Residential

Momentum for impactful investments

Dutch rental houses have been a significant component of the investment portfolios of Dutch pension funds and insurers for decades. However, the investment market for Dutch housing has undergone substantial changes in recent years due to rising interest rates, declining values, fiscal adjustments, and increasing regulation in the rental housing market. Interest rates have now stabilised, values are rising again, and uncertainty regarding regulation has diminished. With an increasing demand for rental properties across all price segments, the risk of vacancy is low, and a stable return can be achieved. There is an opportunity to contribute to major societal challenges by placing extra emphasis on affordability and sustainability, where a stable financial return is accompanied by a social return. As a result, the opportunities to invest in Dutch housing are expected to increase in the coming years.

Californieplein, Haarlem

Turning point reached

The activity of institutional investors in the residential investment market has declined since 2022 due to a mix of rising interest rates, fiscal and rental policies, and legal disputes. However, there are increasing signs that a turning point has been reached.

Due to rising interest rates, institutional investors have a disproportionately high allocation to real estate (see also the analysis in the general section of this Outlook). Additionally, the adjustment in interest rates has led to a 15 percent decrease in the values of Dutch residential investments since their peak in 2022. Capital market interest rates have now stabilised, allowing valuations to recover, and there is no longer a case of over-allocation due to appreciating values in other asset classes. Higher interest rates have made external financing of real estate investments more expensive. Consequently, institutional investors, who in most cases do not or only minimally utilise external debt, have a competitive advantage over parties that rely more on external financing.

Another reason for the low activity in the investment market relates to the fiscal and rental measures implemented in recent years. On the fiscal side, particularly the increase in the transfer tax to 10.4 percent has had a significant negative impact on the values of investment portfolios and the feasibility of new construction. It is expected that the transfer tax will decrease to 8 percent in 2026, providing some relief.

In addition to fiscal measures, there have also been changes in rental regulation. The extension of the Nijboer Act ensures that tenants are better protected against excessive increases in contract rent. The implementation of the Affordable Rent Act has attracted considerable attention from institutional investors in 2024. After several years of legislative processes, clarity has now been provided for both tenants and investors. The impact appears to be relatively limited for most institutional investors.

One uncertainty that institutional residential investors still face involves legal disputes regarding rent increase clauses. This clause, which determines the maximum allowable rent increase, has been ruled by magistrates to potentially conflict with European consumer legislation, creating a risk of repayment of rent payments should it be annulled. It now seems that the rent increase clause will hold, thereby alleviating this uncertainty. The decision of the Supreme Court, expected at the end of 2024, will be crucial in this regard. With the stabilisation of interest rates and clarity on regulation, momentum is building for institutional investors to add Dutch residential investments to their portfolios. Furthermore, institutional investors now find themselves in a better position in the investment market compared to a few years ago, as they tend to rely much less on external debt than other investors, thus being less affected by higher (re)financing costs. Indications from some early movers suggest that institutional capital is once again flowing into the Dutch residential investment market.

FIGURE 1: Development of interest rate and yields

Source: MSCI, Oxford Economics, edited by Achmea Real Estate (2024)

Structural high demand drives prices up

Boezemlaan Rotterdam

In the coming decades, there will continue to be a high demand for housing in the Netherlands. Nationwide, there is a housing shortage of approximately five percent, but in regions in and around the Randstad (opportunity maps 1 to 3), the shortage is several percentage points higher. Population forecasts predict that the housing shortage will persist in the coming decades. Despite additional incentives from the government, achieving the required annual new construction production of 100,000 homes proves challenging. Streamlining planning processes and faster construction times through industrial building are intended to accelerate construction, but the effects of these measures are not yet visible in new construction figures. According to forecasts from ABF Research, the target of 100,000 new homes will not be reached until 2027. Therefore, it is expected that by 2040, there will still be a national housing shortage of 2.2 percent, just above the target percentage of 2 percent. Due to the relatively scarce building land and strict spatial planning policies in the Netherlands, it is also unlikely that more will be built than is needed. Additionally, peaks in immigration, such as increased labour migration due to an ageing population, are difficult to predict but could further increase the housing shortage in the coming decades.

“Scarcity will persist”

One consequence of the housing shortage is that the demand for rental properties is very high and continues to grow. This has resulted in vacancy rates for Dutch institutional rental properties being around 1.5 percent in 2024 (MSCI). The risk of vacancies is therefore very low, as evidenced by the numerous registrations for new construction projects, which sometimes exceed availability by as much as 20 times. Furthermore, the scarcity is driving market rents sharply upwards, reaching record levels by mid-2024 and boosting investment values.

