Economy and demographics
Dutch economy shrugs off potential impact of Brexit vote
Despite the initial fears triggered by the Brexit vote, the Dutch economy continued its steady recovery in 2016 and economic growth with a level above 2% actually outpaced earlier projections. This economic growth was driven by rising business confidence and as a consequence a rise in business investments, on the back of a steady rise in manufacturing output and continuing export growth. The main negative uncertainties relate to events outside the Netherlands. The uncertainty triggered by the Brexit vote and the recent U.S. elections, plus a potential economic slowdown in China, may put a damper on growth and confidence, while geopolitical tensions in various parts of the world continue to pose a risk to the global economy.
Population growth continues
Recent decades have seen strong population growth and it is expected to continue in the coming years. The total population and the number of households are expected to continue growing until 2040, stimulating overall consumer spending. The current population is expected to increase from 16.9 to 17.6 million by 2025, while the number of households is set to rise by 70,000 each year from the current 7.7 million to 8.3 million by 2025 and 8.6 million by 2040. The largest growth is set to be in single-person households, which are expected to increase from 2.9 million to 3.3 million by 2025.
Trends and developments in the residential market
Quantitative gap - Urbanisation
The Dutch residential real estate market is characterised by marked regional differences in housing demand, with the heaviest demand concentrated in regions with a healthy economic and demographic outlook. Population growth and the increase in the number of households is expected to be well above the national average in certain ‘core’ regions, such as the Randstad urban conurbation (Amsterdam, Utrecht, Rotterdam and The Hague) and the Brabantstad conurbation (Breda, Eindhoven, Helmond, Den Bosch and Tilburg). However, the population and housing demand is expected to fall in some peripheral regions in the north, south west and east of the country. On balance, the quantitative housing shortage will continue to increase, partly due to the relatively small number of new homes being built. The resultant gap between supply and demand will continue to put pressure on the market.
Qualitative mismatch – Single-person households and elderly are changing the market
In addition to the quantitative shortage, the qualitative gap between housing supply and demand is also set to widen, due in part to the increasing number of smaller households and – forecasts are predicting that the G4 cities will see 20% to 40% more single-person households over the next 15 years, with an average expectation of 28%. For Amsterdam, this implies an increase of over 70,000 single-person households. On a national level, the number of single-person households is set to grow by approximately 600,000. Starters moving into their first home will find it increasingly difficult to enter the owner-occupier market, due to persistently low levels of available financing, and they will be looking for good quality rental property.
Another trend that is changing housing demand is the ageing population. Between 2016 and 2030 the number of elderly is forecast to grow by some 875,000 households, an increase of 44%. Many retirees, especially those living in the larger cities, are expected to sell off their existing properties and rent smaller, higher-quality and low-maintenance homes. These so-called lifecycle-proof housing developments are built or refurbished according to a wide range of sustainability-related criteria, including energy use and general liveability. They are also future proof in terms of providing the right amenities when residents need assisted living or healthcare services. Overall, the rising number of younger single-person households and the effects of the ageing population is creating a growing awareness among municipalities, developers and investors that demand for multi-family, liberalised rental homes is set to grow rapidly in these city centres.
A more level playing field
Dutch government reforms of the residential market have created a more level playing field and the liberalised rental sector is now in a much more competitive position vis-a-vis the owner-occupier and regulated rental markets. The changes are beneficial for investors in residential real estate. The government has imposed a tax on the regulated sector of the residential market and housing associations are now much more focused on their core task, renting out regulated homes to lower income households. The owner-occupier market is still heavily subsidised due to the generous tax relief on mortgage interest in the Netherlands but the phased reduction of tax relief on mortgage interest and the increasing loan to value demands will also help boost demand from starters for rental homes. The reforms have already led to an increase in demand for liberalised sector rental homes, which is increasing the opportunities for institutional investors in this segment of the rental market.
