Economic headwinds will impact the Dutch real estate market in 2023, but strong fundamentals will tide it over until more benign conditions set in, Bouwinvest Real Estate Investors predicts in its outlook report for the coming three years.
The macroeconomic outlook for the Netherlands has deteriorated significantly since Russia’s invasion of Ukraine in February 2022, and the resultant energy crisis has put the economy on track towards a potential recession in 2023.
Soaring inflation has also hit the property industry as it grapples with rising energy, labour and construction material costs, while rising borrowing costs are impacting leveraged real estate investors.
Against this backdrop, real estate deal volumes are drying up as investors wait for assets to reprice before a new equilibrium is established in asset values.
Yet thanks to strong fundamentals, the Dutch market is well positioned to weather the storm, with 2024 set to be a ‘more attractive year’ than 2023, said Jeroen Beimer, head of research and strategic advisory at Bouwinvest.
‘The real estate fundamentals are healthy thanks to expected household growth and relatively low vacancy rates, among other things. That will generate opportunities for investors who use little or no leverage in particular given that financing costs have risen and forced sales are on the cards.’
In its Dutch Market Outlook 2023-2025 report, Bouwinvest highlights residential and healthcare real estate in particular as promising sectors.
Strong demographic fundamentals continue to underpin the residential rental sector as supply falls seriously short of demand, notably in the mid-range affordable rental segment.
The number of households is set to increase by over 12% by 2040, due mainly to the rising number of single-person households and the ageing of the population.
Market rents for residential continued to increase in the second quarter of 2022, by an average of 11.8% compared to the year-earlier period.
Healthcare real estate is also seeing a surge in demand for more modern and ‘needs-based’ senior living and care complexes amid the accelerating structural ageing of the Dutch population.
This is already attracting a rising number of investors, and real estate investment volumes in the healthcare segment are surging as a result. Total transaction volume climbed from €335 mln in 2015 to more than €1.2 bn in 2020, before levelling off to just over €1 bn in 2021. A comparable volume is forecast for 2022 following a strong performance in the first nine months of the year.
Bouwinvest believes more alliances between care institutions, investors and other stakeholders including local authorities, developers, housing corporations and insurers are needed to tackle the huge task of creating sufficient high-quality care accommodation in coming decades.
Overall demand for office space is expected to fall in the Netherlands now that working from home has become common practice, but rents have been climbing on the back of record-low vacancies and higher inflation. Although initial yields may move out in the coming months, the supply of the most modern and sustainable offices is expected to tighten further due to stricter requirements for energy performance and environmental regulations for new developments.
From 1 January 2023, all offices in the Netherlands - excluding listed buildings - will be required to have a minimum C-rating for energy efficiency. Owners of offices that do not possess a C certificate or higher will not, in principle, be allowed to lease their space from that date.
A recent study by CBRE indicated that some 10% of all Dutch office stock had a D-rating or worse, while the energy performance of around 26% of total supply was not even known.
Across the market as a whole, Bouwinvest believes that the valuation divide between ‘green’ and unsustainable assets is set to deepen as discerning investors, spurred by the energy crisis, increasingly focus on the ESG characteristics of their investments.
Said Beimer: ‘A growing body of evidence shows it pays to be green over the long term, both on the financial front as well as in terms of environmental, social and governance (ESG) returns. A consensus is emerging that sustainable buildings command higher rents and values and provide more stable long-term financial returns. Impact investing is also gaining ground by prioritizing sustainability in both a social and environmental sense, alongside financial returns.’
