Netherlands: lack of supply brings ‘race for space’ among sectors
Residential is being given priority, making it tough for logistics operators, while offices face challenges over compliance with ESG regulations. Nicol Dynes reports.
The “race for space” is set to be the dominant feature in the Dutch real estate market this year and beyond. As opportunities become limited, there is increased competition between investors and also between sectors.
“In the Netherlands there is strong competition for space between logistics, office and residential,” says René Buck, CEO of Buck Consultants International. “It’s a small country, land availability is limited so it’s a struggle that will last for several years.”
“The competition for space is quite intense and the question is, which sector should have priority?” adds Madeline Buijs, chief economist and head of research Netherlands at Colliers. “At the moment residential is being given priority because there is a need for housing, and this is making it difficult for the logistics sector.”
The Dutch government has a commitment to build 100,000 new homes a year, but currently only 65,000 are being built. “The problem is finding the land to build them on and also getting all the necessary permits,” explains Buijs. “It’s a long and complex process that can take years and even a decade or more.”
‘This year logistics volumes are likely to be 10% lower, not due to lack of appetite but rather lack of product on the market or lack of space to build new warehouses.’
René Buck, Buck Consultants
The influx of people into the Randstad will continue, but at the same time many workers and families are moving out of the main Dutch cities to find more affordable accommodation.
“A lot of people are moving to secondary locations partly to have more space, but mostly it’s to do with the huge increase in resi prices,” notes Elise van Herwaarden, sustainability manager at a.s.r real estate.
The supply/demand imbalance is making resi very popular with investors and attracting even more capital to the sector. “As a bank we’re very positive on the outlook for the resi sector and we like the social impact aspect as well,” says Dennis de Laat, deputy head, real estate finance Benelux, at Berlin Hyp. “We’ve been in the Netherlands for 12 years, we know the market and now we notice a lot of investor appetite, especially for resi and logistics assets.”
Despite the competition with residential, industrial and logistics had a very good year in 2021, but lack of supply is likely to slow its expansion this year.
One of the reasons is that last year supply chain risks pushed companies to increase inventory levels in Europe and fill up their warehouses to make sure their products got to their destination on time.
“Dutch logistics had a great 2021 with take-up at record levels,” says Buck. “This year logistics volumes are likely to be 10% lower, not due to lack of appetite but rather lack of product on the market or lack of space to build new warehouses.”
‘There’s a requirement from investors for core assets Core now means not just in a good location but also an energy-efficient building in compliance with the regulations.’
Dennis de Laat, Berlin Hyp
A feature of the sector recently has been the huge growth in mega distribution centres of 40,000 sq m and more to service the market, but that may slow down.
“There may be a levelling off in the next couple of years simply because there are no 100,000 sq m plots to build these XXL assets on,” notes Buck. “Again, it’s not about appetite but about supply.”
Energy efficiency a must for offices
The Dutch office sector is in the firing line as sustainability requirements become more stringent. “There’s a requirement from investors for core assets,” says de Laat. “Core now means not just in a good location but also an energy-efficient building in compliance with the regulations.”
All buildings are required to have an energy label in the Netherlands, but the issue is particularly pressing for the office sector because there is an end-of-year deadline.
By law, from 1 January 2023 office buildings must have at least a category C energy label and if they do not comply they can no longer be used as offices. “The choice is between upgrading your buildings to ensure their sustainability credentials or having stranded assets,” says de Laat.
The challenge is complying with the regulations in time and it is a massive undertaking as, according to Colliers data, 43% of office buildings in the Netherlands are not at the required level and need work. But there is unlikely to be a relaxation of the rules, says Buijs: “At most they might be lenient on fines for a little while and give people more time before imposing penalties, but the deadline will not be postponed. Sustainability is too crucial for the government.”
‘What seemed brave at the time now is seen as a logical choice because investors, tenants, managers and authorities are all on board. Sustainability is a must.’
Elise van Herwaarden, a.s.r real estate
The gap between compliant and non-compliant buildings is likely to grow wider as investors will focus on the good assets and demand for the rest will dry up, with just a few ending up in the hands of turnaround specialists.
“Compliant assets will have high valuations and good liquidity, while the others will find no financing,” explains de Laat. “We as a bank take this very seriously. We issue green bonds that are linked to our environmental performance, so we’re tied in to this. If investors want to buy and improve assets, we try to contribute from our end.”
Companies are getting the message and gradually following in the footsteps of frontrunners like a.s.r. “We’ve made a major effort to get an energy label A for all our assets, but everyone has a responsibility to do something, not just institutional investors,” said van Herwaarden. “What seemed brave at the time now is seen as a logical choice because investors, tenants, managers and authorities are all on board. Sustainability is a must.”
The office sector is in the spotlight, but all asset classes have to focus on sustainability, including logistics. “ESG compliance is a hot topic on the workfloor as well, not just in the annual reports,” says Buck. “The vast majority of new logistics buildings are certified and built to high standards. The rest need to be upgraded.”
Main sectors set to return as prospects brighten
Prospects for the Dutch real estate market are brighter after two difficult years, according to Colliers.
“The outlook for 2022 is positive and the economic context is favourable,” says Madeline Buijs, chief economist and head of research Netherlands at Colliers.
Economic growth has returned: GDP increased by 3% in 2021, despite a dip in the last quarter due to the December lockdown. Growth is expected to be at the same level this year, while the unemployment rate is at a record low of 3.7%.
‘We’ve seen a very slight decline in investment volumes in offices, but there was a pick up in the second half of the year.’
Madeline Buijs, Colliers
Investment volumes, meanwhile, are set to increase again after a steep fall to €14 billion in 2021 from the €20 billion recorded in 2020. “The main reason for this is the decline in investment in the residential sector,” says Buijs. “2020 was a big year for resi, but last year volumes almost halved, partly because the transfer tax increased from 2% to 8%.”
Retail investment also declined because of the negative outlook for the sector, compounded by the increase in online shopping during the pandemic. Many stores closed down after the lockdowns, especially in inner city locations where vacancies are highest, but there are pockets of resilience with local shops and some out-of-town locations doing well.
The office market has held up quite well, considering the challenges the sector faced as people had to work from home for months. “We’ve seen a very slight decline in investment volumes in offices, but there was a pick up in the second half of the year, with two major deals being announced in the sector in Amsterdam and Eindhoven,” Buijs says.
In December ABN Amro sold its global head office in Amsterdam to Victory Group for €765 million, while in October GIC, Singapore’s sovereign wealth fund, bought the High Tech Campus in Eindhoven for $1.3 billion.
Sentiment is positive and the uptick in late 2021 could be sustained this year as the pandemic recedes and people return to the office. “There was a decline last year, but for very specific reasons, including lack of supply which remains a problem,” adds Buijs.
Investor demand is not a problem, but there are four main issues ahead for the real estate sector that market players should be aware of, she says. “One issue is government regulations that will affect mainly the resi and logistics sector. Inflation is also a huge topic as costs increase. Bankruptcies are expected to increase following the end of government support. The fourth problem is labour shortages, that are affecting the real estate market as well.”