Like 2020, last year was dominated by the Covid-19 pandemic and government measures and restrictions, including several full and partial lockdowns, aimed at containing the spread of the virus. Despite this, the Dutch economy proved remarkably resilient last year, with most experts agreeing that GDP would increase by around 4% in 2021 after contracting by 3.6% in 2020, and cautiously optimistic on the outlook for the coming years. This was partly due to the continued government support for the sectors hardest hit by the outbreak, plus the fact that most public and private sector organisations that were able to, had already switched to remote working or hybrid models. And despite initial delays, the subsequent rapid roll-out of the vaccine programme led to a sharp dip in the number of hospital admissions and absenteeism rates. Unemployment also failed to rise as much as initially feared and the biggest threat to the labour market turned out to be the rising shortage of personnel in a number of important sectors, including the construction industry. More worrying was the sudden rise in inflation in 2021. If this continues, it could have a negative impact on both consumer confidence and consumer spending in 2022. And the surge in Covid-19 infections in late 2021, largely driven by the new Omicron variant, could endanger the recovery of the Dutch economy if the outbreak is prolonged and the government imposes further lockdowns.
Office real estate market
The Covid-19 pandemic has accelerated a number of existing trends in the Dutch office market. Home working became standard almost overnight and the majority of office workers have stated they want to continue to work at home for between one and three days once the pandemic is over. However, home working does have its drawbacks and young employees found it particularly difficult. Many companies are already unveiling plans to make their offices as attractive as possible, to safeguard their corporate culture and to increase collaboration. Office lay-outs will be improved to make them better meeting places or collaborative spaces, and that will require extra space. At the same time, they will have to offer a sufficient number of individual work stations for peak periods and spaces for work requiring concentration. On the whole, the demand for office space is likely to decline by between 5% and 10%, mainly in secondary locations. The impact on the best locations will be marginal.
Another challenge facing the office sector is that all office buildings will have to be Paris Proof by 2050. This will be particularly challenging for existing offices, many of which are likely to be repurposed or demolished entirely. The strongest locations in the main office cities will emerge the strongest from the transition, as these investments will be the easiest to earn back. As has been the case for some time, the strongest and most resilient offices will be those that offer easy access, an element of experience, healthy spaces (safety, good air quality, daylight, green, etc.), sustainability labels and flexible leases. On the whole, the fundamentals of the office market are still strong, with top locations proving the most resistant to negative trends. The continued delays to new-build developments and rising construction costs could put a brake on investment opportunities.
The Fund's progress in 2021
2021 was a particularly productive year for the Office Fund. One of the milestones last year was the delivery of Central Park in Utrecht. The pandemic and home working enabled us to accelerate the renovations of WTC Rotterdam and we completed the renovation of Centre Court in The Hague and handed the building over to the Dutch government’s real estate agency on time. We also upgraded the Mondano restaurant in WTC The Hague and renovated a number of units in the Olympic Stadium and rented these out to new tenants. We joined the Green Business Club in Utrecht to improve and increase the sustainability of the area around the central station together with other stakeholders. We also launched a new health & well-being programme to move towards healthier work environments that can increase workplace attractiveness.
In 2021, we made progress on all our new strategic pillars: quality, diversification and sustainability. We are 100% invested in our selected core regions - Amsterdam, The Hague, Rotterdam and Utrecht – and we signed leases with strong tenants for a number of assets, including Central Park, WTC Rotterdam and Centre Court. New long leases for these assets and lease extensions reduced our vacancy risk significantly and helped the Fund maintain its WALT of 5.6. The delivery of Central Park also gives us a better spread across our core regions. On the sustainability front, we retained our GRESB five-star rating and all assets have a BREEAM-NL label with Very Good as standard and Excellent for 70% of the invested capital. Given that all office buildings will have to have at least a C label by 2023, the Fund is in excellent shape, as 99% of the Fund’s assets now have green energy labels, with 98% now having A labels. We also increased the share of green leases and the number of on-site solar panels. The Fund now has a Paris Proof roadmap for every asset, together with analyses of gross physical climate risks, and we are currently integrating these in the Fund’s long-term maintenance plans. Bouwinvest also appointed a Paris Proof programme manager. Another significant achievement was the modernisation of the Terms and Conditions of the Fund.
The Fund did not make any acquisitions in 2021, largely due to unpredictable building costs and inevitable delays in negotiations for redevelopment projects. However, values remained fairly stable and the Fund recorded capital growth of 4.6%, way above the -1.7% expected at the start of the year, thanks to upward valuations for a number of assets. The Fund’s NAV had increased to € 1,239 million at year end. The Fund’s income return also came in slightly higher than expected at 2.6%, taking the total return to 7.3%, compared with the budgeted 0.7%.
Market and Fund outlook
Although the Dutch economy recovered strongly in 2021, there is still a lot of uncertainty regarding how sustained the recovery will be in the face of new Covid-19 variants and future lockdowns. The sudden surge in inflation seen in 2021 is also worrying, but the Fund can generally charge on higher costs to its tenants. We may see some rise in vacancy rates as companies downsize, but this is unlikely to affect high-quality offices in top locations. Nor is there any sign of waning investor interest in offices. Core investments are as attractive as they have ever been, and the low-interest environment and the sheer volume of available capital will keep investment volumes and initial yields at current levels for the immediate future. Plus we are seeing growing demand for healthy and sustainable meeting places. We are cautiously optimistic that we will achieve our long-term growth and return targets. We are known to be a reliable partner and we are known as a long-term investor.
All that remains is for me to thank our clients for their continued trust in us and our strategy. And of course I would like to thank our team for their flexibility and determination in a very challenging year. And for their professionalism and collaboration, which helped us to anticipate and respond to developments in a very dynamic environment. It is thanks to them that we emerged so strongly from another exceptionally difficult year.
Director Dutch Office & Hotel Investments