INVESTMENT MARKET
Resilient recovery with new opportunities
The real estate market is showing a resilient recovery, and investors should be alert to opportunities that we believe will arise in the coming year. The recovery holds even greater potential if policy-related constraints in the investment climate are reduced.
On the positive side, falling inflation and expected further interest rate cuts provide room for new investments in real estate. While recent years have been marked by economic uncertainty, the current macroeconomic climate offers a more solid foundation for investors. Real estate returns have already moved above the "break-even" line over the course of 2024.
Additionally, there is growing interest in impact investing. Sustainability and social responsibility are becoming increasingly important in investment decision-making. Investors see opportunities not only to achieve financial returns but also to create positive impacts on the environment and society. This trend enhances the appeal of real estate as an investment category, with sustainability and social value at its core.
The new pension system will also play an important role in real estate investments. While institutional investors are still largely cautious, the new system offers more opportunities to include real estate as a stable, long-term investment in their portfolios. With these structural changes, we expect demand for real estate to grow, particularly from pension funds seeking long-term returns and stable cash flows.
In this Real Estate Investment Market Outlook, we delve into the key macroeconomic developments, the impact of the new pension system, and the rise of impact investing. We also focus on the specific markets in which Achmea Real Estate is active: residential, healthcare, and retail, and how these sectors benefit from changing market conditions and trends in sustainability.
Burano, Zaandam
Improved economic conditions and strong fundamentals
The Dutch economy is in good shape. Continued economic growth is expected, driven by a recovery in consumer spending. This is underpinned by strong wage increases and lower inflation. Although a slight rise in unemployment is anticipated, it is expected to remain relatively low in the coming years. In certain sectors, such as construction and healthcare, there is a shortage of skilled workers, which could potentially hinder sector growth. Geopolitical unrest has increased in recent years, with tensions in the Middle East being a recent example. However, forecasts by economists, including those from Oxford Economics, suggest that the economic impact of escalated geopolitical conflicts will be relatively limited in the Netherlands.
The higher interest rate environment over the past two years has had a significant impact on the risk-return ratio of real estate investments. The spreads between the net yield and long-term interest rates across various real estate segments fell to very low levels starting in 2022 and were even negative in some cases. The relative decrease in the spread was particularly sharp in residential real estate, given the low initial yields (see Figure 2). This led to substantial corrections in valuations of investment properties, accelerated by recent reductions in regulatory uncertainties. Retail and healthcare real estate also saw a narrowing of spreads, though this resulted in less significant devaluations due to generally higher initial yields in these sectors.
With inflation continuing to decline in both the Netherlands and the Eurozone, the ECB has now implemented its first interest rate cuts. We expect further rate cuts in 2025, which will improve the investment climate for real estate. However, it is unlikely that interest rates will return to the extremely low levels seen before 2022; instead, we anticipate policy rates around 1.9 percent and 10-year government bonds around 2.5 percent (see Figure 1).
“Interest rate declines create a better investment climate”
Supported by strong demand in real estate markets, real estate has remained a relatively attractive investment, as we noted in our Outlook last year. High occupancy rates and strong demographic prospects ensure low operational risks for real estate. Initial yields for the most desirable properties have now stabilized and, in some cases, even declined. The current stabilization of capital market rates and decreasing base refinancing rates, in our view, mark the end of the brief period of sharply falling spreads for real estate. In fact, we believe the market has already passed the turning point. Our expectation is that interest rates will remain stable in the coming years and are more likely to decrease than increase. Following the modest recovery in capital values for real estate in 2024, we expect value appreciation to continue in the coming years. Additionally, user markets continue to perform well, as highlighted in the Outlook chapters on residential, healthcare, and retail. For institutional investors, we see this as an opportune moment to expand real estate portfolios.
