EPRA Insight: Investors catch up in the Benelux

Cheap debt thanks to a very accommodating ECB and strong competitiveness amongst lenders has prompted a wide range of foreign investors to catch up to the Benelux market, attendees at the EPRA Insight event in Amsterdam heard earlier this week.

Moreover, a strong shift from value-add to core investing is tempting landlords in this market - which until recently lagged behind the core countries in Europe - to become net sellers.

While the discussion at London’s EPRA Insight a week earlier revolved around red flags and the possible end of a cycle, the voices heard at Amsterdam’s event were on the whole much more positive.

Opportunities today lie on the continent, according to Erik Langens, Executive Director at CBRE. Core investors that ‘have been sleeping for some years now’ have collectively woken up as an increase in the sale of privately owned real estate portfolios has emerged.

There is still enough value-add real estate to be found, as evidenced by recent deals executed by London-based Tristan Capital Partners among others which bought two portfolios in the Netherlands from insurers Delta Lloyd and Generali totalling €485 mln. Another active buyer in the Dutch market is Amsterdam-listed NSI which acquired the Cobra-portfolio from Goldman Sachs while British Marathon is rumoured to be targeting more Dutch acquisitions in the coming months.

Prospects are good for the Netherlands and investment volumes will remain high, Langens said. He added, however, that yields would come under further pressure given that Amsterdam is currently amongst the cities with one of the highest real estate-bond yield gaps worldwide,

Listed sector in the spotlight
According to EPRA CEO Philip Charls, the European listed real estate sector performed well in 2015: during the year it attracted €25 bn of new capital, saw 11 new index inclusions and average loan-to-value ratios decrease from 41% to 37%. The listed sector in particular will be in the spotlight in 2016, he predicted. 'Investors will increasingly look for mixed real estate portfolios as they are better served by blended portfolios as global markets enter the late stages of the cycle.'

So far this year, global stock markets have not exactly been in a sweet spot following the worst start to a year in two decades. There are exceptions, however, such as listed Benelux warehouse specialist WDP which is currently riding high on the e-commerce revolution. 'For us the Netherlands is an interesting market,' CEO Joost Uwents told the Amsterdam event. 'The government has done its homework and invested a lot in infrastructure, there is plenty of land available and the cost and flexibility of labour are good. With logistics, everyone thinks of non-food e-commerce, but we are only at the beginning of the growth curve once a solution has been found for everything that is fresh and frozen.'

Wereldhave’s CEO Dirk Anbeek was less upbeat following negative shareholder returns in the wake of the collapse of leading Dutch retailers V&D and Macintosh. ´We had anticipated the collapse of Macintosh and had prepared a Plan B, but V&D came as a bigger surprise, because the financial backers had committed capital until 2017. Overall, however, we will be able to fill up most of the empty spaces in larger towns like Hoofddorp and Purmerend. But it is very clear that small cities will undergo some big changes in retail. If you are a shop owner close to a V&D in a small town like Meppel or Den Helder, you definitely have a problem. As for our shareholders, they are waiting for the returns on the portfolios we have bought. For us, it’s all about improving the operations – as soon as they improve, our share price will return as well.'

The Dutch office market is likewise displaying strong polarisation between good and bad locations. But NSI, the only Dutch listed real estate investor specialised in offices, saw the first positive revaluation in many years last year, CEO Johan Buijs told the meeting. 'In 2015, our share price was at the lowest level ever mainly due to the stock market collapse in China, but the office markt is now finally bottoming out and companies are relocating their main offices once more. The Cobra portfolio that we bought from Goldman generated an 8% annual return and we have bought other offices at yields of around 10%. It looks like the retail market is catching up to where the office market was in the past, because we already had problems with oversupply in the office market many years ago and are now moving up.'

Healthcare is one to watch
Healthcare is another sector to watch, since demand in the Netherlands is exploding on the back of a rapidly ageing population as well as new legislation which is leaving the provision of accommodation to individuals and the market. While the entire European market for healthcare is growing, the Dutch market is really opening up, according to Jean-Edouard Carbonnelle, CFO at Cofinimmo. 'It is creating interesting investment opportunities,' he said.

Carbonnelle pointed out that three of the 10 largest REITs in the US are healthcare REITs. 'As demand grows further in Europe, we will see a dramatic change in the market here as well. Last year we raised more equity, but we couldn’t resist selling some of our assets because of the price we could optain for healthcare and office properties. Yields in the healthcare market are currently around 5.5% for Belgium and France, and 100 basis points more for Germany and the Netherlands. But that could change rapidly once this sector becomes more mainstream.'

That raises the question of how much further investment yields can fall if the current historically low interest rate environment persists. Uwents of WDP claims that yields for prime logistic assets in the Netherlands are currently below 6% and could drop further towards 5.5% or even further. 'That raises the question though whether it’s sensible to buy at 5.5%. But it’s not only about yields; people tend to forget that they are also buying the buildings and underlying land.;

NSI's Buijs said: 'It will depend on how badly money is burning in investors' pockets. In the Amsterdam Zuidas office market yields are already very low and that trend is slowly slipping into other markets.'

Carbonnelle of Cofinimmo is looking for healthcare assets in core and new markets at yields of 5-5.5% for the first category and around 6% for the latter. 'In the current markets, it’s wise to sell at 4.20% and re-invest at yields of 5 to 5.5%.'

Wereldhave's Anbeek believes there are still great opportunities in the European market. 'The assets in the French portfolio we bought from Unibail-Rodamco are located in good markets in provincial cities like Rouen, Strassbourg and Le Havre. For Unibail, these assets no longer fit their core strategy of capital cities but I’m positive we can achieve some very nice returns there.'