RESIDENTIAL

Keypoints

Investment volumes remain low, initial yields stabilise
Clarity on rental regulation imminent
Scarcity on rental market persists
House prices continue to rise
Slow rise in construction costs

Volumes remain low

Activity in the investment market for Dutch rental properties remained at a low level in the first quarter. The investment volume, based from preliminary figures from RCA, came to around €500 million. As due to after-reports, the volume is likely to increase further, this is volume is comparable to the €650 million in the same period in 2023. Historically, however, volumes are still low: in the first quarter of 2019, during the peak of the investment market, volumes were volume three times higher than today. Increased activity from institutional and foreign investors stood out in the first quarter of 2024. In 2023 it was mainly private investors making purchases, in many cases with a privatisation strategy.

RESIDENTIAL INVESTMENT VOLUME BY QUARTER (2010=100)

Source: RCA (2024), edited by Achmea Real Estate

Signs of bottoming out

Prime initial yields remained stable in the first quarter of 2024. This brings an end to eight quarters of increases in prime initial yields for the time being. Overall, prime initial yields grew by around 150 basis points since the beginning of 2022, which has put considerable pressure on residential property valuations. As the risk-free rate increased slightly, although the spread fell in the first quarter, it still remains above 200 basis points (source: C&W).

With initial yields remaining stable and interest rates not expected to rise further, there appears to be cautious bottoming in the market. In addition, increasing clarity on rent regulation is expected which will remove investor uncertainty. Average initial yields of rental properties owned by institutional investors still rose slightly in the fourth quarter of 2023 (source: MSCI). First-quarter figures will be available later, but given the trend in prime yields, stabilisation here also seems likely (source: C&W). There has been a lot of uncertainty in the residential investment market in recent years due to increasing regulation. The extension of the legislation on limiting contract rent growth has now been passed by the House of Representatives. Until 2029, contract rent growth for deregulated rental properties in the Netherlands will be capped at CPI+1%. In case the CAO wages are lower than the CPI, CAO+1% will be used. The Affordable Rent Bill, which regulates the initial rents of mid-rent homes, is also expected to be debated by parliament in the second quarter. This will finally bring clarity for institutional investors more than two years after the announcement of the law.

PRIME YIELDS

Source: MSCI, Oxford Economics, C&W (2024), edited by Achmea Real Estate

Clarity of regulation and rapid increase in market rents

There has been a lot of uncertainty in the residential investment market in recent years due to increasing regulation. The extension of the legislation on limiting contract rent growth has now been passed by the House of Representatives. Until 2029, contract rent growth for deregulated rental properties in the Netherlands will be capped at CPI+1%. In case the CLA wages are lower than the CPI, CLA+1% will be used. The Affordable Rent bill, which regulates the initial rents of mid-market rental properties, has been passed by the House of Representatives and is expected to be addressed by the Senate in the second quarter. This will finally bring clarity for institutional investors more than two years after the announcement of the law.

The housing shortage in the rental market continues, the financial vacancy rate remained historically low at 1.2 per cent in the fourth quarter of 2023. Consequently, interest in rental properties is high as evidenced also by the many applications for new construction complexes. As a result of the low vacancy rate, market rents rose 5.8 per cent from a year earlier. Never before have market rents risen so much since the MSCI quarterly index began in 2008. Due to low new construction production, market rents are expected to continue rising. Figures for the first quarter will be available later (source: MSCI).

KOOLHOVEN BUITEN - TILBURG

Source: Achmea Real Estate

Buying market continues to perform well

House prices remained almost stable in the first quarter of 2024 compared to the fourth quarter. Compared to a year earlier, prices rose by 9.1 per cent. This is according to figures from the NVM. The number of transactions fell by 18 per cent compared to a quarter earlier, as did the supply, which fell by 15 per cent. Because the number of transactions fell faster than supply, the tightness indicator rose: a potential home buyer now has a choice of 2.4 houses compared to the fourth quarter. A year ago, this was 3.2. The NVM figures are based on the average transaction price and give a rough but up-to-date indication of house price developments. The existing house price index (PBK) from CBS and the Land Registry gives a more accurate but delayed indication. The first-quarter figures are not yet known but based on Oxford Economics' forecast, the PBK will rise by more than 2 per cent in the first quarter. The Home Ownership Market Indicator, which shows consumer confidence in the housing market, has shown an upward trend since June 2023. In January, at 85 points, it was at its highest level since July 2022 (100 is 'neutral' on a scale of 0 to 200).

INDEX OF PURCHASING AND RENTAL PRICES (2015=100)

Source: MSCI, Oxford Economics, Kadaster (2024), edited by Achmea Real Estate

Construction costs rising slowly

Construction costs for new-build flats rose about 0.7 per cent in the fourth quarter. Year-on-year growth was around 2.5 per cent which is a long-term normal trend. Prices for aluminium and wood rose slightly in the first quarter, while other prices remained stable. In addition, wages from the collective labour agreement for the construction industry increased by 3.5 per cent from 1 January 2024. Because wages will rise again by the same percentage in mid-2024, construction costs are expected to increase by about 2 per cent this year. A major uncertainty here is energy costs, due to the unrest in the Middle East, a possible increase in this will cause higher construction costs. The procurement index rose 0.6 per cent in the first quarter. Due to a declining number of building permits, fewer projects are being started, increasing competition, which has a cost depressing effect. IGG expects that the work stock will continue to decline and, as a result, the procurement index will rise less rapidly than construction costs (source: IGG).

CONSTRUCTION COST INDEX (2015=100)

Source: IGG (2024), edited by Achmea Real Estate

Outlook

Further stabilisation in the investment market is expected for the rest of 2024. With interest rates remaining unchanged, initial yields will not increase further and value growth will mainly be determined by direct returns. Expected clarity on regulation, especially the Affordable Rent Act, will provide certainty in the market. As a result, investment volumes may increase slightly again as institutional and foreign investors will become more active. The rental market continues to perform well due to the huge tightness, which means stable rental growth remains possible the risk of vacancy is low. Increasing investor leasing combined with disappointing new construction production will only increase the scarcity of rental housing. Scarcity is also noticeable in the owner-occupier market; due to sharply rising wages and slightly falling (mortgage) interest rates, the expectation is that the vacancy values of homes will start rising again in 2024.

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