Economy & politics
Positive outlook Dutch economy
In the course of 2017 the Dutch economy has gained additional positive momentum. GDP growth was largely driven 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 as yet 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 current 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 (Dutch: ‘FBI’) 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 office market
Newly introduced policies related to the office market included new regulations on sustainability and will be covered in the section on sustainability and climate change.
Demographics
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. At the same time, the working population in the Netherlands will show virtually no growth over the coming years. The major Dutch cities however, especially those within the Randstad region, will continue to grow in number of inhabitants as well as in employment.
Employers follow the trend of urbanisation and polarisation and generally opt for growing cities which show a steady influx of (young) working people. The focus of employers tends to be towards mixed-use locations at well-connected public transport locations, meeting the qualitative requirements of the working population.
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.
Capital market
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.
Positive expectations
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 market
Investment volumes up, supply of core product limited
Preliminary data for 2017 indicates that the office sector accounted for an investment volume of around € 7 billion, or around a third of total real estate investments. This is a further increase on the € 6.0 billion invested in office property the previous year. It should be noted that office buildings purchased with an eye to converting them for other uses, often residential, are not included in these figures.
Overall, most investments are focused on cities with strong employment and economic growth figures. On the office investment front, locations differ from prime CBD to inner city locations near public transport links, to redevelopment sites such as former factories, which are currently in favour with more trendy office occupiers.
In line with the increase in investor interest, yields have continued to compress. This compression was particularly marked in the Amsterdam region, where gross prime yields are now hovering near the 4% level. Good locations in the cities of Utrecht, Rotterdam and The Hague are changing hands at an average yield level of 5.5% to 6.0%. Cities like Eindhoven and Den Bosch have prime initial yields of around 7.0% to 8.0%.
While the overall volumes are exceptional, investors are generally being cautious, as the fundamentals of the office market are still mixed. On the one hand, the average vacancy is still high on a national level and the trend towards the more efficient use of office space is continuing; on the other hand, employment growth has been substantial and conversions of older office stock is substantially reducing vacancy rates.
Investor appetite for real estate remains high
Following the increase in investment volumes, we expect investor interest for the office market to remain high, resulting in further downward pressure on yields. However, due to the declining availability of prime stock combined with the relatively low level of yields for prime property in Amsterdam (the Zuidas business district and the like), it has become increasingly difficult for core investors to meet their return targets.
They are therefore increasingly focusing on core+ and value add product, while also broadening their scope towards portfolios encompassing multiple sectors. In addition, these investors are increasingly open to taking up lease risk or even a certain level of development risk.
Occupiers market
Demand, supply and vacancy showing positive trend
Employment growth picked up strongly in 2017, in line with the steady growth of the Dutch economy. This has had a positive impact on the Dutch office occupier market, as shown by a further increase in take-up volumes: up 26% to 480,000 m2 in the first half of 2017. The increase in office take-up was especially marked in Amsterdam (+66%), showing the ever-increasing pulling power of the Dutch capital.
Demand was very much focused on modern, multifunctional office space with good transportation links located in the larger (inner) cities of the Randstad region. Vacancy rates in these prime office locations are falling rapidly and in some areas, like the Amsterdam Zuidas business district and the Utrecht Central Station area, there is now a shortage of high-quality office space. In those areas, rents have been on the rise for some time and this is where most new office developments are being built.
Conversions main driver for lower vacancy
Increased take-up coupled with ongoing conversions of outdated offices to other purposes has led to a further overall decline in supply and vacancy rates. Vacancy is currently standing at around 13.1% for the national office market. It should be noted that there still is a large excess supply of outdated stock in some secondary locations and in peripheral regions that are not benefitting from economic or demographic growth.
Sustainability and climate change
Global goals
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 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 office market
In late 2016, the Dutch government announced that as of 2023 office buildings will be required to have a minimum of a C energy label. If a building has a D-rating or worse it can no longer be used as an office building. Monuments will be exempted from this requirement for the time being. While this may not directly affect the Bouwinvest portfolio, it will have impact on the overall office market. Outdated offices in areas with low price levels and high vacancy rates 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.
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 knowledge on 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 offices will boost the health and well-being of occupants
The real estate business, originally conservative in nature, has been discovered by start-ups that offer a wide range of new services for building owners, asset managers and tenants. An important development is the rise of Environmental and Energy Management Systems (EMS). These systems enable owners and managers to actively monitor and collect building data, such as occupancy rates, energy usage, quality of the indoor climate and waste, using sensor technology. Improving insight into this data will improve management decisions related to tenant health & well-being and a building’s environmental footprint.
Additionally, office workers can use IT solutions to adapt the likes of temperature and lighting automatically to their individual preferences. When building data is combined with external data, like the diaries of employees and weather forecasts, these systems turn office buildings into smart offices. It is then just a small step to healthy offices, which maximise benefits for people (low carbon, resource efficient, healthy and productive).