The effect of the tight market is also visible in the sales market. Although house prices showed a downward trend from mid-2022, rising wages have resulted in a more generous mortgage budget, causing prices for owner-occupied homes to reach record highs at the beginning of 2024. As a result, the ratio between the value in rented state and the vacant value, known as the vacant value ratio, has decreased to approximately 70 percent. Selling rental properties to owner-occupiers thus forms an alternative strategy for institutional investors to achieve additional returns. However, declining turnover rates in the rental market mean that such a strategy takes more time than a bulk sale.

FIGURE 2: Index of purchase and rental prices (2015=100)

Source: MSCI, Kadaster, CBS, edited by Achmea Real Estate (2024)

FIGURE 3: Expected housing shortage

Source: ABF Research, edited by Achmea Real Estate (2024)

Justus, Amsterdam

Focus on affordability

The effect of the housing shortage is that affordability in the housing market has become a concern. For low-income individuals, waiting lists for social housing remain long. Middle-income earners in many regions earn too little to purchase a home or rent in the private sector. Due to decreased affordability, increasing regulation has been introduced in the rental housing market over the past few years. Municipalities have added maximum rent prices in their housing construction programmes through middle-rental regulations. This has also led to the Affordable Rent Act, which finally provided clarity in 2024. Properties with fewer than 187 WWS points, corresponding to a rent of €1,156 (2024 price level), are capped at the maximum reasonable rent determined by the number of WWS points. Part of the law also includes a revision of the housing valuation system (WWS), which offers a higher valuation for properties with good energy labels and a new construction supplement. The strategy of institutional investors in recent years to focus on the sustainability of the existing portfolio means that the direct impact of the Affordable Rent Act is relatively limited. Additionally, there is often still a gap between contract rent and market rent, meaning that properties may not necessarily see a decrease in rent upon re-letting.

To create additional supply, 40 percent of the total new construction target in the Netherlands must consist of mid-rental or affordable purchase homes. Both at the national level and through local authorities, efforts are being made to incorporate this into the programming of construction projects. There is a shared responsibility for housing corporations and market parties, including institutional investors. Consequently, a significant amount of investment opportunities in this segment is expected to emerge in the coming years.

While the impact of the Affordable Rent Act on existing portfolios is limited, it is more significant for new construction acquisitions. Despite the new construction supplement of 10 percent in the revised WWS, the law negatively affects rental income due to the limitations on initial rents and the inflation-linked rent growth of the maximum reasonable rent. Furthermore, a large part of the Dutch municipalities has their own mid-rental regulations that apply to new construction projects, resulting in an accumulation of regulations.

“Alongside financial returns, impact can be made at a local level.”

Combined with the significantly increased construction costs, the rent limitations mean that initial yields in the mid-rental segment are low. However, the risk is also much lower due to the large target audience attracted. Historically, vacancy rates and operational costs for properties below the mid-rental threshold are lower than those in more expensive rental categories. Especially in economically uncertain times, such as during the COVID-19 pandemic and the aftermath of the financial crisis, the differences were significant. Partly due to the low vacancy rates, the long-term total return on mid-rental properties is comparable to that of social rental properties but over one percentage point higher than in more expensive rental segments. Additionally, the returns are much less volatile, which means the risk is very low (source: MSCI).

In addition to financial returns, institutional investors can make an impact with mid-rental properties. By investing in this segment, they can contribute to a significant societal issue in the Netherlands: sufficient housing for middle-income earners. With priority given to tenants from so-called key professions, local impact can also be made by providing opportunities for teachers or healthcare personnel to live near their workplaces. Finally, this can contribute to mobility within the housing market by offering mid-rental properties to households leaving social housing.

FIGURE 4: Financial vacancy rate per rental category (monthly rent, current price level)

Source: MSCI, edited by Achmea Real Estate (2024)

Impact with mid-rental: case study of Justus in Amsterdam

In the Amsterdam Sluisbuurt, the residential tower Justus has been completed. The building consists of 289 mid-rental apartments and amenities. There were over 10,000 interested households for the homes. Through a priority scheme, 47 of these homes were allocated to people in key professions such as police officers, teachers and nurses. An additional 19 new residents are vacating social housing, creating space for those on the waiting list. The project demonstrates, on one hand, the strong demand for affordable rental housing in the Netherlands and, on the other hand, the opportunities for institutional investors to create impact through residential investments.

