Select few asset pickers become Dutch masters

Big foreign investors are getting in early on the Netherlands’ recovery, writes Lauren Parr

Hot might be stretching it as an epithet for the Dutch real estate market in 2014, yet a select band of investors decided there was excellent value to be found and took the plunge.

The country’s economic prospects are still fragile, but the gap between buyers’ and sellers’ price expectations narrowed this year, unlocking some interesting deals.

REC 12.14 p 24 chartBlackstone, Lone Star, MBay, Prologis, Rockspring and Round Hill Capital were among the international investors who took advantage of the change. Overseas capital was behind more than half the €4bn of deals transacted in the first three quarters of 2014, according to Savills – the highest level of activity since 2007 (see chart).

The feeling among investors is that parts of the Netherlands real estate market have reached the bottom, while some sectors, such as residential and logistics (see panels), possess particular appeal.

Holland’s oversupplied office market is viewed as a ‘no-go’ area by many, but well-informed investors that have incorporated vacancy rates into their projections recognise that the sector has pockets of opportunity – if they can get in at a good price.

London-based private equity firm Patron Capital was one of the first to tap into Dutch distress back in 2012, via a takeover of troubled Uni-Invest, alongside TPG.

Their joint venture prised out a portfolio of more than 200 office and industrial properties with high vacancy rates by acquiring the €359m securitised Opera Finance loan, secured against Uni-Invest’s shares. In the process, junior note holders of €243m of debt were wiped out.

Laurens Feleus, responsible for Patron’s activities in the country, says: “The deal set the standard to some extent and now everyone wants ‘in’ on the Netherlands.”

A year ago the former Uni-Invest, now renamed Merin, acquired three offices in Zoetermeer, Utrecht and Eindhoven from Morgan Stanley and is in the process of selectively buying more.

Feleus says it is targeting “less prime, good-quality, not-too-old assets with a fairly decent tenancy schedule for a fair price” in Amsterdam and the other large cities in the Randstad conurbation, which comprises The Hague, Rotterdam and Utrecht.


An opportunistic play

In the past couple of years, the Netherlands has mainly been seen as a credible opportunistic play. Of northern Europe’s economies, the market has suffered particularly badly as a result of “a number of problems coming together: too much supply; too little take-up, owing to the financial crisis; and a lack of financing”, says Clive Pritchard, investment director at Savills in the Netherlands.

However, a substantial fall in prices means there is the potential for international investors to secure attractive yields for core assets. Prime offices in Amsterdam’s South Axis offer a net yield of 5.6% compared to yields below 5% and even below 4% in parts of central London.

“With low capital values and high vacancy rates in portfolios, even if investors only lease 1m2 the investment model is starting to work,” says Jeroen Jansen, head of research at Savills Netherlands.

That said, it is vital for investors to have the right skills and people on the ground that understand the market, because the occupational market remains challenging and it is a stock-pickers environment.

So while there are significant distressed property opportunities, they come with qualifications. Hugo Van der Goes, head of Internos’s Netherlands office, says: “If you look at Amsterdam’s best locations [South Axis, inner city and the area around the Ajax arena in the south-east suburb], take-up is quite stable and the vacancy rate is 5-6%. There is lots of distress in tertiary cities, but private equity firms have difficulty assessing risk in a city 150km from Amsterdam.”

The real estate market’s recovery is expected to be slow and some office locations may never recover. But the logistics and residential sectors are “a logical path for investors to pursue”, says Jansen, thanks to undersupply and low vacancy levels.

Investor demand is rising across asset classes too, but lack of product could hold back investment volumes, particularly in the retail and prime office sectors.

German open-ended funds have not set off an avalanche of Dutch deals because they are focusing on selling in better-priced parts of Europe, while domestic Dutch insurance companies and pension funds are holding on to their retail and residential “crown jewels” says Pritchard, though they continue to sell off non-core office assets, which they are overweight in.

Sources of deals are institutions cashing in on increased liquidity, such as oil and gas company Shell, which is said to be considering a sale-and-leaseback of its Dutch property portfolio. Rabobank, meanwhile, has announced plans to sell its real estate investment arm.

Lone Star picked up 32 assets with high vacancy rates from the CBRE Dutch Office Fund, one of a number of former ING funds that CBRE has been restructuring.

The part-privatisation of Dutch housing association stock (see panel, p24) is a new investment opportunity which “a huge amount of international capital is looking to get into”, says Savills’ Pritchard.

