Market risk overall
From a market perspective, last year was marked by significant geo-political, financial, social and environmental turbulence. As we emerged from the worst of the Covid-19 pandemic, and economies were showing clear signs of recovery, we were faced with Russia’s invasion of Ukraine. In addition to the human tragedy and economic uncertainty that this created, it also ignited high inflation. The response of the US Federal Reserve, the ECB and other central banks has been a series of rapid and significant interest rate rises, pushing the world’s economies towards recession. Consumer and investor confidence deteriorated rapidly, and so, consequently, did asset pricing. The Fund evaluates these changed market circumstances on a continuous basis, and they are taken into account, both in the daily management of the Fund and in the investment and divestment decision processes.
Occupancy rate risk
The Fund has a leasing strategy for each individual retail asset to achieve an optimal occupancy rate. In most locations, but especially in district shopping centres, it is also vital to have the right mix of complementary tenants to ensure the long-term success of a shopping centre. Despite the COVID-19 crisis, which was still present in early 2022, and the Ukraine war leading to a higher level of inflation, the Fund managed to maintain its average occupancy at a high level in 2022. It should be emphasised that during the Covid-19 crisis, many tenants in financial difficulties survived thanks to government support combined with the Fund’s payment arrangements. The long-term impact of past Covid-19 restrictions, the war in Ukraine, higher inflation and low consumer confidence on the financial resilience of tenants is still unclear at this moment.
Following the end of the Covid-19 lockdown in early 2022, and the subsequent further loosening of restrictions, the outstanding tenant receivables fell to 2.5% (0.6% of which was deferred) at year-end 2022, from 5.2% at the end of 2021. On the other hand, as a result of the war in Ukraine, which led to higher levels of inflation (and low consumer confidence), retailers are facing a major rise in operating costs, including rent, energy, material and wages. Given the above, the Fund expects a small increase in outstanding tenant receivables in 2023.
Within the area of liquidity risk, no material risks occurred in 2022.
Business environment risk
The Dutch government announced that as of 1 January 2025 Fiscal Investment Institutions (FIIs) may no longer invest in directly held real estate, the so called real estate measure. The timing of this announcement was slightly surprising since it was not in line with the conclusions of the evaluation of the FII regime by the Dutch Economic Research Foundation (SEO) earlier in 2022. At the same time, Bouwinvest has has been anticipating such change of law for a number of years.
The measure implies that FIIs holding real estate directly will become subject to corporate income tax at the ordinary rate (25.8% in 2023). Bouwinvest is therefore preparing to restructure the Fund into the legal form of a so-called closed Fund for Mutual Account (FMA). Given its fiscal transparency, the closed FMA prevents (double) taxation for investors and is therefore the most appropriate alternative for an FII. Since the government also confirmed that it should remain possible to structure an FMA as ‘closed’, and thus tax transparent, this is expected to be a sustainable alternative going forward.
The government also announced a conditional exemption from real estate transfer tax for the transfer of real estate in the context of a restructuring directly related to this measure. This conditional exemption should come into effect on 1 January 2024. Bouwinvest welcomed this announcement, as such an exemption should remove one key uncertainty.
A draft bill on the real estate measure was submitted for public consultation in early 2023. Bouwinvest will continue to provide feedback through industry groups. A final law proposal is expected to be published on Budget Day (September 2023). Bouwinvest will decide on the exact date of the envisaged restructuring in the course of 2023.
Increase in real estate transfer tax (RETT) rate
As per 1 January 2023, the RETT rate for investors was increased to 10.4% (was 8%). The exact impact on the real estate market is not yet clear.
Within the area of ESG risk, no material risks occurred in 2022.
Within the area of operational risk, no material risks occurred in 2022.
Within the area of compliance risk, no material risks occurred in 2022.
There were 21 data breaches with respect to the processing of personal information. Four of these were reported to the regulator, the Dutch Data Protection Agency. Some of the data breaches occurred at processors, such as property managers. The data breaches were caused by, amongst others, incorrectly sent e-mails. All data breaches were investigated and, where necessary, additional control measures were taken. In cases where this was necessary, Bouwinvest has informed the data subjects.