“The market has already passed the tipping point”
FIGURE 1: Inflation, interest rate policy ECB, long-term interest rate
Source: Oxford Economics (2024), edited by Achmea Real Estate
FIGURE 2: Net initial yield vs long-term interest rate
Source: MSCI (2024), Oxford Economics (2024), edited by Achmea Real Estate
Zaans Medical Center, Zaandam
Expected recovery in investment volumes
The current market shows significantly less uncertainty compared to our Outlook from a year ago. We still see activity, particularly from private parties with opportunistic or value-add strategies, aiming to capitalize on the temporary mismatch between supply and demand in the market. However, asking and offering prices have become more balanced. Clearer expectations regarding the future economic situation and the partial recovery of real estate over-allocation in investment portfolios will further improve the investment climate.
This is expected to also lead to an increase in the share of institutional investors in the investment volume. Therefore, we anticipate a rebound in investment volume in the coming years, which lagged significantly in 2023 and 2024 compared to previous years (see Figure 3).
Dutch institutional investors largely finance real estate with equity, making them less sensitive to the increased costs of debt than other types of investors. They are also less impacted by recent fiscal measures that limit interest deductibility, such as the elimination of the real estate FBI (Fiscal Investment Institution). The lower reliance on debt financing provides institutional investors with the flexibility to proactively participate in (area) developments. Combined with the stabilization of interest rates, we expect to see more activity from institutional investors in the Dutch real estate investment market.
FIGURE 3: Investment volume Dutch real estate (dealvolume above € 5 million)
Source: MSCI Real Capital Analytics (2024), edited by Achmea Real Estate
“We expect more activity from institutional investors”
Impact investing is rapidly gaining importance
Impact investing has gained increasing popularity in recent years, and this trend is expected to continue in the coming years. Investors seeking to achieve both financial returns and positive social impact will increasingly opt for investments aligned with the Sustainable Development Goals (SDGs). The Global Impact Investing Network (GIIN) estimates that 3,907 organizations worldwide manage $1.571 trillion in impact investments, with an annual growth rate of 21 percent since 2019. Despite this growth, capital allocation towards the SDGs is insufficient to effectively address climate change and global inequality. This underscores the growing urgency of social and environmental issues, which motivate investors to seek more impactful investment opportunities. In this context, pension fund participants are increasingly demanding sustainable and socially responsible investments. They want their money to not only yield financial returns but also contribute to social and environmentally friendly goals.
Major challenges require improvement of investment climate
There are significant societal challenges in the Dutch real estate market. Hundreds of billions of euros in investments are needed to address the housing shortage and the impacts of an aging population. Additionally, there is a major sustainability task within the built environment. Institutional investors, together with housing associations, can play an important role in addressing these challenges. Given the scale of these issues, however, the investment capacity of institutional investors and housing associations appears insufficient. These parties face limits on maximum allocations to real estate and/or restrictions in financing options. Therefore, foreign investors are also essential to help grow the invested capital in the Netherlands. Globally, €5,900 billion is invested in real estate (source: IPE), and by making investing in the Netherlands more attractive, part of the challenge in the Netherlands could be met by foreign investors.
Currently, recent fiscal measures such as the elimination of the real estate FBI regime and regulations like rent control are causing a deterioration in the investment climate for Dutch real estate. As a result, achieving these major societal goals becomes more challenging. The weakened investment climate also reduces liquidity by limiting the sales options for institutional investors. Therefore, it is in the interests of both institutional investors and the Netherlands as a whole to implement policy measures that restore the investment climate for Dutch real estate.
Monarch, The Hague
House Modernes, Utrecht
Impact potential across multiple areas
In the real estate sector, we expect a significant increase in impact investments, particularly in specific sub-sectors such as sustainable housing complexes, healthcare real estate, and properties focused on affordable housing. The need for affordable and sustainable housing is growing, especially in urban areas where the pressure on the housing market is increasing. This presents investors with an opportunity to address the demand for housing that is both sustainable and accessible to low- and moderate-income individuals. Healthcare real estate, which focuses on housing for vulnerable target groups, also offers considerable opportunities, especially given the aging population and the associated growing need for health and wellness.
The impact that can be achieved through real estate investments is substantial. The real estate sector significantly influences CO₂ emissions, with approximately 38 percent of total emissions attributable to it (source: DGBC). Making existing buildings more sustainable and developing new, energy-efficient constructions can not only help reduce the ecological footprint but also generate financial returns. Investors can focus on circular construction methods and energy-efficient solutions, lowering operational costs and increasing property value over the long term.