“If housing associations start selling in a big way, there will business there for the next five to 10 years.”


Housing reform has positive associations for international investors

Foreign investors have a spotlight trained on the Dutch residential market and financing is readily available at margins that have halved over the course of 2014, to around 200 basis points.

House prices are stabilising or rising again slightly, albeit from a low level, following movement in the investment market since last year. The sector’s fundamentals are good; there is relatively little risk because a housing shortage, particularly in cities, means vacancy rates are practically zero.

Recent deregulation of the housing market means housing associations will have to sell their non-core assets and investors are lining up to capture the opportunities. Patrizia’s €577m purchase of 5,500 homes from housing association Vestia, agreed in July, is the first major example. The buyer still has to jump through some hoops before the deal’s expected end-
of-year completion, in terms of dealing with several stakeholders, including the Dutch regulators.

Peter Helfrich
Peter Helfrich

Peter Helfrich, head of Patrizia’s Dutch business, says: “If this goes smoothly expect a lot more sales over the next few years.”

Patrizia received substantial interest from lenders and has agreed finance with a German bank that plans to syndicate the debt to one or two other international lenders.

Bayern LB is in the market, while at least 20 German banks are estimated to have set aside capital for Dutch residential deals, including Deutsche Pfandbriefbank. They are being cautious, with a preference for residential portfolios spread over the Randstad area.

M&G Investments made its first Dutch residential loan in April, financing a €170m portfolio of 1,250 homes with a €110m loan at a 175-200bps margin. It was structured as a part fixed-rate and part floating-rate deal to enable the Dutch borrower to sell assets.

Meanwhile, UK private equity firm Round Hill Capital financed a €180m deal to buy 1,534 homes from a CBRE fund in the summer, while Venn Partners bought €500m of Dutch residential mortgages early this year. The London investment manager, which specialises in credit, wants to use the mortgages to build up an RMBS issuance business in the Netherlands, in anticipation of this market growing hotter.


Overseas lenders take lead in offices play

Paralysis in the Dutch banking market kept local lenders out of the loan origination picture until recently, leaving the field open for a handful of lenders prepared to follow the entry of more opportunistic, international buyers, in return for juicy margins.

Amsterdam's Atrium
Amsterdam’s Atrium

In the summer, Starwood European Finance advanced Liran Wizman, a key shareholder in Grand City Hotels, a €99m, floating-rate loan on a two-year term, with a one-year extension, to refinance and refurbish a W-branded hotel in Spuistraat, central Amsterdam.

Starwood, which seeks 9% gross internal rates of return on its European debt investing, has found other opportunities in the Netherlands, including a five-year, €71.4m loan for M7 and Bayside’s MBay, to fund the acquisition of nine assets.

Higher leverage has been available for private equity players — for example, DRC Capital’s €10m mezzanine loan for UK private equity group Victory Advisors. In June, Victory bought the 1970s-built Atrium building in Amsterdam’s South Axis district for €95m, from Lloyds Bank, which had foreclosed on the previous owner.

The Netherlands has proved a hot market for Deutsche Bank too. At the end of September the bank securitised two loans in DECO 2014 Tulip at a blended coupon of 120bps over Euribor. The blended margin on the around €250m of originated debt that was securitised was 405bps, making a profit before costs of 275.6bps.

But with Dutch banks’ capital ratios back in order and their balance sheets reduced over the past couple of years, the likes of ING and even ABN AMRO are starting to make a return. As a result, lending margins have halved in the past 12 months.


Competition creates a logistical challenge

Demand for Dutch logistics property is booming, as it is across much of Europe. The prime market is bottoming out and there is occupier demand for new space.

Hugo Van der Goes
Hugo Van der Goes

“A clear sign that this is a market with a lot of opportunities is buildings being developed speculatively for the first time in five or six years,” says Jeroen Jansen, head of research at Savills in the Netherlands.

First-half volumes reached €850m, up from €300m in the first half of 2013.

“There’s also huge demand for multi-let light industrial assets, mainly from Anglo-Saxon investors; competition is fierce and it won’t be easy, as yields are going down,” says Hugo Van der Goes, Dutch country head at Internos, which began selling maturing funds’ assets last year.

“There is interest because it’s high-yielding real estate and every city in the Netherlands has a light-industrial park with small and medium-sized firms as tenants. Investors in these can achieve a 10% yield.”