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.
Retail real estate market
Once again, the retail market was one of most badly affected by the Covid-19 pandemic, although not as badly as in 2020 and continued government support did alleviate some of the worst effects and kept bankruptcies to a minimum. Despite a number of forced lockdowns of non-essential shops, total retail sales increased by around 4.4% in 2021, largely driven by higher sales for supermarkets, specialty shops, furniture stores and DIY outlets, while online sales continued to increase strongly. The hardest hit segments were fashion and shoe stores. And while government support did keep a number smaller retailers afloat, high street vacancy rates are on the rise, which is putting pressure on retail rents. Retailers that manage to find a good balance between their physical store sales and online sales are the most likely to survive and thrive in the future. Because while the growth in online sales seems unstoppable, people still want to visit physical stores, as proven last year when high streets were open for business. Various pure play physical retailers are now actively building an online presence and distribution capabilities. The convenience segment – supermarkets and district shopping centres – remained most popular with investors last year, followed at some distance by experience assets in the best shopping streets.
The Retail Fund's achievements in 2021
A number of the Retail Fund’s tenants in the experience segment once again experienced difficulties in 2021 and the Fund reached rent deferral agreements with many tenants. And while vacancy rates are on the rise in the sector as a whole, they are not increasing in the Fund's portfolio, and tenants are paying the rent deferred over the past two years. The Fund was proactive in terms of extending existing contracts and the negotiations for the takeover of rental contracts. The most striking example of this approach was TK Maxx’s takeover of C&A's lease for its store on the Damrak in Amsterdam under the same conditions. We also actively worked with various supermarket operators to facilitate their expansion plans. Last year, the Fund managed to sell a number of assets that no longer met our risk requirements in what was a very difficult market, most notably the Muntpassage shopping centre in Weert, following a strategic upgrade of the asset. The Fund also acquired a major asset with 17 retail units, including an Albert Heijn supermarket, on the Lijnbaan, one of the busiest shopping streets in Rotterdam. And we once again outperformed the retail market as a whole and won the MSCI award for the best performing real estate fund in the Netherlands for the third year in a row, largely thanks to our convenience assets and high percentage of experience assets in the G5 cities.
Last year, the Fund made solid progress on its new strategic pillars: quality, future-driven and sustainability. We once again improved the overall quality of our portfolio, by acquiring new core assets, including the Lijnbaan in Rotterdam and three high street retail units in Eindhoven. The sale of Spuistraat in The Hague and Muntpassage in Weert also led to a significant reduction of ‘other retail’ assets. And the sale of a retail unit in the Centrumplan shopping centre in Rosmalen strengthened that asset. On the future-driven front, the Fund actually managed to increase occupancy thanks to its proactive approach to Covid-19-related agreements with existing tenants. The deal with TK Maxx reduced the vacancy risk for one of our biggest assets, the Damrak in Amsterdam. And we made a start on the renovation and expansion of our PC Hooftstraat asset in Amsterdam. We once again devoted a great deal of attention to sustainability, thanks to which we managed to retain our GRESB five-star rating. We also increased the number of solar panels on our assets, often in collaboration with our tenants. As part of our lease negotiations last year, we reached an agreement with more tenants on sharing data on energy use and the like. This additional coverage will help us to come up with joint sustainability initiatives with our tenants. We also completed our Paris Proof roadmap and we now know what we have to do and how much investment will be required to achieve our ambitions on that front. Bouwinvest also appointed a Paris Proof programme manager. Another significant achievement was the modernisation of the Terms and Conditions of the Fund.
The Retail Fund recorded a total return of 4.4% in 2021, well above our budget of 0.5% and 3.9 %-points higher than the market average. While the income return came in lower than budget, largely due to the financial help we gave our tenants, it was still a healthy 3.9%. And our capital growth was a lot better than we thought at the start of the year. Not surprisingly, we saw a sharp drop in the value of experience assets, but this was more than offset by the rise in the value of our convenience assets and a substantial book profit on the Lijnbaan acquisition in Rotterdam, resulting capital growth of 0.5%, versus a budget of -3.9%. Thanks to the acquisitions we made in 2021, we also increased the Fund NAV to € 976 million at year end, compared with a budget of € 924 million. This puts us well on track for our target of € 1.089 million at year end 2024.
Outlook for the market and the Fund
We expect 2022 to be another challenging year for the retail sector. The lockdown announced in December, triggered by the surge in Omicron infections and which ran well into January was another blow to retailers, especially those in the country’s main shopping areas. Missing the very important Christmas season was particularly difficult. It certainly looks like Covid-19 will be with us for some time, but the vaccination programme is working and it is likely that the impact of the virus will lessen over time and there will be less need for lockdowns. However, we are likely to see continuing pressure in the experience segment. The retail sector in cities like Amsterdam depends to a large degree on tourists and it is unlikely that they will return in large numbers on the short term. That said, thanks to the strategic choices the Retail Fund has made in the past and our high-quality and sustainable portfolio, we are well equipped to weather this storm and emerge from this crisis stronger.
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 dedication 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 Retail Investments