Syntrus Achmea Outlook 2020–2022 Table of contents Introduction 3 Residential market 5 Healthcare real estate market 21 Retail market 37 Office market 55 Mixed use 67 Residential mortgages market 75 Going forward: trends, challenges and opportunities 87 Cover: Neudeflat, Utrecht 2/102 Syntrus Achmea Outlook 2020-2022 Introduction World trends and the global economy require Retail vigilance, yet Dutch real estate and residential • Developments in the retail landscape are mortgages are still attractive as investment forcing retailers and investors alike to take opportunities. a critical look at the market. It has become increasingly clear who the winners and losers Despite the slower pace of economic growth are in the retail market, both as far as the types and an interest rate environment fraught with of retailers and locations are concerned. uncertainty, we believe that real estate and • For investment opportunities in traditional retail residential mortgages will continue to be lucrative locations, the focus should therefore be on investment categories in the years to come. The prime locations and successful retail concepts. historically low initial yields and the slowdown • In concrete terms, this means maintaining in rent increases in various real estate sectors investments in A1 areas in the larger cities, and therefore require properly substantiated investment investing in promising suburban centres where propositions, with appropriate risk-return profiles the emphasis is on food. These centres stand and good collaboration with other stakeholders, to to benefit, both socially and in terms of value, be able to meet high investor demand. through repositioning or redevelopment. Our expectations for the various market sectors are • At non-traditional shopping locations, there as follows: are attractive investment opportunities in the expanding mixed-use category and where Residential there is high traffic. These are concepts in • The housing market remains an attractive which – apart from shops – the buildings are investment sector due to the high demand for used for a range of purposes, such as cafés and (affordable) rental properties coinciding with restaurants, leisure activities and offices. supply shortages. • Locations where construction is permitted are Healthcare real estate thin on the ground. Expanding the housing • Healthcare real estate is clearly an asset that stock is important if structural improvements will have a positive social impact through in housing affordability are to be achieved. investment in real estate, Collaboration between the government, • and so long-term investment in the curative housing associations and market participants is care sector will always be attractive. That therefore essential for expanding construction said, many existing healthcare properties are opportunities. outdated; they have to be modernised and • Mid-market rental housing is a sector where made more sustainable. Institutional investors institutional investors can assume their can make a major contribution to this. social responsibility at very low risk and with • Due to the ageing population, the demand for an acceptable return. It is a sector that is residential care real estate is growing rapidly. indispensable for the throughput in the local New projects are not readily available. The housing market, while at the same time it also increasing scarcity is evident in an competitive presents an incentive for quality of life and investor market where yields are under inclusiveness. pressure. • Legislation and regulations, both at local and national level, and rising construction costs bring even more uncertainty in their wake. 3/102 Syntrus Achmea Outlook 2020-2022 Offices Residential mortgages • User and investor interest in the traditional • These loans are an interesting investment prime locations remains strong. category given their attractive value in relation • Due to high demand, the available supply is to government bonds, the way the housing falling while average rents are rising, and this market is performing and the state of the is the case at public transport hubs in major economy. cities as well. • The risk in residential mortgages is relatively • New working concepts, for instance limited. Default risk is limited because Dutch flexi-offices, are presenting opportunities at households generally have good payment traditional locations but also at mixed urban ethics and because of the rise in house prices. locations. National Mortgage Guarantee Scheme (NHG) • The office market is facing a major redevel- loans and mortgages with a low LTV represent opment challenge if it is to meet sustainability the lowest risk. requirements. Opportunities are out there • Mortgage rates have remained relatively for investors who are interested in playing an stable, but margins have increased due to integral role and contributing to responsible sharply falling risk-free interest rates. Because urban densification that will cater to a range of mortgage interest rates generally lag behind purposes. changes in risk-free interest, we expect that mortgage interest rates will fall in the coming Mixed-use real estate period. • Due to the low long-term interest rate, investors • Digitisation can improve the efficiency of the are looking for investment opportunities with a mortgage process, especially acceptance. core profile. However, as it stands now very low However, due to changing regulations, initial yields make homes, shops and offices in mortgage lenders are having to pay more the most prosperous cities relatively expensive, attention to managing mortgages. while the opportunities to buy property are very limited. • Due to a slightly higher risk premium, mixed-use real estate is a suitable alternative. Mixed-use investments have a risk-return ratio that, in the short term, should be at least equal to the average of the sectors taken separately. • Availability of this type of property is relatively good and will only increase under pressure from urbanisation. • Mixed use as an asset class still stands to benefit from growth in value, whereas traditional asset classes, for instance offices, are already somewhat further in the cycle. 4/102 Syntrus Achmea Outlook 2020-2022 The Dutch residential market Kleefkruidstraat, Amsterdam 5/102 Syntrus Achmea Outlook 2020-2022 Outlook for the Dutch residential market Despite huge demand, the residential property market is facing major challenges The pressure on the Dutch residential property space needed if more homes are to be built. market is significant. The supply side of the This means that the housing market will remain market cannot keep pace with demand, which an attractive investment market for investors in turn is pushing up prices. Increasingly, in the coming years. To be able to meet the middle-income earners, starters, students and demand of housing consumers and investors the elderly are having difficulty finding suitable alike, we will have to be clever about how we housing. This is particularly the case in the use the scarce space available to us. Improving Randstad and major cities where the availability accessibility and affordability in the housing of affordable housing is limited, in both the market and meeting the ambition of building owner-occupied and rental sectors. We fully 75,000 new homes each year will require a expect that this situation will continue well into major effort, one that can only be summoned if the future, thanks to the popularity of these municipalities, housing associations and market areas in combination with the scarcity of the participants join forces. Compagniestraat, Alkmaar 6/102 Syntrus Achmea Outlook 2020-2022 Definition There are 7.7 million residential properties in the housing a prominent place in their local housing Netherlands as it stands now. This housing stock policies. If the (local) housing market is to function is spread across various market sectors. We have properly, mid-market rent plays a major part in the based our analysis of what these market sectors sector between social rental properties and the look like now and will look like in the future on owner-occupied housing sector. simulations generated by a housing market model (Socrates; ABF). This model charts supply and Around 400,000 homes were being let in the demand as it stands today, and the future is mid-market rent sector in 2019. According to explored based on various scenarios. the forecasts (ABF Socrates), the number of mid-market rent houses is set to rise to 540,000 in Social rent 2040 (+ 35%). Only the owner-occupied sector is The Netherlands currently has around 2.76 million growing faster in real terms (from 4.5 million to homes that are rented out for less than €720 per 5.4 million owner-occupied houses in 2040; month. This accounts for 35% of housing stock + 20%). In the longer term, the projected consumer in the Netherlands. The expectation is that the demand for mid-market rental houses is high number of homes that are rented out under the and, because it concerns a wide target group, rent control ceiling will, in the shorter term, remain it is virtually structural in nature. All in all, this fairly stable in real terms because production is means that vacancy risk is limited. The level of rent lagging behind due to the levy on lessors. In the indexation is often agreed for a longer period (10 to longer term, however, the number of rental homes 25 years), so it is possible to estimate rental income may fall slightly, depending on trends in Dutch quite accurately. High construction costs, however, incomes and the building strategy. On average, our are resulting in lower initial yields for investors. As projections up to 2040 show that approximately opposed to this, risks in this sector a more limited 31% of homes in the Netherlands are still in the and it has a stable internal rate of return, which social sector. can also lead to an attractive risk-return ratio for institutional investors, even during an economic Mid-market rentals downturn. A term that is being used more and more frequently these days is the term ‘mid-market rent’.