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1
RESEARCH PAPER:
DUTCH RESIDENTIAL INVESTMENTS
IN EUROPEAN PERSPECTIVE
2
OUTLINE
Residential real estate in the investor portfolio
Steady income return
Moderate inflation hedge
Low correlation with other asset classes
High portfolio diversification potential across Europe
The conditions on the Dutch housing market
Regulation is consistent
Economic situation shows positive signs
Indicators for investing in Dutch residential markets are positive
Pricing has improved
Housing shortage is increasing
Non-regulated rental market will be bigger
3
GOOD RISK-ADJUSTED RETURN AND MODERATE INFLATION HEDGE
Residential investments have a good long-term risk-adjusted return.
Volatility of capital growth has been relatively high, and income volatility very low.
Over the past ten years the total return in Sweden, the UK and the Netherlands has only been negative once. For France, Germany and Switzerland this has not occurred even once.
Residential investments give more protection against inflation risk than other Dutch asset classes.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
The NetherlandsFranceGermanyUnited KingdomSwedenSwitzerland
ANNUAL TOTAL RETURNS
Source: IPD (2003 - 2012)
Correlation to inflation 1 year 2 year 3 year
Residential 1 0.30* 0.35** 0.40**
Stocks 2 - 0.09 - 0.09 - 0.11
Bonds 3 0.10 0.10 0.09
Liquidity 4 0.29* 0.33** 0.34**
* Significant at a 90% level ** Significant at a 95% level1 BIS (1971 - 2012) 2 MSCI Netherlands (1971 - 2012) 3 JP Morgan GBI Netherlands 7-10 years (1975 - 2011);
4 3-month Euro deposito (1971 - 2012); 5 FTSE EPRA/NAREIT EU (1990 - 2012)
4
DOUBLE DIVERSIFICATION: IN OVERALL PORTFOLIO AND IN HOUSING PORTFOLIO
Correlations between housing investments and other Dutch asset classes are very low.
So housing offers excellent diversification potential.
Cross-country correlations among European residential markets are low.
So international investment in housing provides good diversification advantages.
The low correlations between the Dutch housing market and other European markets stand out.
Cross-correlation Residential (IPD) Stocks Bonds
Stocks 0.15 1
Bonds - 0.10 1 - 0.09 1
Liquidity 0.03 1 0.20 1 0.23 *3
* Significant at a 90% level ** Significant at a 95% level1 1977 – 2012; 2 1990 – 2012; 3 1977 – 2011; 4 1990 - 2011
Cross-correlation The Netherlands France Germany Sweden Switzerland
France 0.13
Germany 0.09 0.21*
Sweden 0.38** 0.43** - 0.07
Switzerland -0.28* 0.27* 0.59** 0.17
United Kingdom 0.09 0.45** 0.40 0.46** 0.70**
* Significant at a 90% level ** Significant at a 95% levelSource: BIS (1971 – 2012)
5
OUTLINE
Residential real estate in the investor portfolio
Steady income return
Moderate inflation hedge
Low correlation with other asset classes
High portfolio diversification potential across Europe
The conditions on the Dutch housing market
Regulation is consistent
Economic situation shows positive signs
Indicators for investing in Dutch residential markets are positive
Pricing has improved
Housing shortage is increasing
Non-regulated rental market will be bigger
6
RENT REGULATION CREATES INFLATION HEDGE AND REGULATED SECTOR WILL GET SMALLER
Rents, regulation and inflation
Regulated rental dwellings (88% of the market) have a rent increase based on inflation.
This is a reason why housing returns are correlated with inflation.
Regulated sector gets smaller
Up to one million regulated houses could get non-regulated, based on current WWS points.
Due to income-based rent increases regulated dwellings will likely get non-regulated.
Social housing providers have to go back to core business.
So non-regulated rental dwellings could shift towards other landlords.
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
1%
2%
3%
4%
5%
RENT INCREASE LINKED TO NL INFLATION
Inflation rate NL
Rent increase
Source: CBS(2013)
7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0%
20%
40%
60%
80%
100%
120%
RESIDENTIAL MORTGAGE DEBT TO GDP RATIO
Netherlands
United Kingdom
Sweden
Germany
France
RESIDENTIAL MORTGAGE DEBT HIGH, BUT HOUSEHOLD BALANCE SHEET LOOKS HEALTHY
The mortgage-debt-to-GDP ratio has increased rapidly.
The Dutch ratio seems very high, which is caused by
− increasing home-ownership
− increasing house prices
− willingness of home buyers to take out mortgage with high LTV
− growing popularity of mortgages that do not (directly) amortize
Many mortgages have savings account attached, which is currently not in the statistics.
The large mortgage debt is put in perspective by the underlying house values, other assets and the extensive pension scheme in the Netherlands. Hou
se v
alue
Mor
tgag
e de
bt
Ove
rval
ue
Oth
er a
sset
s
Oth
er d
ebt
Pens
ions
Capi
tal
0
400000000000
800000000000
1200000000000
1600000000000
2000000000000
2400000000000
€ 1,158
€ 505,827,454,000
€ 757,875,415,000 - € 652 - € 95
€ 817,336,000,000 2081038869000
BALANCE SHEET DUTCH HOUSEHOLDS (2011)
Source: CBS (2012, 2013)
Source: Hypostat (2011)
8
THE ECONOMIC OUTLOOK IS IMPROVING FAST
The economic outlook has recently started to brighten up.
