17 April 2014

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The government’s move to rebalance the residential rental sector in the Netherlands have combined with what Bouwinvest believes is a cyclical low in the market after five years of price falls, to create a very attractive “sweet spot” for investment in 2014.

Government rebalancing being the cut in high state subsidies and to attract investor capital to head off a looming shortfall in housing supply.

The confluence of key bullish trends in the housing market has been highlighted by a major recent independent research report backed by the eight largest Dutch residential fund managers. The report: “Dutch Residential Investments in a European Perspective” was prepared by consultants Finance Ideas under the authorship of Professor Piet Eicholtz of Maastricht University and has received the full support of the Minister for Housing and Public Services, Stef Blok.

Domestic residential assets have traditionally formed a larger part of Dutch institutional real estate portfolios – on average 49% — than in any of the other five countries in Europe with sizeable institutional holdings: Switzerland at 47%, France 12%, Germany 12%, Sweden 12%, and the UK at 4%, according to Investment Property Databank (IPD) data. But Dutch residential property has been almost entirely overlooked by international investors in the past, due to a lack of local knowledge and expertise and competition from other domestic sources of capital such as aspiring homeowners, private investors and social housing providers — which have dominated the rental market.

The Dutch market has now been transformed with house prices tumbling for the past five successive years to where they are on average 18% lower than in 2008, while rents have risen and are likely to continue to do so. The house price-to-rent ratio — the residential property equivalent of the equity price-earnings ratio — which shows the price an investor has to pay for the annual cash flows an investment generates, has trended back to its long-term average in the Netherlands. This indicates that the price correction has moved the market from being “expensive” in the pre-financial crisis boom to “fair value” from an investment perspective.

Neighbouring Germany, in contrast, which has been the recipient of huge international private equity flows into residential property, has seen house prices rising by on average 31% over the last five years as Germans have moved from an overwhelming “rental housing culture” to investing in residential property in the face of very low, or even negative real interest rates on their bank deposit savings. The Bundesbank has recently voiced concerns that housing may be as much as 25% overvalued in the major German cities.

In the Netherlands, the government has acted to shake up the previously heavily regulated rental sector to allow rents to be determined to a much greater extent than previously by market forces and so attract more investment. Under new legislation introduced in January, the regulated rental sector has been to a large extent liberalised for tenants paying above the €700 per month level. Social housing providers who manage 71% of Dutch rental housing, or approximately 2.25 million dwellings – 94% of which fall into the regulated rental sector — will now have to focus on properties for lower-income earners below this benchmark, forcing them to sell part of their housing stock to other investors.

The researchers estimate that the legislative changes could make a large contribution to projected growth in the number of residential properties in the non-regulated sector of up to 200%, or 695,000 homes over the next 20 years, while the regulated market is projected to decline by between 10% to 16% over this period.

Further boosts to demand in the non-regulated market could come from less favourable tax treatment of mortgages, measures to close the gap between regulated and free market rents and future upward pressure on Dutch residential prices from a shortfall in supply. Since the onset of the financial crisis, the construction of new housing has fallen from a peak of about 80,000 per year in 2008, to under 60,000 in 2011. Meanwhile demand for additional residential units is seen increasing by 540,000 over the next 10 years, driven almost entirely by an increase in the number of elderly single person households.

Bouwinvest believes that with many homeowners experiencing “negative equity” in the value of their properties since the start of the financial crisis and with projections that house prices will rise in the future, people will find it more difficult to get on the “housing ladder.” Dutch society will become less focused on home ownership, and renting will be more attractive. This should also help underpin a positive trend in the rental market and we expect residential rents in the Netherlands to rise by on average 2.0% to 3.0% a year going forward.

Residential property has consistently delivered steady income streams in the six markets studied in the Finance Ideas research. These returns varied from 3.0% in the UK to 4.7% in Switzerland, with the Netherlands almost in the middle at 4.0%. The low standard deviation in all these countries shows that the income streams are very persistent.

Low correlations between the performance of different housing markets in Europe imply that large diversification opportunities also exist to reduce systemic risk by investing cross-border.

Furthermore, residential real estate has the highest correlation to inflation among all asset classes studied and this increases as the investment time horizon lengthens. Only short-term government paper comes close in terms of the inflation hedge potential. Bonds, stocks and listed real estate do much worse in this regard.

When comparing Dutch residential properties with other investment asset classes, the IPD database showed these outperformed stocks, bonds and listed real estate in the Netherlands over the long-term (25 years). Housing generated average annual total returns of 8.6%, with a standard deviation of 6.4% and a return-risk ratio of 1.34.

In conclusion, I can hardly do better than quote Professor Piet Eicholtz on the findings of his research: “The housing market in the Netherlands offers investors excellent returns and can play a significant role in reducing risk for pension funds. Housing offers a very advantageous spread of risk as well as protection against inflation, which outperforms all other categories of investment.”

The research report “Dutch Residential Investments in a European Perspective” is now available.

Dick van Hal, CEO BouwInvest and Member of the Executive Committee of IVBN,(Dutch association of Institutional Property Investors),