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.
Residential real estate market
The Covid-19 pandemic had little impact on the Dutch housing market last year. Once again, the huge demand for homes and the lag in the production of new housing stock increased the shortage of homes. In 2021, this shortage had risen to around 280,000 homes or 3.5% of the housing stock and this is expected to rise to a peak of 316,000 homes in 2025. The scarcity, low interest rates and favourable lending conditions once again pushed up house prices, putting home ownership beyond the reach of a growing number of households. The biggest shortage on the housing market is in the (affordable) mid-rental segment, where most of these people are looking for homes. This segment is crucial for mobility in the housing market, as it provides an alternative for people living in social housing who earn above the maximum income level, freeing up social housing for lower income groups. The shortage of smaller, lifecycle-proof homes is also stifling mobility among 65+ households, many of whom would free up larger homes for families.
Many national and local government efforts to improve the affordability of homes are proving counterproductive. For instance, the removal of transfer tax (stamp duty) for first time buyers simply encouraged people to bid more for homes, which pushed up prices even further. Raising the transfer tax for investors in rental homes, on the other hand, made it more difficult for investors to acquire projects at prices that meet the financial targets of their clients, mostly pension funds and insurance firms. And it is still not clear what impact the (temporary) maximisation of rent increases in the liberalised rental sector will have in the long term. On the sustainability front, the government did introduce stricter requirements for homes, but is still focused on energy labels, rather than the energy use of tenants, which is a better measure of long-term sustainability. All in all, these measures are making it more difficult for institutional investors to achieve their targeted returns. Despite this, the demand for Dutch residential real estate is as strong as ever, and the competition from international investors is becoming even more fierce.
The Residential Fund's achievements in 2021
The Residential Fund absorbed the impact of the higher transfer tax fairly quickly and managed to once again record solid returns. The value increases in Amsterdam are slowing and last year the Fund concentrated its acquisition efforts in the wider Holland Metropole region, where demand will remain the strongest in the years to come. We also constantly monitored legislative changes and kept clients updated on any potential impact on the Fund or its portfolio. While we support measures aimed at combatting excesses in the liberalised rental sector, Bouwinvest is concerned that some measures will reduce interest from institutional investors. After all, their capital is needed to address the growing shortfall in homes. We continued our lobbying efforts for realistic and constructive legalisation, both as Bouwinvest and via the IVBN (Association of Institutional Property Investors in the Netherlands).
Last year, the Fund also devoted a great deal of attention to the rental of homes in the higher rental segment, where vacancies had risen, partly due to the departure of many expats following Brexit and the Covid-19 outbreak. Thanks to our active marketing efforts and a pick-up in the market for these homes, these vacancies have now been reduced to a minimum. And we also spent a good deal of time dealing with tenants who found themselves in financial difficulties. In most cases, we reached tailor-made agreements and payment plans with individual tenants. Despite these problems, the Fund closed the year with very low rent in arrears. Last year, we also devoted a great deal of attention to tenants services, including the opening of a tenants contact point and a new portal, all of which led to a clear improvement in our tenant satisfaction score.
The Fund made solid progress on all of its strategic pillars in 2021. In terms of quality, despite Covid-19-related construction delays in some projects and in deal making for new projects, the Fund acquired five new-build projects in the Holland Metropole region (one project in The Hague, one in Rijswijk, one in Hoofddorp and two in Rotterdam), for a total of € 153 million and added five projects to the portfolio (90 houses and 342 apartments). On the affordability front, 252 or around 70% of the homes we acquired were in the affordable mid-rental segment. We also made a start on the appropriate income-based allocation of homes. On the sustainability front, we retained our GRESB five-star rating and once again improved our overall score. We also continued with our efforts to Paris proof the portfolio, upgrading a number of projects and adding solar panels were possible. We also completed our Paris Proof roadmap and came up with custom-made plans for around 150 projects. Bouwinvest also appointed a Paris Proof programme manager.
As already stated, despite the increase in transfer tax the Fund recorded solid returns in 2021. The income return came in on target at 2.1%. Due to the growing shortage of homes, especially in the mid-rental segment, vacant values and investment values increased enormously in 2021, resulting in capital growth of 8.9%, way above the forecast at the start of the year. This resulted in a very satisfying total return of 11.1%. The Fund’s NAV stood at € 7,681 million at year end. Very importantly, the Fund attracted two new investors and top-up investment from an existing client for a total of € 356.5 million in 2021, a clear sign of their trust in the Fund and its strategy. Another significant achievement was the modernisation of the Terms and Conditions of the Fund.
Outlook for the market and the Fund
The Dutch residential real estate market once again proved very resilient in the face of several crises, including the Covid-19 pandemic, the massive and growing shortages on the housing market and the problems in the construction sector. The outlook remains positive in terms of valuations and returns, especially in the Holland Metropole region. At the same time, we have to recognise that not everyone is emergng from this crisis unscathed. Affordable rental and owner-occupier homes are now beyond the reach of even more people than before the crisis and we find this unacceptable. So we will be intensifying our efforts to provide affordable, high-quality homes for as many people as we can the years ahead, as we look to achieve the right balance of financial and social returns. Of course, it will be a major challenge to meet this huge and ever-growing demand for homes, especially in the mid-rental segment. Cooperation with national and local governments will be crucial on this front. The energy transition will be another major challenge as we move forward. The Fund is already making progress on making its own contribution to this effort by boosting the climate resilience of its portfolio and making it Paris Proof before 2045. We have always been and still are in this for the long haul and we are very confident about the future of the Dutch residential market.
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 hard work helping our tenants. And for their professionalism and collaboration, which helped us to anticipate and respond to developments quickly and effectively. It is thanks to them that we emerged so strongly from another dynamic year.
Michiel de Bruine
Director Dutch Residential Investments