Sustainability pays off

Institutional investors have had a strong focus on sustainable real estate for years and are at the forefront of sustainability efforts in the Netherlands. Existing portfolios have been made more sustainable through renovations and the divestment of residential complexes with low energy labels in recent years. Newly constructed homes by institutional investors are inherently energy-efficient due to stringent requirements that often exceed building regulations. Moreover, institutional investors are increasingly using bio-based and circular materials in their construction to reduce the material emissions of their new builds.

While institutional investors already have relatively sustainable portfolios, the rental housing market as a whole still faces a significant sustainability challenge. More than 400,000 rental homes owned by market parties still have an energy label D or lower. To bring these homes in line with the goals of the Paris Climate Agreement, investments amounting to tens of billions of euros are required. Sustainability can also contribute to lower living costs and improved comfort for tenants. However, making homes more sustainable is financially challenging due to the high renovation costs involved. This creates a split incentive: the owner must make investments, which only partially lead to an increase in value, while the tenant benefits from lower energy costs. Furthermore, a majority of current tenants must agree to the sustainability measures, making it difficult to implement a rent increase. Investments in sustainability currently only partially translate into valuation returns. Nonetheless, there are increasing indications that sustainability also contributes financially to returns. In the sales market, the value differences between good and poor energy labels are increasing, and this trend is also observable in the investment market. Research commissioned by ARE shows that sustainable properties outperform comparable non-sustainable homes after a few years.

To achieve climate goals, more regulations related to sustainability are being introduced. An important measure is the introduction of the EPDB IV. This European legislation mandates member states to reduce energy consumption in homes by 16 percent by 2030 compared to 2020 levels. The Netherlands will need to develop additional policies to meet these objectives. The announced phase-out of energy labels E, F, and G in the rental market is a first step in this direction. However, it is expected that more supplementary policies will follow in the coming years, and sustainability will have an increasing impact on property values. This will increase the value difference between sustainable and non-sustainable homes and improve the business case for making homes more sustainable. Consequently, opportunities will arise for institutional investors to adopt a sustainability strategy by acquiring existing complexes with low energy labels and subsequently upgrading them. Institutional investors can apply their experiences in sustainability within their own portfolios.

"The business case for making homes more sustainable is getting better and better."

For institutional investors, making their portfolios more sustainable reduces risk. It leads to lower energy costs for tenants and ensures that the portfolio is prepared for future regulations. Additionally, through sustainability efforts, institutional investors have an impact by contributing to the resolution of poor energy performance in a portion of the housing stock.

FIGURE 5: Distribution of energylabels per owner type

Source: RVO (2024), edited by Achmea Real Estate

Sustainability: Single-family homes in Waddinxveen

In Waddinxveen, Achmea Real Estate, on behalf of PME Pension Fund, has upgraded 55 single-family homes built in 1985 from energy label D to label A+. Among other improvements, solar panels, a CO₂-controlled ventilation system, insulating doors, and HR++ glass have been added to enhance the environmental performance of the homes. Additionally, a hybrid heat pump has been installed. As a result of the renovation, the living conditions for residents have improved, and living costs have been reduced. This is one of many examples from the portfolio where sustainability positively impacts tenants and enhances sustainability while simultaneously improving the risk-return profile.

Koolhoven, Tilburg

Investment perspective

With the introduction of the Affordable Rent Act, a new classification of the Dutch rental housing market emerged in mid-2024. We can distinguish between social housing, mid-rental, and private sector housing.

Social housing

The social segment, traditionally the domain of housing corporations, consists of homes with a rent up to €879.66. Due to the relatively low rental prices, the initial yields in social housing are generally too low for institutional investors to develop regular homes in this segment. However, there are opportunities to invest in smaller homes for specific target groups, such as studios for students and young people in large and medium-sized cities (opportunity maps 1 and 2) or age-friendly homes with care facilities in almost all opportunity map regions. For these homes, there is expected to be a sustained high demand from starters and movers, and vacancy rates are low. Shared amenities, such as a communal garden or living room, improve the living product for both young and older residents. This also provides opportunities for creating living communities to reduce loneliness. Historically, the social segment has achieved higher total returns in the MSCI benchmark than the private sector, making it financially attractive as well.

