30 June 2020

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The Dutch building sector can draw important lessons from the 2008 Global Financial Crisis when residential construction ground to a halt. History may repeat itself after the Covid-19 pandemic passes, unless all parties in the industry join forces to keep building homes, Marleen Bosma, Head of Research & Strategic Advisory, and Jeroen Beimer, Real Estate Investment Strategist, at institutional property investment manager Bouwinvest, argued in a Q&A session with Financial Investigator. The situation is even more urgent today given that the national housing shortage is estimated to have doubled since 2008 to approximately 300,000 homes in 2020, with some forecasts projecting the supply/demand gap may rise further to around one million homes by 2035.

How is the current crisis affecting the Dutch real estate market and how does it differ from the previous one?

Bosma: The economic consequences of the pandemic will hit the entire Dutch real estate investment market, especially those discretionary spend sectors which consumers and companies can easily decide to save on, such as non-convenience retail, hotels and restaurants and the relatively small co-working office niche. Sectors such as residential and healthcare real estate should be more resilient due to the underlying persistently strong demand as well as supply-side constraints.

Beimer: The residential sector is now in a better place than it was during the previous crisis. The opening shot then came from the highly leveraged housing market in the U.S. which exposed the entire securitised chain of debt to enormous risk. That resulted in a systemic crisis and confidence collapsing in financial markets, putting parties at loggerheads with each other. In the Dutch housing market, both demand and construction came to a complete standstill, partly because parties involved in the sector were not prepared to reach compromises despite their mutual long-term interests.

Bosma: The situation now is completely different. From the outset of the Covid-19 crisis we have seen enormous solidarity, with commercial parties and the government prioritising the broader public good over their own interests. The fundamentals of the housing market are healthier, thanks partly to historically low mortgage interest rates as well as the reduction of riskier interest-only mortgages and maximum loan-to-value limits applied to new mortgages.

The members of the Dutch Association of Institutional Investors in Real Estate (IVBN) have recently committed to a campaign aimed at keeping housing construction going in the Netherlands. What are the goals of that campaign?

Bosma: There is a huge housing shortage in the Netherlands, especially in the affordable segment for the low- to middle-income group, but supply is constrained by a lack of available construction sites, high land prices, rising costs for building materials and labour shortages.

During the GFC construction came to a standstill, which has partly contributed to the current housing shortage. The government and commercial market players want to avoid history repeating itself and have joined forces, under the auspices of the Ministry of the Interior (BZK), and agreed to accelerate the construction of sustainable new housing in line with the Dutch climate accord. They have committed to speeding up investment, permit and tendering procedures and sharing project risks.

Institutional investors are indispensable for tackling the housing crisis, but why would they want to invest in Dutch residential assets?

Beimer: Pension funds are facing huge challenges since the outbreak of the pandemic. They have  suffered enormous losses in equities markets, for example, and since many of them are confronted with low premium coverage ratios, underfunding and implementing recovery plans, it makes sense for them to focus on low-risk, or income-focused investment categories with direct cash flows, such as residential real estate. High-quality rental housing should also be ‘future-proof,’ from the perspective of sustainability, have low price volatility and act as a hedge against inflation.

Bosma: We expect the strong demand for housing to continue to persist over the long term, especially in the mid-market segment, with rents of €738- €1,000 per month, that Bouwinvest is so heavily focused on. Even if demand weakens a little, there is nothing much to worry about because the need is so great. Bouwinvest also invests in Dutch regions where residential demand is highest and which extend beyond the four big cities of Amsterdam, The Hague, Rotterdam and Utrecht. The Covid-19 crisis will have much less impact on this core market segment than other areas of residential real estate.

What is the added value of real estate in an investment portfolio compared to other asset classes?

Beimer: In the ‘search for yield,’ the housing market offers a relatively attractive risk/return ratio compared with other asset classes and the risk of the total portfolio can be reduced by adding other sectors to the property mix. We believe in blended portfolios, consisting predominantly of rental housing, particularly because interest rates are expected to stay low for a protracted period due to limited productivity growth and loose monetary policy.

  • Left: An example of input for the allocation model: direct income return and 10-year historical average
  • Right: Outcome of the allocation model showing a distribution of optimal weights instead of a single percentage. That accounts for the 'robustness' of the model, because it shows multiple scenarios in the future.

Beimer: In our efforts to understand in greater depth the role of real estate and individual property sectors within the investment portfolio and their interdependencies, we have built an advanced allocation tool internally which is linked to our data warehouse. Our model is based on the well-known Modern Portfolio Theory (MPT) developed in 1952 by Harry Markowitz, but we have expanded it with additional factors to produce a more robust risk framework. This tool allows us to conduct frequent impact analyses, to monitor market developments and to conduct stress tests or scenario analyses.

Investments in rental housing are therefore a good alternative to bonds and shares. Are there any other reasons that might draw investors?

Bosma: The Dutch construction sector accounts for about 9% of gross domestic product and over €70 billion of production, with large multiplier effects in the household good markets. The social dimension to these investments of supplying key workers with accommodation is also particularly relevant in the current crisis.