“Significant impact can be achieved with real estate”
It is crucial for impact investors to pay attention to measuring their impact. This involves establishing Key Impact Indicators (KIIs) that align with the intended social objectives. By systematically measuring and reporting impact, investors can not only provide transparency but also optimize their investment decisions. This is particularly important in the real estate sector, where investments often come with long-term commitments and significant capital investments.
Furthermore, we anticipate that the gap between sustainable real estate products and 'stranded assets' will widen as sustainability requirements and regulations become more stringent. 'Stranded assets' are real estate properties that are no longer financially viable due to changes in regulations or market demand. Buildings that do not meet sustainability standards will increasingly be difficult to lease or sell, leading to a depreciation of such assets. The expected widening value gap between sustainable and non-sustainable assets will create investment opportunities for impact strategies that focus on making non-sustainable properties more sustainable.
Creating impact reduces risks
Investments in sustainability and affordable housing make real estate less vulnerable to laws and regulations aimed at addressing social, economic, and societal inequality. By investing now in energy savings and affordable rent prices, property owners can more easily meet legal standards and avoid potential financial and legal risks from future regulations. An example of this is the introduction of the Affordable Rent Act, which is intended to limit excessive rent prices. Properties that already fall within these limits are at less risk of forced price adjustments or loss of income, allowing them to generate more stable income in the long term. Thus, investments contribute to a future-proof portfolio that not only meets current societal demands but also responds to anticipated regulations.
For investors, it is important to find a balance between achieving financial returns and pursuing social impact goals. This means that managing costs is essential to ensure that sustainable adaptations remain feasible and profitable. Intentionality and additionality play a significant role here: by investing in sustainability, investors can demonstrate that their efforts contribute to a broader positive impact, where social value is not subordinate to financial performance.
One example of this is the sustainability of existing real estate. Although it requires significant investments, improvements in energy efficiency can ultimately result in lower operational costs and higher rental incomes, while also actively contributing to improved climate conditions, residential comfort, and long-term affordability.
“Sustainable real estate projects have a lower risk”
Despite a potentially lower expected financial return, impact investments can provide a positive risk-return ratio in the long run. Sustainable real estate projects carry lower risks because they are currently and will be less dependent on the energy supply from fossil fuels, the prices of which are uncertain in the future. This dependence on fluctuating energy prices can lead to unpredictable costs for real estate investors and developers. By investing in sustainable energy sources and energy-efficient solutions, real estate projects become better equipped to withstand price volatility and associated risks, making them more attractive to investors. Additionally, building with sustainable and circular materials such as wood, bamboo, and hemp offers numerous practical advantages. Wood products like cross-laminated timber can be prefabricated efficiently, resulting in a quick and clean construction process with significantly less nitrogen and CO₂ emissions. These materials can replace fossil construction materials like concrete, brick, and steel, even in high-rise buildings.
Overall, we expect impact investments in real estate to increase significantly in the coming years. This offers investors the opportunity to combine financial and social returns and to anticipate the growing demand for sustainable and affordable housing. By investing in properties focused on sustainability and social impact, investors can play an important role in promoting a more just and sustainable society.
Impact in Practice: Biobased Insulation Material
Achmea Real Estate, on behalf of BPL Pension, has cultivated hemp that will be used for insulating homes. The 4.6-hectare plot is located near Woerden and is owned by the pension fund. This is a pilot project that may lead to further development if successful. The hemp contains no THC, making it unsuitable for consumption. Natural materials like hemp are much more sustainable than traditional insulation materials. One hectare of fiber hemp yields approximately 6,000 kilograms of dry matter and sequesters 9 tons of CO₂. The use of this crop thus contributes to reducing CO₂ emissions in residential construction. In the future, it may also lead to a new alternative revenue model for farmers. The harvest from the plot in Woerden can insulate four to five single-family homes. Initially, the hemp will be used for blown-in insulation. In the longer term, it could be made into board material, which would provide broader application possibilities.
