Investment Update 2023 Q2

Halfway through the year, we can conclude that the changed macroeconomic conditions, and in particular rising interest rates, have led to a stagnation in the real estate investment market. Transaction activity is subdued and initial yields have now risen sharply in almost all sectors. Inflation is falling, but is expected to remain high for longer than earlier anticipated. In the fight against the inflation, the ECB raised interest rates again to 3.75% at the end of July.

Nevertheless, there appears to be light at the end of the tunnel. Interest rates are expected to stabilise towards the end of the year, and real estate investment markets with higher initial yields, such as the retail market, appear to have bottomed out. In markets with lower initial yields, such as the residential market, values are still under pressure. However, depreciation rates are much lower than before, which is an early indication that that the market is bottoming out.

Some institutional investors are still suffering from an overallocation to real estate due to the sharp decline in the value of their fixed income portfolios. As property values have also fallen sharply in recent quarters, the position of real estate appears to be improving. The fact remains that real estate fundamentals remain strong, with strong demand for high quality and sustainable real estate. As a result, real estate remains an attractive asset class for institutional investors.

In particular, the fall of the Rutte IV cabinet has brought new uncertainties regarding the policy for the residential market. The shortage of affordable housing will remain a pressing issue in the Netherlands in the coming years and will require decisive government action. The current uncertainty in the market is not helping institutional investors, yet they are an essential part of the solution to the housing shortage. Finally, sustainability is playing an increasingly important role in the performance of real estate. For this reason, in addition to reviewing key developments in the residential, retail and healthcare property markets, this Investment Update also looks at carbon pricing.

Casper Hesp, Director Investment Management