Monitoring risks is embedded in the daily activities of the responsible line manager and is an integral part of the planning and control cycle. Bouwinvest monitors all the defined risks via key risk indicators, supported by the performance reporting and business incidents reporting processes. Each quarter, the Board of Directors is provided with a risk report, including the risk indicators indicated above and actions necessary to limit or mitigate risk, if there is a deviation between the outcome and the pre-determined norm. The Fund continued to enhance its system for reporting and monitoring risk in 2018. These improvements enable management to act in a timely manner to counteract or mitigate risk.
The importance and relevance of the individual risk factors is constantly changing. In 2018, the Fund mainly focused on mitigating the market risk of lower financial occupancy in the portfolio. In addition, occupancy is an important driver for the expected return and value of the Fund. To mitigate the risk of lower financial occupancy, the Fund focused on increasing the knowledge about liberalised sector renters, our target groups and their needs in terms of their lives, living environment and rental motivation.
Regional and geographic developments can have a significant impact on future market conditions. Bouwinvest conducts continuous research into the dynamics of regional population growth and economic developments. This is the reason the Fund invests in the Bouwinvest core regions. More than 90% of the properties are located within these core regions, 80% of the properties in the Fund are located in the Randstad conurbation and almost 40% is located in Amsterdam. Although this results in a more concentrated portfolio, we believe that within the Netherlands, Amsterdam is the best city to invest in with the highest population growth and the most positive economic developments. This justifies the relatively high allocation in this city.
Fund-specific legal or regulatory risk
In 2017, the Dutch government proposed to amend the FII regime, potentially affecting the fiscal status of the Fund. In late 2018, the government abandoned this proposal, so this risk did not materialise. However, the Ministry of Finance announced that it planned to investigate the application of the FII regime by foreign real estate investors in situations that could be considered ‘abusive’. Since the Fund's application of the FII regime is considered to be in line with the spirit and purpose of the law, we do not expect the Fund's FII status to be considered ‘abusive’ and we do not therefore expect such an investigation to have a major impact on the Fund.
One potential operational risk in the Dutch residential market is the increased regulation of the liberalised rental sector. As mentioned before, there is a major lack of supply, especially in the mid-rental segment, and pressure on this segment of the market is therefore also increasing. As a result, larger municipalities in particular are taking steps to include concrete measures on this front in their housing policies, increasingly in close contact with stakeholders. So far, the focus and the regulation has been on newly built properties, but in the future we could see measures extended to standing investments. Bouwinvest itself and the IVBN are actively engaged in discussions with both local authorities and the national government to influence the decision-making on this front, to reduce or mitigate the risks of such legislation.