From Land tot Property
Enhanced opportunities through the Wtp
One of the key themes currently affecting pension funds is the introduction of the Pension Future Act. The reform of the pension system may have consequences for the future share of real estate investments held by pension funds. We see opportunities for increased real estate investments within the Wtp. Real estate offers additional returns due to the illiquidity premium and diversification benefits, making it attractive in an investment mix that will increasingly focus on returns. The Wtp provides opportunities to increase the allocation to real estate by lifting the VEV restriction (required equity). Pension funds currently invest about 20 percent of their assets in illiquid categories, of which 10 percent is in real estate. Within the Wtp, this allocation can increase, but this is not the case for all pension funds.
In addition to providing extra returns through the illiquidity premium and diversification, real estate also offers several other important advantages for investors. Historically, real estate has delivered positive real returns, making it an effective way to retain value during periods of inflation. However, a full inflation hedge requires that returns not only be positive in real terms but also move in tandem with changes in inflation. Real estate has proven to be a partial hedge in this regard, particularly effective against expected inflation, but less so against unexpected inflation shocks (source: Inrev, 2024). Moreover, real estate is a tangible product that aligns with participants' need for visible and impactful investments. The ability to leverage real estate for impact investments enhances its attractiveness moving forward, given the increasing importance that pension funds place on impact-driven investments.
“Illiquidity premium makes real estate attractive”
While the illiquidity premium of real estate presents an opportunity from a return perspective, its illiquid nature may be somewhat less suitable for smaller pension funds that have opted for the Flexible Premium Agreement (FPR) or for funds with a relatively older participant population. In these cases, a certain degree of flexibility and liquidity is required. In addition to non-listed real estate, there may be more room for listed real estate in the investment portfolio. However, this type of investment comes with more volatility and leverage, resulting in a different risk-return profile for a shorter investment horizon. By combining a portfolio with an illiquid core and a liquid shell, flexibility can be maintained, allowing for better responsiveness to liquidity needs while largely preserving the illiquidity premium.
Most pension funds, including almost all industry pension funds and a significant portion of corporate pension funds, choose the solidarity scheme (SPR), which limits the negative consequences of the illiquidity of real estate. Therefore, the importance of direct real estate in investment portfolios remains, and there are good arguments for why this importance may even increase. Nevertheless, allocation decisions may be postponed in the short term, as the current focus is primarily on implementing the Wtp regulations.
The Valuation Issue of Real Estate within the Wtp
Illiquid investments, such as real estate, pose the valuation issue as an additional challenge within the framework of the Pension Future Act (Wtp). The liquidity of real estate is partially related to the frequency of appraisals, which is generally low. A low appraisal frequency not only determines the level of liquidity of this asset class but also results in less volatility in valuations, an effect known as "smoothing." Increasing the frequency of traditional valuations is a costly and inefficient process, and therefore, it is not an easy option to pursue.
An innovative option that has been considered for some time is model-based valuation. This is essentially independent of the Wtp, but this development could facilitate a higher frequency of valuations and help address the valuation issue within the Wtp more easily. Although efforts have been underway for some time to accelerate valuations using modeling techniques, this is still in its infancy, particularly for non-residential properties. The current (inter)national regulations for appraisers do not allow for model-based valuations. Any discrepancies between the conventionally determined appraisal value and the model-based value could also lead to additional uncertainty. One possible alternative is to assess the established value within a certain range.
To effectively organize the methodology and frequency of appraisals in the Wtp era, it is essential that this is addressed sector-wide in collaboration with peers. This is important to ensure comparability and uniformity. Additionally, extra appraisal moments will be necessary, such as during the transition to the Wtp arrangements and in asset transfers, further emphasizing the importance of a well-organized valuation approach.
The impact of the Wtp on the allocation to real estate is currently still limited, as the playing field has not yet fully crystallized. As the regulations are implemented more in practice, it will become clearer how real estate positions itself within the new pension environment. When real estate receives higher allocations, the demand for core real estate will increase, which may lead to greater downward pressure on initial yields.
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