Last year was another challenging year for both for real estate markets and the wider economy. Russia’s invasion of Ukraine led to a huge rise in energy prices and a surge in inflation. With no end in sight for the conflict, the outlook for 2023 is fragile, reflected in low consumer and business confidence, despite government aid. Unemployment has remained low, but rising staff shortages in a growing number of sectors, including the retail sector, is putting a lot of pressure on economic growth. And while wages have risen quite sharply, they have not been able to keep pace with burgeoning inflation. The increase in construction costs, fuelled by staff shortages and related wage increases plus rising material costs, is also putting pressure on new-build projects, with some being postponed or even cancelled. Obviously, inflation is impacting people’s spending power, which will in turn affect retail sales, especially in the experience segment, as food sales are generally  less affected by economic cycles. At the same time, the sharp rise in energy prices makes it more likely that retail tenants will be willing to collaborate with the Fund to make its assets more energy efficient and sustainable. 

Investment market

The Dutch government’s regulatory changes continue to create a great deal of uncertainty on real estate markets. Investment managers are also dealing with a stream of new (EU) sustainability regulations, including the SFDR and the EU taxonomy. Moreover, the sharp rise in interest rates has had a major impact on the investment market. Given this, the above-mentioned inflationary pressures and rising construction costs, on top of the existing pressure created by burgeoning online sales, the sentiment on the retail investment market is currently quite cautious. The sharp decline in stocks and bonds also triggered the so-called denominator effect, leaving investors (temporarily) overallocated to real estate and forcing some to trim their holdings. However, Bouwinvest is a long-term investor and we continue to have faith in the long-term future of the retail sector.

All of this led to a decline in asset valuations from Q3 onwards, mainly due to widening yields. We expect to see a growing gap in valuations between prime assets and secondary assets, as investors focus on high-quality, sustainable retail assets with strong catchment areas in economically healthy areas. The government’s planned ESG-related regulation is also putting a premium on sustainable retail assets, putting the Retail Fund at an advantage. Investments in sustainability also contribute to the financial performance. Moreover, the Fund won the MSCI award for the best performing specialist fund in the Netherlands for the fourth consecutive year in 2022.

Responding to uncertainties

Of course, this uncertainty has also had an impact on the demands of our clients. As long-term investors, they are focused on stability and predictability. They are also more engaged with the world than ever before and have set targets in terms of environmental performance environmental risk, social impact and solid governance. The Fund’s challenge is to meet these demands in even these uncertain market conditions.

Bouwinvest has responded to the demands of our clients and regulators by refining our strategy and strengthening our risk management, compliance, financial and ESG reporting capabilities, while also investing in sustainability measures that will help make our portfolio fit for the future. We are a long-term investor and as we have repeatedly proven in the past, this long-term view and our strategy will enable us to continue to create real value for life in even the most challenging of markets.

The Fund’s strategy

Despite the above developments, the Fund delivered a strong performance in 2022, with a total return of 10.5% for the full year, despite a dip in the fourth quarter, which saw capital growth fall into slightly negative territory. While the fundamental strategy was unchanged, the Fund did make some adjustments to make its portfolio more resistant to the expected challenging market environment in 2023 and beyond, putting even greater focus on its main strategic pillars, quality, future-driven and sustainability. The Fund delivered solid performances on all three pillars in 2022, as the Fund and its tenants continued to invest in upgrading and updating assets, including sustainability measures. The Fund retained its 5-star GRESB rating and achieved a score of 88 points, two points less than last year. The main challenge in improving the score is obtaining more tenant data related to water and waste. We also worked hard on our Paris proof roadmaps and now have defined roadmaps for a number of assets. The Fund also devoted a lot of attention to the optimisation of its portfolio, acquiring three high street assets in the center of Eindhoven and disposing of three non-core assets. 

Market outlook

Given the level of uncertainty in the market, it is difficult to predict what will happen in the retail sector the near term. However, we do expect there to be opportunities. Less committed, less long-term investors or invests that rely heavily on leverage may withdraw from the market and we could well see high-quality assets coming to the market at discounted prices. Provided we have the funding, we will seize those opportunities to optimise the Fund’s portfolio. 

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 hard work, professionalism and collaborative efforts. It is thanks to them that we emerged as strongly as we did from another dynamic year.

Collin Boelhouwer
Director Dutch Retail Investments