demand for office space and, consequently, low vacancy rates and positive rental outlooks. However, the lack of adequate investment product in these locations, especially in Amsterdam, did result in a shift of investor focus to other major cities, especially Rotterdam and Utrecht.

In line with the increase in investor interest, yields continued to compress in 2018 and have now dipped to below 4% gross initial yield for prime properties in Amsterdam. Strong locations in the cities of Utrecht, Rotterdam and The Hague are changing hands at an average yield level of 4.75% to 5.75%, historically low yield levels. While the sheer volume would suggest otherwise, investors remain well aware of the office market risks, resulting in a further widening of the yield gap between prime and secondary properties.

Market opportunities and risks

Bouwinvest expects mixed-use, easily accessible, metropolitan office locations to continue to flourish in the coming period. Especially as a substantial part of office market growth will stem from the fast-growing IT sector, which generally aims for high-quality urban office locations.

The vacancy in these areas is expected to remain low, ensuring an upward pressure on rents and thus a strong attraction for (international) investors. As a result, initial yields at these locations will remain sharp, barring economic and political uncertainties. Some secondary locations within major cities are also showing growth potential, provided public transport accessibility is good and additional functions are added, including homes, shops, hotels and other facilities.

The office occupier market is undergoing substantial changes. Occupiers increasingly expect flexibility in rental periods, additional services, smart and healthy offices, hospitality and experience. This also influences the role of the investor.

Global tensions (for example in the field of trade), the imminent Brexit and the ECB's changed monetary policy (and potential rate hikes) are among the biggest risks for the economy, for employment and therefore for the office market, but less so on the prime sites in major Dutch cities.

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