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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 development, 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 growth forecasts show a diverse but lower growth path for the years ahead. Firstly, the growing lack of affordable housing was affecting 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 ended its stimulus programme at the end of 2018 and this is expected to result in higher policy interest rates.

The Dutch labour market performed very strongly as a result of both job growth and the decline in unemployment rates to record low levels. However, the 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 inflation 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 strongly-performing housing market has been one of the pillars of the recent spurt in economic growth. However, construction firms have on average taken on more work than they can deal with and they are now faced with a shortage of skilled employees (which is partly a direct consequence of the loss of jobs during the aftermath of the financial crisis). They are also facing higher building costs, driven in part by a growing shortage of materials. The risk now is that construction firms will have to turn down projects simply because they do not have enough staff. This could temper growth in the construction sector in the years ahead.

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.

With respect to the residential market, the national government is increasingly focusing on the growing housing shortage. The Dutch Interior Ministry’s National Housing Plan 2018-2021 formulates three main priorities: build more homes and build them more quickly, continue to provide affordable homes, and use the existing supply more efficiently. Increasing the supply of homes – a minimum of 700,000 new homes in the period to 2025 – will be the biggest challenge.

In addition to the fact that the Dutch Interior Ministry has increased its focus on the housing market, it is the local (municipal) authorities that have the greatest impact on housing policy. On the liberalised sector front, the mid-rental segment is an important issue for many municipalities in their efforts to ensure sufficient affordable homes for middle-income households. In their coalition agreements, many large municipalities have agreed to increase their focus on boosting the number of mid-rental homes, and the national government has specifically targeted this category of rental home in its draft bill Measures Mid-rental Segment. Over the past few years, municipalities such as Amsterdam and Utrecht have taken major steps to include concrete measures in their housing policies on this theme. Alderman Laurens Ivens of Amsterdam is looking for ways to increase the regulation of the mid-rental segment, which is difficult to accept for institutional investors. Other large municipalities are also working hard to come up with new policies and regulations, increasingly in consultation with stakeholders.

Sustainability and climate change

One of the many consequences of not meeting the Paris climate control goals will be a global 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 the 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 have to prepare for.

In mid-2018, the Social Economic Council of the Netherlands (SER) announced the main concepts of the Dutch Climate Agreement to comply with the Paris Climate Agreement. For the built environment: before 2050, seven million homes and one million other buildings will have to be made sustainable in one way or another to make them low (or even net-zero) carbon. This pertains primarily to existing buildings, as newly-constructed buildings will have to be nearly energy neutral from 2020 onwards to comply with the European Energy Performance of Buildings Directive (EPBD). However, lots of the technology required already exists and companies are already preparing to make a start on this initiative. One hot issue is the affordability of the required changes and who will pay. The government has now said it is willing to increase tax on natural gas and reduce the tax on electricity, which will act as an incentive to switch to more renewable energy sources. On the rental property front, the split between investments and financial profit still needs to be settled. Other challenges that need to be addressed include: the availability of skilled workers, reducing the costs of measures, the development of new technologies, digitalisation of the building process and the availability of proven solutions and resources.

Sustainability and the residential market

Before 2021, local governments will declare their fossil-free heating solution and where and when this will be available at district level, targeting the disconnection of two million houses from natural gas grid before 2030, starting with the assets of housing associations. Asset owners will embed this into their sustainability plans and also integrate the reuse of building materials and elements in the building life cycle. While we fully endorse the need to mitigate the impact of future climate change, we also recognise that the impact of climate change is already being seen and felt and that real estate assets need to be resilient. For example, so they can recover quickly following an extreme weather event.

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 Sustainable Development Goals (SGDs) to demonstrate their contribution to society.

With regard to the residential market, this is increasing the overall focus on sustainability. This is also in line with demand: both investors and tenants are increasingly focusing on this aspect.

Demographics and social changes

The number of households in the Netherlands is expected to increase by around 11% in the period to 2040. This is equivalent to an extra one million households. The highest growth will be seen in the number of single-person households and the number of homes for elderly people. On the ageing front, the Dutch population is undergoing what is termed double ageing; not only is the number of elderly growing, but people are on average living to an increasingly advanced age. The number of 65+ households as a proportion of the overall population is expected to increase from the current 28% to 38% in 2040.

