Buoyed by strong economic fundamentals, the Dutch real estate market is expected to see a record real estate investment of €20 bn for 2017, PropertyEU's European and the Netherlands Outlook 2018 briefing heard recently.

It's a kind of renaissance for the Netherlands, and mainly Amsterdam, according to Maurizio Grilli, head of investment management analysis and strategy at BNP Paribas Real Estate.

The dynamics of the office market have completely changed here, Grilli said. 'The Netherlands ranks quite well from a cyclical point of view in terms of GDP growth. This is also the case from a strategic point of view because all the typical indicators for long-run growth look very positive. Those indicators include the quality of infrastructures, education, the strength of institutions, capacity to innovate and adoption of technology.'

'We are quite positive in relation to the demand drivers and we also see that the Dutch have done quite a good job in reducing the amount of supply of obsolete offices by conversion to other uses and demolition. The level of the vacancy rate is still an issue, but much less so compared to a few years ago,' Grilli added.

_______________________

Also see:

'The Netherlands is the most popular real estate destination worldwide' 

Korean real estate investment style best suited to off-market deals

Presentation and videos

_______________________

Macroeconomics
Grilli told the event that he was not worried about the outlook for the economy in the Netherlands or Europe itself. 'There are plenty of good reasons why interest rates will stay low for some time even after QE comes to an end. Real interest rates in Europe are still negative,' he said.

'I expect the Netherlands to perform better than other markets. Generally, the cycle we are seeing today is much more subdued than previous cycles. This means less rental growth compared to the past.'

The only potential drawback for the Netherlands, Grilli said, was more rigid labour laws compared to some of the other European countries. 'It is debatable but I would say it is the only spot where the Netherlands is not perfect.'

Secondary markets
Another potential fly in the ointment was raised by fellow panellist, Reinoud Plantenga, director of Dutch investment at Germany investment company Triuva. Simply put, prices for prime Dutch real estate have risen sharply and in some cases are becoming too expensive for core investors.

Plantenga: 'The one thing that worries me and our investors is the enormous yield compression, some of which is based on speculation the market rent might be higher than the current rent. Our investors - often pension funds - need a certain return. If the actual return gets lower and lower it is questionable whether real estate in the core segment is affordable. Amsterdam is at the moment for most German investors a bit too expensive because we are cash-on-cash players.'

He warned that some investors - though not Triuva - are softening their investment criteria. 'First people say they only want freehold offices with a 10-year lease. But today they say they are willing to accept 5-years and leasehold and with annual instalments to be paid off for the remaining 20 years. This worries me because these types of assets if they are bought at a 4-4.5% yield, they will be the bleeders in the next cycle when the economy goes down again.'

Some investors, Plantenga said, may be tempted to look at assets in other cities where assets trade at relatively higher yields, taking into account the associated risk premium. 

Finance
As demand for core assets in the Netherlands is outstripping supply many investors are automatically moving towards core-plus, agreed Rogier Bos, head of Real Estate Finance Benelux, Berlin Hyp.

This is not a problem for Berlin Hyp as the German lender has been active in the core-plus segment since opening its Benelux office in 2008. 'Core-plus is a segment that has always treated us fairly well,' Bos said.  'Yields are significantly higher than you see in core, but the risk is not necessarily that much higher as long as you are in the right segments.'

Good asset selection in the core-plus segment is key for both investors and lenders, Bos said. 'We have been critical about what we finance, taking into account the core-plus market had 15% vacancy in the bad times. This also meant we had 85% occupancy, so as long as we could find the 20-30% best offices and finance these we felt safe. This is how we acted and our investors and clients have been well rewarded as this segment has gained 50% in value.'

Some investors are now trying to realise capital gains on core-plus assets which they acquired during the downturn. 'Assets are coming on to the market and the question is whether the price is still right,' Bos said. They are selling into a market where the fundamentals are strong and the defining characteristic is the lack of supply.

2018
Commenting on the forecasts of €20 bn of investment in the Netherlands this year, Berlin Hyp's Benelux chief said he was not sure this level would be sustained in 2018. Bos: 'My gut feeling is that it will be a little bit less. Not because the market goes into a downturn, but because there is less product available. Having said that, I thought the same thing in 2017 and that turns out to be a record-breaking year.'

'There will be a little bit more competition but I think 2018 is going to be good for everyone,' he added.