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Keypoints

  • Nijboer Act extended for five years
  • Inflation and collective agreement wages are closely aligned
  • Potential negative impacts on real estate investments

Introduction

Over recent years, there has been an increased focus on affordability in the housing market among politicians. The Rutte IV cabinet has proposed various laws to regulate a portion of the liberalised rental market. In mid-April, the Affordable Rent Act was passed by the House of Representatives, which, subject to approval by the Senate, will regulate the initial rents of rental properties up to 187 WWS points. For existing tenants, there was no national legislation before 2021 that limited the increase of contract rent in the private sector. However, most landlords have restrictions in the rental agreements they conclude. With the extension of the "Act on capping rent increases for liberalised rental agreements", the annual contract rent growth of properties in the private sector will be limited in the coming years, which will have implications for investments in Dutch rental properties.

Extension for 5 years

To protect tenants from significant increases in living costs, the initiative legislative proposal "Act on capping rent increases for liberalised rental agreements" (also known as the Nijboer Act) was adopted in 2021 to limit rent growth for existing tenants in the private sector to inflation + 1% for three years. Due to the high inflation in 2022, resulting from the energy crisis, it was decided to cap rent growth at the lower of CPI + 1% and the increase in collective agreement wages + 1%. As the law was due to expire on 1 May 2024, Minister Hugo de Jonge submitted a proposal to extend the law and limit contract rent growth for the next three years based on collective agreement wages + 1%. During the debate in the House of Representatives, the bill was amended to adopt the lowest of CPI + 1% / CAO (collective labor agreement) wage growth + 1% and to extend it for 5 years instead of 3. The legislative process has now been completed, and from 1 May 2024, the existing law will be extended until 1 May 2029. The CPI for all households in November of the preceding year will be used as the basis for the rent increase. The law only applies to liberalised rental homes; for regulated homes, agreements were previously made to link rent growth to collective agreement wages.

MID-MARKET RENTAL HOMES IN UTRECHT RIJNVLIET

Source: Achmea Real Estate

Wages track inflation

Until 2022, the Consumer Price Index (CPI) was primarily used for rent increases, but since the Nijboer Act, the development of collective agreement wages has also become important. The trends in price inflation and CAO wages have been similar. Over the past twenty years, the average wage increase was 2.1% per year, while inflation was at 2.2%. Based on this, whether CPI or CAO are used should make little difference. However, taking the lower of the two averages, either collective agreement wages or CPI, reduces the average to 1.6% over the past 20 years. This difference is explained by the delayed response of collective agreement wage developments to CPI. Collective labour agreements are often concluded for several years, which means it takes some time for significant CPI increases to be reflected in wages. The exceptionally high inflation of 2022 is particularly influential here. Excluding 2022 and 2023, the long-term difference between the CPI and the lowest of CPI and CAO wage development halves.

The delayed impact of inflation on collective agreement wages is also evident in recent forecasts by the Central Planning Bureau (CPB), which indicate that CAO wage development, in response to the high inflation of 2022, will rise much more sharply than the CPI in the coming years.

[1] CPB Forecast Februari 2024

CAO wages and inflation

Source: CBS, CPB, edited by Achmea Real Estate (2024)

Implications for Real Estate Investments

The long-term limitation on contract rent growth is expected to have a negative effect on the rental income from property investments. Particularly, large fluctuations in inflation will result in a lower permitted contract rent growth compared to using CAO+1% or CPI+1%. However, forecasts for the coming years suggest that inflation will remain below CAO wage developments, thereby allowing rent growth above inflation to continue. Calculating the precise impact on real estate investors in the long term is challenging as rent growth is not solely determined by statutory provisions but also influenced by other factors:

Firstly, the development of market rent is crucial. Due to housing shortages, market rents have risen faster than both CPI+1% and CAO+1% nationally over recent years, but in economically challenging times, it was common for market rent growth to fall below these rates. Additionally, local differences may result in market rents lagging, limiting contract rent growth.

Secondly, institutional investors often use rental contracts that specify the maximum rent growth, typically based on CPI plus a margin of one or several percentage points. It is customary for rent increases to take effect on July 1 of a contract year, with increases announced several months in advance. Therefore, rental contracts often use the annual change in CPI from an early month in the year, such as March. Under the adopted law, the maximum contract rent growth is determined based on the annual change in CPI or collective agreement wages with a reference date in November of the previous year, which can result in different growth percentages where the lowest is legally valid.

Thirdly, the rental policy of investors is significant. Although financial return is paramount, many institutional investors employ a somewhat conservative rental policy, not necessarily seeking the maximum allowable rent growth. A typical markup relative to CPI of less than 1% is not uncommon within the portfolio of ARE and similar institutional investors. This approach helps mitigate rental risk and increasing vacancies. Furthermore, institutional investors are increasingly considering their social responsibility to protect their tenants from substantial cost increases. Within the portfolio of ARE and other comparable institutional investors, an average contract rent increase of more than 1% above CPI is exceptional.

For institutional investors, it is crucial to achieve rent growth above inflation. Real estate is seen as a hedge against inflation within an investment portfolio, making inflation-tracking rent growth necessary. Additionally, a markup is required to cover rising costs for maintenance, insurance, and investments in sustainability, which often increase more rapidly than inflation. For instance, material costs for regular maintenance such as painting and glass replacement have more than doubled in the past 20 years, while inflation increased by about 50% over the same period (source: SUSAG). Costs for major maintenance and insurance of (purchase) homes have risen by 47% over the past decade, also outpacing the inflation of 27% during the same period (source: CBS). Therefore, a markup on top of inflation is essential to cover these rising costs.

[1] See also Brounen: Huurindexatie (2023)

Market rental growth and lowest CAO/CPI+1%

Source: MSCI, CBS, edited by Achmea Real Estate (2024)

Conclusion

For several years, the investment market for Dutch rental properties has been negatively affected by uncertainty regarding regulations. With the approval of the Affordable Rent Act in the House of Representatives and the extension of the Nijboer Act, clarity is provided for housing investors. The extension of the Nijboer Act by five years instead of the proposed three years provides more stability in policy.

For investors, rent growth above inflation remains important in the investment portfolio. Additionally, this covers rising operational costs such as maintenance expenses, and rent increases are necessary to enable improvements to the property, such as investments in sustainability. The legislation means that rent growth above inflation is not always possible. For individual complexes, this could mean that an investment in sustainability is no longer profitable because the contract rents can only rise limitedly. Based on current forecasts for inflation in the coming years, rent growth above CPI is expected to remain feasible, so the impact at the portfolio level will likely be minimal for institutional investors on the short term. However, fluctuations in inflation are difficult to predict and often related to unexpected events such as wars and pandemics. Since inflation, apart from these events, deviates only slightly from CAO wage development, the long-term impact on institutional investors is expected to be manageable.

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