Liberalised rental segment most attractive
The liberalised rental sector accounts for a mere 6% of the total Dutch housing stock. This may be a small segment of the market right now, but demand is growing steadily. Fewer people are willing or able to enter the owner-occupier market, either because they cannot afford to buy in the current market or the need for flexibility. While the low interest rate environment is making mortgages less expensive it has also helped lift house prices to above pre-crisis levels, sparking fears of overheating on the owner-occupier market and more or less preventing first-time buyers from entering the market. On top of this rent increases now being imposed in the regulated sector for people who earn more than the limit set for regulated rental homes are slowly driving tenants towards the liberalised sector. Consequently, demand for liberalised sector rental homes is expected to double in the next thirty years, with demand growing the hardest in the larger cities.
Increasing demand for liberalised sector homes
The above-mentioned trends will lead to increased demand for homes in the liberalised rental sector, especially in the larger cities of the Netherlands, as the four major cities together of the Randstad urban conurbation will account for one-third of expected future population growth due to ongoing urbanisation. The number of households is expected to grow even more quickly, as average household size continues to decline. Demand for single-person rental homes is strong and growing, especially in the large (and some medium-sized) cities. Shortages are high, especially in Amsterdam, Utrecht and Haarlem.
Because the demand is so high, there is a side-effect. In the large cities, especially in Amsterdam, rental levels increase rapidly which can result in the fact that for certain groups, rental levels become too high. Local governments will more and more set new rules concerning the annual rent increase for newly built properties, even in the liberalised rental segment.
New leasehold conditions Amsterdam
Currently the municipality of Amsterdam is in a process of renewing the current leasehold conditions. Concept lease hold conditions have been published, which has led to quite some response and turmoil. The reaction of the municipality on this turmoil was that the municipality will review and analyse all reactions and that this may lead to an adjusted concept. At this moment it’s unclear what the final version of the lease hold conditions will encompass and if and to what extent these possibly adjusted lease hold conditions will affect the value of the investments of the Fund in Amsterdam. The Fund has € 1.6 billion exposure at year-end 2016 in Amsterdam for in total 6.531 residential units. Bouwinvest is monitoring this matter closely and possible steps to mitigate any loss of investment values will depend on the outcome of the new leasehold conditions.
Implications for residential real estate
Strong demand for Dutch real estate investments
After climbing to their highest level since 2007 in 2015, Dutch real estate investment volumes came in at € 13.5 billion in 2016, which is about 9% higher than the level in 2015. Of this figure about € 3.5 billion was invested in residential real estate, which is 21% higher than the total residential investments in 2015. Foreign investors now account for around 55% of the total investment volume and are showing continued interest in the investment market. With interest rates in the U.S. slowly increasing and real estate prices in other key markets such as London, Paris and Munich having already increased, investment momentum is picking up in continental Europe, including the Dutch real estate markets. More risk-seeking investors have become more active on both the buy and sell side. Supported by the economic recovery across the country, prices of secondary locations are expected to increase. However, the continuing interest of both Dutch and international investors is quickly pushing up prices. This trend is expected to continue in the coming years. For core investors, it is now essential to have the right relationships in the market and to be a partner in the early stages of development or buying processes, as this enables them to select the right assets for an attractive risk-return profile. Compared to more opportunistic competitors, investors with in-depth real estate knowledge and active asset management teams will be the ones that can add value and that will therefore outperform in the long run.
Liquidity rises sharply in residential investment market
Investment and liquidity in the residential real estate investment market is currently at its highest point since the onset of the 2008 crisis and once again showed a big year-on-year increase in 2016. Last year saw a marked increase in the number of new investors, both institutional and private. While domestic players are still very active and their investments are also increasing, foreign investors now account for the majority of residential investments and their share of the market is set to increase in the years ahead. This has already increased competition for attractive investment properties and has resulted in continued yield compression. However, this will also have a positive impact on portfolio valuations and boost indirect returns. The biggest challenge is simply finding and securing high-quality liberalised sector residential assets, as production is nowhere near rapid enough to keep up with the sharp increase in demand. Thanks to the high levels of competition, investors have now broadened their view. Secondary markets are therefore expected to develop in line with the top of the market in the near future, albeit to a slightly lesser extent.
Strong outlook Dutch residential investments
Low interest rates and more than healthy risk premiums make the Dutch residential sector an interesting proposition for investors. Further downward pressure on initial yields is expected to drive capital growth for residential investments in the near future, while strong economic and demographic fundamentals will drive steady rental income growth. The overall outlook for Dutch residential investments remains highly positive.