Consumer confidence is going up, after years of pessimism.
In 2012 and 2013 the Netherlands had negative GDP growth rate of 1,2% and 0.4%, respectively.
Real GDP is expected to increase by 1.0% in 2014, and 1.5% in 2015.
Sources: European Commission (2014), Swiss National Bank (2014)
1995 2001 2007 2013
-45
-30
-15
0
15
30
45France
1995 2001 2007 2013
-45
-30
-15
0
15
30
45Germany
CONSUMER CONFIDENCE
1995 2001 2007 2013
-45
-30
-15
0
15
30
45Sweden
1995 2001 2007 2013
-45
-30
-15
0
15
30
45The Netherlands
1995 2001 2007 2013
-45
-30
-15
0
15
30
45United Kingdom
1995 2001 2007 2013
-45
-30
-15
0
15
30
45Switzerland
9
OUTLINE
Residential real estate in the investor portfolio
Steady income return
Moderate inflation hedge
Low correlation with other asset classes
High portfolio diversification potential across Europe
The conditions on the Dutch housing market
Regulation is consistent
Economic situation shows positive signs
Indicators for investing in Dutch residential markets are positive
Pricing has improved
Housing shortage is increasing
Non-regulated rental market will be bigger
10
DECLINING HOUSE PRICES RESTORE EQUILIBRIUM BETWEEN HOUSE PRICES AND RENT LEVELS
Since the start of the financial crisis Dutch house prices have decreased more than those in comparable countries.
Dutch nominal house prices have fallen 18% and are now back at the year 2000 level.
The house price/rent ratio is an indicator for the attractiveness of rental houses for investors.
Since 2008 the ratio is declining, caused by declining house prices and increasing rent levels.
The Dutch ratio is currently very close to its long-term equilibrium.
HOUSE PRICE / RENT RATIO (1975-2013)
175
150
125
100
75
50
1975 1985 1995 2005 2013
175
150
125
100
75
50
1975 1985 1995 2005 2013
175
150
125
100
75
50
1975 1985 1995 2005 2013
175
150
125
100
75
50
1975 1985 1995 2005 2013
175
150
125
100
75
50
1975 1985 1995 2005 2013
175
150
125
100
75
50
1975 1985 1995 2005 2013
The Netherlands
GermanyFrance
Switzerland
Sweden
United Kingdom
Source: The Economist (2013)
11
INCREASING NUMBER OF HOUSEHOLDS, DECLINING NUMBER OF BUILDING PERMITS
In 2012 there was a shortage on the housing market of about 3.4%.
The number of Dutch households is expected to increase by around 60,000 per year.
Based on the most recent forecasts, Dutch population will grow until 2040.
During the financial crisis there has been a decline in the amount of newly built dwellings.
With a sharp decline in permits granted, the construction of new homes will likely continue to be low in the next two years, resulting in housing shortages.
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
*20
20*
2025
*20
30*
2035
*20
40*
2045
*20
50*
2055
*20
60*
-30000
0
30000
60000
90000
120000
150000
-2000000
0
2000000
4000000
6000000
8000000
10000000
TOTAL NUMBER OF HOUSEHOLDS
YTY differenceNumber of households
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
*0.000
20.000
40.000
60.000
80.000
100.000
120.000
NEW BUILDING PERMITS AND FINISHED DWELLINGS
Owner-occupied
Rent
Building permits new dwellings
Finished dwellings
Source: CBS (2013)
Source: CBS (2013)
12
HOUSING DEMAND STRONG IN URBAN AREAS AND DEMAND WILL SHIFT TO UNREGULATED SECTOR
Household development
Strongest in urban areas, larger cities in ‘Randstad’: Amsterdam, Utrecht, The Hague.
Smaller cities in Brabant: Breda, Den Bosch, Eindhoven.
Many rural areas in northern and southern parts of the country will face decline in housing demand.
Demand for unregulated housing
A growing part of this demand will go to unregulated sector in the next twenty years.
This is due to changing social housing policy and less favorable tax treatment for mortgages.
Households that plan to move are relatively more willing to rent.
Less than - 500
- 500 to 0
0 to 200
200 to 500
More than 500
Expected household development per municipality (2012 - 2030)
EXPECTED REGIONAL HOUSEHOLD DEVELOPMENT (2012 – 2030)
Source: ABF Research (2014)
13
LESSONS FOR DUTCH INSTITUTIONAL HOUSING INVESTORS
This seems to be a good moment to get in.
− The market is priced attractively
− Long-term reforms are implemented
− Scarcity of supply is likely to increase
But the rest of the world does not know it.
− Interviews with international experts and foreign institutional investors show lack of knowledge
− But there would be interest if the right opportunities were presented
− Co-investing with respected Dutch institutional investors is attractive
So fly to the money!