E&Y: Equity players back in the limelight in Holland

Equity investors will play a larger role in the Dutch real estate market during 2008 as the locations and sectors attracting investment are likely to change, according to Ernst & Young Real Estate Group. In March 2008, Ernst & Young RE asked a representative set of real estate professionals in merchant banks, institutional investors, pension funds, fund managers and REITs about their views of the market.

One of the main messages of the survey was that the financial turmoil and associated absence of liquidity is leading to relatively more transactions involving smaller portfolios at the expense of larger ones. Respondents to the survey predicted that total investment volume for 2008 will be lower than the record of EUR 13.2bn last year. The 2007 figure was 20% up on 2006. Logistics and retail, as well as a differentiation between A- and B- locations, will be more important this year, the survey found, but office investments will remain the most attractive sector.

The total investment volume in 2007 amounted to EUR 13.2bn as the relative share of offices, residential and mixed-use assets increased. The office sector, the most important investment sector in 2006, gained further in popularity last year. The office sector attracted EUR 8.1bn, about 60% of the entire investment volume.

Banks have become more cautious, and their caution matches the nascent risk sensitivity of investors, Ernst & Young said. Off-balance-sheet financers, who used to underwrite large transactions, currently lack the option to refinance through the securitisation market and have lapsed into virtual inactivity. Additionally, the boom of large transactions in the last few years is expected to fade as financers are asking a higher risk premium due to interest rate uncertainty.

Returns in future will be driven more by rental performance from underlying assets than capital values. The market will show a stronger differentiation of yields between A- and B- locations. Risk is again a decisive pricing factor. Properties at A-locations are characterized with long lease contracts and stable cash flows. The focus on acquiring these properties will become more challenging than in the past and active asset management will become more important.

High-leveraged investors dominated the investment market in 2007 but it is now virtually impossible for them to obtain such financing. Debt has become more expensive. The banks are increasing spreads and reducing LTV's to reflect a higher risk premium. This is one of the main reasons why it is expected that private equity funds, in particular, will partly sell some of their recently acquired properties. In addition, corporates might be among the most active vendors in 2008. They are expected to realise a considerable number of sale-and-leaseback transactions.

Authors - Ad Buisman and Frank Albers: Ad Buisman is Partner Ernst & Young and European head of Ernst & Young real estate, hospitality and construction group. Frank Albers is Senior Manager at Ernst & Young real estate advisory services, Netherlands and responsible for Real Estate transaction support.