ECONOMY

At the start of 2026, inflation was still expected to return towards the ECB’s long-term target of 2%, but the Iran crisis has led to a rise in inflation expectations. Fuel prices reacted immediately following the outbreak of the conflict, and in the coming months higher energy costs will increasingly be reflected in the prices of energy-intensive goods (second-round effects). Over time, wages may also increase. This raises the risk of a renewed wage–price spiral, with more persistent price pressures, similar to the situation in 2022 following the war in Ukraine. At that time, however, the inflation shock of around 10% year-on-year was significantly larger than what is currently expected even under the most adverse scenario.

For real estate, higher inflation typically translates into stronger rental indexation, as most commercial lease agreements are linked to inflation. In the residential sector, rent increases are legally capped at inflation or a related measure, such as collectively agreed wage growth. Current forecasts assume inflation of around 3.3% in 2026 (baseline scenario); this will carry through into 2027 and result in higher rental growth. In an extreme scenario where the Strait of Hormuz is closed for at least six months, inflation could rise to 6.4%. As rent increases in the private rental sector are determined by the lower of inflation and collectively agreed wage growth, rental growth would in that case be capped, as inflation would exceed wage growth. Given that annual market rental growth for Dutch investment residential assets in the MSCI has exceeded 7% for several years, such levels of rental growth appear achievable. Overall, the current inflation peak is expected to result in higher rental income in 2027, with a positive impact on real estate values.

Persistently high inflation may lead to higher interest rates. The ECB targets 2% inflation and steers towards this through its policy rate. If price increases continue to rise in the coming months, that target will move further out of reach. It remains uncertain how persistent inflation will prove to be, but financial markets are factoring in a potential rate hike later this year. Partly as a result, the risk-free rate (10-year Dutch government bonds) has risen by several tens of basis points since the outbreak of the conflict. The risk-free rate is a key indicator for initial yields. Real estate is generally considered riskier than government bonds issued by economically stable countries such as the Netherlands. As a result, real estate yields tend to follow movements in the risk-free rate, although typically with a lag due to the illiquid nature of the asset class. The spread relative to 10-year Dutch government bonds has narrowed significantly in recent years. As a result, the premium between this risk-free rate and the average gross initial yield for residential assets has for some time been around 150 basis points; recent interest rate increases have further reduced this margin. It is therefore likely that there will be limited scope for further compression of initial yields in the coming quarters. Some stabilisation in initial yields has already been observed for some time. Whether initial yields will increase over the course of the year and into 2027 depends on the duration and intensity of the conflict involving Iran and on the extent to which inflation deviates from the policy target. If the risk-free rate rises significantly, real estate yields will ultimately move upwards as well. This could have a negative impact on real estate valuations.