Last year was another challenging year for both real estate markets and the wider economy. Russia’s invasion of Ukraine led to a huge rise in energy prices and a surge in inflation. With no end in sight for the conflict, the outlook for 2023 is fragile, reflected in low consumer and business confidence, despite government aid. Unemployment has remained low, but rising staff shortages in a growing number of sectors is putting a lot of pressure on economic growth. And while wages have risen quite sharply, they have not been able to keep pace with burgeoning inflation. The increase in construction costs, fuelled by staff shortages and related wage increases plus rising material costs, is also putting pressure on new-build projects, with some being postponed or even cancelled. On a more positive note, rising energy prices are increasing demand for sustainable, energy-efficient homes.
The Dutch government’s proposed regulatory changes, such as the regulation of rents of mid-priced housing, the increase in the real estate transfer tax and its efforts to maintain or increase the supply of affordable homes in the Netherlands continue to create a great deal of uncertainty on the residential market. Investment managers are also dealing with a stream of new (EU) sustainability regulations, including the SFDR and the EU taxonomy.
Moreover, the sharp rise in interest rates has had a major impact on the investment market. Due to this, together with the above-mentioned inflationary pressures and rising construction costs, the sentiment on the residential investment market is currently quite cautious. The sharp decline in stocks and bonds also triggered the so-called denominator effect, leaving investors (temporarily) overallocated to real estate and forcing some to trim their holdings.
All of this led to a decline in asset valuations from Q3 onwards, mainly due to increasing yields. We expect to see a growing gap in valuations between prime assets and secondary assets, as institutional investors focus on high-quality, sustainable homes in economically healthy areas.
Rising energy prices, plus new, stricter ESG-related regulations, has increased the premium on energy-efficient homes, for both investors and for rental tenants and home owners. This puts the Residential Fund at an advantage thanks to the high quality of our homes and the measures we have taken to maximise the energy efficiency of the portfolio as part of our ambitious Paris Proof drive.
Responding to uncertainties
Of course, this uncertainty has also had an impact on the demands of our clients. As long-term investors, they are focused on stability and predictability. They are also more engaged with the world than ever before and have set targets in terms of environmental performance, environmental risk, social impact and solid governance. The Fund’s challenge is to continue to meet these demands in even these uncertain market conditions.
The Fund’s strategy
Despite the negative sentiment on the residential investment market, the Fund bore up relatively well in 2022, with a total return of 0.6% for the whole year, despite a sharp decline in valuations in the final quarter of the year. The Fund’s fundamental strategy was unchanged in 2022, while we put even greater focus on its main strategic pillars, quality, affordability and sustainability. The Fund delivered solid performances on all three pillars in 2022, as we managed to acquire high-quality new-build projects in the Holland Metropole region and added a number of projects to the portfolio. These included the acquisition of 288 affordable mid-rental properties and the addition of 1,309 homes to our portfolio. The Fund also made a start on the income-related allocation of homes in the mid-rental segment. The Fund retained its 5-star GRESB rating, while once again improving its score, and ended second in the Dutch residential funds ranking. We also worked hard on our Paris proof roadmaps and now have tailor-made plans for around 150 projects moving forward.
Given the level of uncertainty in the market, it is difficult to predict what will happen in the near term. However, as always we do expect there to be opportunities. Less committed, less long-term investors or investors relying on substantial leverage may (partially) withdraw from the market and we could well see assets coming on to the market that might not have in different circumstances. Provided we have the funding, we will seize those opportunities to optimise the Fund’s portfolio.
All that remains is for me to thank our clients for their continued trust in us and our strategy. And of course I would like to thank our team for their hard work, professionalism and collaborative efforts. It is thanks to them that we emerged as strongly as we did from another dynamic year.
Michiel de Bruine
Director Dutch Residential Investments