Mid-rental

Investments in regulated mid-rental properties (homes with 147 to 187 WWS points) have a lower initial yield than the private sector but remain interesting for institutional investors. Mid-rental homes provide stable rental income and a low risk of vacancy, even during economically challenging times. One downside of investments in this segment is that, in addition to a maximum rent price, they often face restrictions on conversion to private rental. However, these restrictions expire over time, allowing for potential benefits from value appreciation due to increased vacant values. Furthermore, impact can be achieved by renting to key professions or by facilitating movement within the housing market by renting to households leaving social housing. Municipalities are interested in providing housing for middle-income earners and will allocate a significant portion of their housing construction programmes to this segment. National policies, such as the proposed Strengthening the Control of Housing Policy and the government's lobbying in Brussels to relax state aid rules for mid-rental homes, will only increase the supply of mid-rental investments.

Biobased construction

Newly built homes are already very sustainable due to the stringent requirements of building regulations and the tightening of the Material Index (MPG). By using biobased and circular materials, such as wood, in construction, CO₂ emissions can be reduced. Additionally, biobased materials contribute to a better indoor climate and lead to shorter construction times. Although biobased construction is still somewhat more expensive, the difference is decreasing due to the sector's scaling up and rising costs for CO₂-intensive materials.

Private sector

For the private sector, which includes homes above the mid-rental threshold, there are only restrictions concerning the maximum growth of contract rents. Private sector rental homes fit well into an institutional investment portfolio. Since the initial rent can be freely determined, rental income can grow significantly above inflation in the current tight market. This results in higher yield rates over time. However, this segment is more sensitive to economic fluctuations due to the relatively high rents. Additionally, turnover rates are higher than in lower rental price segments, as tenants in this segment tend to transition to the owner-occupied market more quickly. By not operating at the upper end of the rental market, the rental risk can be somewhat mitigated, although the level at which this occurs varies greatly between regions and the characteristics of the property. While the private sector is very appealing to institutional investors, the supply in this segment is expected to be limited and competition fierce. Due to low vacant value ratios, many developers currently find it more attractive to sell such properties through the sales market.

Student housing

There is a persistent shortage of student housing in the Netherlands. As a result, this segment is an attractive investment category for institutional investors in major university cities. However, student housing requires intensive property management due to the relatively high turnover rates. In some cases, collaborating with a specialised student housing provider can be a solution to this challenge.

Not all residential investments are attractive

Although there is currently a housing shortage in almost all regions of the Netherlands, this is not expected to be the case everywhere in the coming decades. It is anticipated that the growth in the number of households will be greatest in urban areas and that the trend of urbanisation will continue. The new Spatial Planning Memorandum outlines the preliminary plan for the development of the Netherlands by 2050. It particularly focuses on strengthening the agglomerations in the so-called Bandstad, which roughly consists of the Randstad and adjacent urban regions, including North Brabant, North Limburg, Gelderland, and Overijssel. The government will make substantial investments in housing construction and the necessary infrastructure in this area. By collaborating with developers and corporations in urban restructuring locations and area developments, institutional investors can contribute to this growth. Early involvement in such developments allows investors to influence the plans and potentially benefit from value growth in the long term.

Demographic growth in the Bandstad is evident in the opportunity map (see figure 5), which outlines the current and future demand for liberalised rental homes, as well as the attractiveness of different municipalities. Particularly in categories 1 to 3, there are numerous investment opportunities in almost all price segments. In categories 4 and 5, opportunities are more dependent on the product and location, with limited space for homes in the private sector that exceed the mid-rental threshold. In smaller municipalities, the absolute demand for rental homes is low, resulting in only room for small-scale housing complexes. Additionally, some parts of the country will see an ageing population over the coming decades, leading to a decline in local housing demand in the long term. This is especially true in categories 6 and 7; however, there is still demand for age-friendly rental homes for the elderly.

FIGURE 6: Opportunity map residential 2025

Source: Achmea Real Estate (2024)

Conclusion

Dutch rental properties are an essential part of the institutional investment portfolio due to the combination of stable returns, low risk, and opportunities to make an impact in the domestic market. With the stabilisation of capital market interest rates and clarity regarding regulation, momentum has emerged for adding real estate investments to the portfolio. Ideally, an institutional investment portfolio has a geographically diversified mix of social, mid-market, and free sector rental properties. The ratio between the three price segments is highly dependent on the requirements concerning risk, return, and desired impact. In all rental price segments, there are opportunities for institutional investors to invest, but it is expected that the investment supply in the mid-market segment will be the largest, given the significant challenges in this segment.

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