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 continued 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. The year 2023 will go down as the hottest and at the same time 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 turned out to be a mild one, 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.

On a more positive note, environmental concerns and higher energy costs are increasing the demand for sustainable (climate-proof) and energy-efficient homes, the kind of homes that make up the vast majority of the Residential Fund’s portfolio. We have always taken the long-term view, including with regard to the sustainability of our rental homes, and this and our renewed focus on affordable homes will help us to weather the current storms.

Investment market

The sharp rise in interest rates had a major negative impact on the residential real estate investment market.. This market was also hit hard by the prospect of additional rental regulation, increase of transfer tax, rising construction costs, looming power grid congestion, prolonged building permit procedures and a lack of dedicated public sector resources. As a result, many (international) investors withdrew from the market.

The collapse of the Dutch government created even more uncertainty around new mid-rental sector regulations. In November, the Council of State advised the government to take a closer look at the risk that the new regulations could lead to a sharp decline in the number of rental homes. In response, the government postponed the enactment of the new regulations until July 2024.

In late 2023, the government published the bill prohibiting the fiscal investment institutions (FIIs) from investing in directly held real estate, which will come into force on 1 January 2025. In response the Residential Fund is now planning to convert into a fund for mutual account (FMA - Dutch FGR) effective 1 January 2025.

One worrying development we are monitoring very closely is a Dutch court’s annulment of the rent increase clause in our rental contracts. This is something that affects the entire residential investment sector and thus the Residential Fund also. 

Given the high levels of uncertainty in the market, residential real estate saw quite marked write-downs last year and yields fell to historically low levels. 

Despite all of this, the rental market continued to perform strongly last year, largely due to continued high demand and very limited new supply.

The Fund’s strategy

The Fund’s fundamental strategy was unchanged in 2023. The Fund delivered a solid performance. The tenant satisfaction score on building aspects and its surroundings increased slightly compared to the previous year. Despite the fact that we made no new acquisitions, the Fund was able to add 943 homes to the portfolio from the existing development pipeline, with 314 of these in the mid-rental segment. The Fund also managed to sell nine assets to meet redemption requests of a number of investors. Nevertheless, due to the negative capital growth, the Fund ended with a total return of minus 6.3% for the whole year.  

On the sustainability front, the Fund retained its five-star GRESB rating, while once again improving its score. The Fund also reviewed its ESG performance framework, and made preparations to refine its asset-level sustainability plans based on the CRREM performance. 

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.

Allard van Spaandonk
CIO Dutch Investments