Last year was another difficult year for real estate markets and the Dutch economy, due to continued geo-political, social, economic and financial turbulence, plus increased environmental concerns. On top of the continuing war between Russia and Ukraine, October saw a tragic escalation of the Israeli-Gaza conflict. The Ukraine war continued to push up inflation in the early part of the year, driven by high energy costs. Inflation did decline quite rapidly in the latter part of the year, taking annual inflation to around 3% for the  full year. At the same time, central banks fought inflation by raising interest rates to the highest levels in 20 years. This all had a major impact on the Dutch real estate market, resulting in a sharp decline in real estate valuations driven by higher borrowing costs, reduced investor confidence and appetite and increasing economic uncertainty. At the same time, the year 2023 will go down as the hottest and the wettest year since records began, once again confirming that climate change is part of our day-to-day lives and that everyone, including the real estate sector, needs to take urgent action.

The deep recession feared at the end of 2022 did not emerge last year, thanks to a surprising surge in consumer spending, although GDP growth was flat or negative for most of the year. Despite this, unemployment has remained remarkably low over the past year. In fact, there are growing shortages of workers in several sectors, which is hampering growth. And while wages have increased quite sharply, they have not been able to keep pace with inflation. Following the end of the government’s Covid-19 support measures, bankruptcies in 2023 were just over 50% higher than in 2022, possibly triggered by the end of government support and the payment of deferred taxes.

On a more positive note, environmental concerns and higher energy costs are increasing the demand for sustainable (climate-proof) and energy-efficient offices. The rise in the number of people working from home (WFH) also continued to increase. While this will limit overall demand for office space, it will only enhance employers' focus on providing employees with an inviting and well-located office. We have always taken the long-term view, including with regard to the future resilience and sustainability of our assets, and we believe this will help us to weather the current storms.

Office market

The sharp rise in interest rates had a major negative impact on the real estate investment market, including the market for offices, especially for investors that rely on leverage. Driven by higher interests rates, the yield gap also tightened significantly, putting additional pressure on prime yields. As a result, many (international) investors cut back on their investments or withdrew from the market. Nor did the increase in the real estate transfer tax from 1 January do anything to boost declining real estate investment levels.

Additionally, in late 2023, the government published a bill prohibiting the fiscal investment institutions (FIIs) from investing in directly held real estate, which will come into force on 1 January 2025. In anticipation of this, the Office Fund converted into a fund for mutual account (FMA - Dutch FGR) effective 1 January 2023. 

High interest rates continued to affect yields throughout 2023, while - a temporary - overallocation to real estate was also of concern for institutional investors. Given the above, office investment volumes came in at a subdued total of € 1.4 billion, way down on 2023 volumes.

Economic uncertainty, severely limited new-build projects and the impact of working from home filtered through in overall office demand and take-up came in at a total of 765,000 m² in 2023, down 30.8% on the previous year.

Conversely, office vacancy in the Netherlands ended up lower than at the start of the year. The same trend is visible in the 12 prime office locations, supporting prime rents.

The Fund’s strategy and performance

The Fund’s strategy remained largely unchanged in 2023 and while the Fund recorded a higher than expected negative total return of -8.3% for the full year 2023, this was still a solid outperformance of the MSCI index last year. The unexpectedly high negative return was entirely due to a more negative capital growth than expected, which was driven by the series of interest rate hikes in 2023. The difference between bids from potential buyers and the asking price from sellers was often large, resulting in few transactions and a decline in values. Interest rates are currently stabilising and we might even see some cuts, so the outlook for transactions and returns is less negative for this year and 2025. In the meantime, we are seeing an increase in the supply of assets that meet the Fund's investment strategy, while downward revaluations are making acquisitions more feasible.

The Fund also delivered solid progress on its three main strategic pillars: quality, diversification and sustainability. The acquisition of The Bell in Amsterdam strengthened the Fund’s focus on the G4 cities and added a very promising multi-tenant asset to our portfolio in November. Meanwhile, the Fund signed a range of new leases that took financial occupancy to 94.3% at year-end 2023, largely thanks to a number of new tenants for another multi-tenant asset; Central Park in Utrecht.

On the sustainability front, in 2023 the Fund retained its GRESB five-star rating and improved its score to 93 points (92 in 2022), putting the Fund third in its Western Europe group of 29 peers. In Q4 of last year, following the BREEAM recertifications, the Fund once again achieved at least a Very Good label for all assets, with the exception of De Lairesse and Valeriusplein in Amsterdam, both of which are for sale. The Fund has incorporated measures to ensure that the labels continue to meet the targets in the future in the multi-year asset planning. The Fund also reviewed its ESG performance framework, and made preparations to enable it to direct its progress on Paris Proof targets and refine its asset-level sustainability plans based on the Carbon Risk Real Estate Monitor (CRREM) performance of those assets. 

The average tenant satisfaction score for the Fund’s office buildings came in at 7.3 in last year’s survey, above the target of 7.0. All sub-elements of the offices are rated above 7.3, with only the indoor climate remaining a point of attention. The financial aspect (including service costs) was perceived more negatively in last year’s survey, due to the exceptionally high rent indexations and increased energy costs last year.

With so much uncertainty in the market, the Office Fund ramped up its communications with clients last year. This included relevant market developments, as well as our financial performance and ESG-related performance. We will continue to keep our clients abreast of the latest developments on the fronts described above.

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 collaboration over the past year. It is thanks to their hard work that we emerged in relatively good shape after another challenging year.

Bas Jochims
Fund Manager Dutch Office Investments