Dutch real estate nearing market peak, investors widen search to emerging segments and secondary cities in hunt for yield

The scarcity of supply in the Dutch real estate investment sectors combined with favourable macro-economic and demographic fundamentals in the wider domestic property market are creating investment opportunities in secondary cities where higher yields and returns are possible, institutional manager Bouwinvest’s annual Dutch Real Estate Market Outlook 2020 – 2022 concludes. Bouwinvest said the same drivers are fuelling the growth of niche real estate investment sectors such as student housing, healthcare and hotels, which are emerging as attractive alternatives for institutional investors targeting the market in the Netherlands as it appears to be nearing a cyclical peak.

Dick van Hal, CEO at Bouwinvest, said: “Initial yields and yield spreads are stabilising in this late stage of the cycle, and institutional investors, especially, are finding it increasingly difficult to generate the returns they need. The long-term forecast for both residential and offices is that demand will remain stable and that is underpinning investment into these sectors. A select number of investors are, however, looking at higher-yielding alternative niche property segments such as healthcare, student housing and senior living, where there are attractive growth opportunities. As these niches mature, they are becoming more professionalised.” 

The Dutch economy has been one of the outperformers in Europe over the past few years and capital flows from international investors into the domestic real estate market accounted for more than half of total investment flows across all asset classes into the country over the past five years. After a record year in 2017, the real estate market in the Netherlands saw investment volumes drop slightly in 2018 to €20.7 billion, but historically this is still very high, and transaction levels were strong in all sectors. Institutional investors are expected to continue to drive capital inflows into the Dutch real estate sector over the next three years unless interest rates rise significantly, which is unlikely in the near future.

The report signals a number of potential risks on the horizon, such as the slowing economy, but GDP growth is expected to stabilise around this year’s level of 1.4% out to 2022 and other macro-economic fundamentals remain robust. Bouwinvest therefore expects real estate will continue to attract investment in an ‘ageing’ market cycle.

Dick van Hal added: “Our investment strategy for the Netherlands remains primarily focused on affordable housing in the Holland Metropole, or Randstad, area in the west of the country and we are actively looking for plots for new development or redevelopment opportunities. For new residential product, we are also looking beyond the well-beaten investment paths in towns close to the large Dutch cities such as Zaanstad, Delft, Zoetermeer and Hoofddorp, where there is ample demand for housing and where it is possible to secure more attractive initial yields with new developments.” 

Residential investment overtakes office sector for first time
Demand for mid-range rental housing far outstrips supply in the Netherlands and investment in residential real estate overtook offices and retail in the market for the first time in 2018, making residential the largest property investment sector by total volume for the first time.

Marleen Bosma, Head of Research & Strategic Advisory at Bouwinvest, said: “The residential sector is growing in importance due largely to the rising number of households and the huge demand for affordable and more differentiated housing.”

In mid-2019, the supply shortfall in the number of homes built over the past 10 years in the Netherlands, relative to demand, stood at 265,000 according to ABF Research, as the number of building permits issued in recent years has failed to reach the government’s annual target of 75,000. In the first quarter of 2019, a decline of 25% was registered compared with the same period last year. That was the lowest level in three years.

The Dutch office investment market may have been overshadowed by the residential sector in 2018, but investor appetite for offices remains strong, thanks to the successful transformation of outdated supply and robust fundamentals in specific local markets. After a long absence, there is room again for new office developments in Amsterdam, in particular in the still evolving Zuidas business district, which commands the highest rents in the country. Generally speaking, the Netherlands remains largely a replacement market for offices, but some locations like Amsterdam’s Zuidas and cities such as Utrecht, Rotterdam and The Hague are exceptions. As rents continue to rise in most prime locations against a backdrop of tightening supply, some well-placed secondary markets like Hoofddorp and Amstelveen are benefitting from their proximity to Amsterdam and their relatively low rental levels.

While the Dutch office market has returned to health, the retail market is now undergoing a massive transformation due to the integration of online and offline, new formats which are replacing old ones and demographic changes.

Marleen Bosma added: “The retail sector has taken over the baton from the office sector as investors convert vacant spaces to other uses to adapt to changing demand. Transformation of outdated retail space is expected to gather pace in coming years as the number of stores at B and C locations across the Netherlands continue to contract in the wake of retailer closures and consolidation of national and international chains. The retail transformation process will take time, but ultimately it will make the Dutch retail landscape more compact and futureproof and create new investment opportunities along the way.”