Due to the ongoing urbanisation trend, the majority of these extra households will be concentrated in the urban regions of the country, with the highest concentration in the Randstad urban conurbation. Due to the influx of student and starters, the ageing of the population will be far less pronounced in the major cities than in the rest of the Netherlands. People want to live in these large cities, because that is where the jobs are and where they find a broad range of amenities. Due to the pressure on the larger cities, affordability and liveability are becoming more challenging in some sub-markets. As a result, a growing number of households are moving to the suburbs.

Demographic shifts in population, urbanisation and ageing are long-term 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 homes and residential locations.

Consumers are embracing technological changes more and more quickly and are becoming increasingly mobile. This is driving the growing demand for rental homes and increasing demand for personalised services, such as mobility that makes living somewhere more convenient. In addition to physical homes, users expect digital service platforms that cover the likes of energy use, interior climate, health and complaint procedures. The addition of virtual and augmented reality to products and services is becoming more important, to help get a story across to a target group effectively.

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.

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

Occupier market

The pressure on the housing market is the most pronounced in the largest cities of the Netherlands, especially in the Randstad urban conurbation. Because the production of new-build homes is lagging demand, this pressure is expected to persist and even increase for the foreseeable future, and in fact to spread further to municipalities around the big cities (the so-called ‘waterbed effect’). This lag in the production of new homes over the past few decades has created a quantitative housing shortage. On top of this, there is a growing qualitative housing shortage due to the above-mentioned demographic shifts. In other words, homes that are severely outdated and homes that no longer meet market demands, such as post-war apartment buildings without a lift, will have to be upgraded and updated or demolished and replaced with new housing.

The scarcity of homes in the urban regions of the Netherlands is pushing up house prices and rents, making fewer and fewer homes affordable. This is primarily hitting starters and middle-income households. These people are now looking for creative solutions (sharing/smaller homes) to make sure housing remains affordable.

On average, people are more willing to compromise on space than they are on the location of their homes. On top of this, cities are seeing a steady rise in the number of one or two-person households. Investors and developers are responding to these developments, but they are also being forced to a certain extent to create this compact housing stock due to higher ground prices. Although compact apartments may be a solution for a portion of the current home seekers, we expect the latent (underlying) demand for larger apartments to persist for the long term.

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 during 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 with 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, a trend that was most notable in the residential market. In contrast, institutional investors remain the biggest players on the buy side, although they are still 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 property, while the ECB's quantitative easing policy has come to an end and the ECB is expected to increase interest rates from mid-2019 onwards. The impact of Brexit and ongoing trade wars might prove stronger than expected, while in the residential market affordability is becoming a major issue.

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

The residential investment market reached a volume of € 7 billion in 2018. Compared to the previous year, this is an increase of nearly 60%. For the first time in several years, residential real estate was the most invested asset class in the Netherlands. The largest transactions included a number of significant portfolios. Dutch investors accounted for 64% of the investment volume. Foreign buyers are still active on the Dutch residential market, but some opportunistic foreign investors sold existing portfolios towards the end of 2018. Thanks to price and rental increases, they were able to achieve a relatively high return in a short period of time.

The steady interest from domestic and international institutional investors and private investors, combined with a shortage of supply, has increased pressure on prices and yields. Prime yields stood at around 3.0%-3.5% in Amsterdam, approximately 50 bps lower than other key cities such as Utrecht and The Hague. Due to these low prime yield levels, investors are increasingly eyeing investment opportunities outside the Randstad urban conurbation.

Market opportunities and risks

Bouwinvest expects the pressure on the strong housing market to remain high in the coming years. The growing demand for homes and the lag in the construction of new-build homes is creating shortages in large parts of the Netherlands. Due in part to this scarcity, the strong regional housing markets will see above average value increases. 

Because of the strong demand and housing shortage, fundamentals on the rental market remain favourable. Vacancy levels remain low, especially in mid-rental segment. This means that it will remain interesting for investors to make long-term investments in residential rental real estate.

The attractiveness of the Dutch housing market is increasing the competition for quality assets. This is pushing up acquisition prices and there are fewer and fewer acquisition opportunities, especially in the core cities of the Netherlands. As a result of steadily increasing prices, affordability is becoming a major issue on the Dutch housing market, both on the rental and the owner-occupier housing markets.

Bouwinvest has noted that new (local) policies related to the mid-rental segment are having an ever increasing impact on new acquisitions. Additional requirements, such as those related to maximum starting rents, minimum surface areas and lower rental indexing, are all having an impact on investment cases and the feasibility of any targeted returns. On the other hand, we do expect the mid-rental segment to have a low risk profile in view of the strong and stable demand. In addition to this, investing in the mid-rental segment can be viewed as a socially impactful investment.

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