Multi-Family Housing: Resi recovery gives investors Dutch courage

Dutch multi-family housing has proved easier to invest in than the infant UK market, with rising house prices and rental growth attracting lenders, writes Lauren Parr

Dutch residential property investors have enjoyed a rise in debt liquidity since last summer, with already cheap financing becoming even more competitive and insurance companies now targeting the debt market.

As the Dutch housing recovery accelerates, local banks have re-entered the market and international players have arrived.While appetite to finance offices and developments remains limited, lenders feel comfortable financing the residential sector thanks to its size and strong fundamentals.

“We’ve seen double digit house price growth in Amsterdam in the past two years and there’s still a big shortage in the Randstad region’s cities, which is driving investment,” says Alexander Buijs, a director in CBRE’s Dutch residential investment team. “There is limited downside.” Rental growth is also coming through.

Netherlands Rental Growth 2015

Just under €2bn of residential deals in the private rental market had taken place by the end of October, according to CBRE and, for the first time, most trades were in the new-build sector. “Many developments are being bought by mainly Dutch institutions, but we’re also seeing international investors buying new stock in Holland,” Buijs says.

In August, US investor Heitman and its Dutch joint venture partner Orange Capital Partners agreed a €45m deal to buy 498 Amsterdam rented social housing apartments, upon completion, with financing from ING Bank, for example. Buijs’ debt advisory colleague Robert-Jan Peters says: “Competition among lenders is tremendous for residential financing.”

Deal flow disappoints

Last year, investors prepared to absorb a deluge of product from taxpayer-backed housing corporations, which are under government pressure to sell non-core assets to focus on providing social housing. But the first and last big trades remain Vestia’s 5,500-unit portfolio sale to Patrizia for €557m in July 2014 and a Wooninvesterings-fonds (WIF) deal in November 2014.

The former was financed with a €331m loan from Deutsche Hypo, Deutsche Pfandbriefbank and ING, while ABN AMRO backed WIF’s 3,600-unit sale to Round Hill Capital for €340m.

One reason for the lack of big deals is that as the economy has continued to improve, interest rates remain low and values increase, housing associations have avoided distressed sales. However many of the corporations continue to trade single units at relatively higher prices.

“There isn’t necessarily another distressed housing association similar to WIF to be sold, but a relatively consistent stream of smaller potential deals are coming from housing associations and other incumbent Netherlands residential owners,” Round Hill managing director Kirk Lindstrom says.

In January, the private equity firm acquired two Dutch residential portfolios totalling 958 units for around €98m from Netherlands private bank Staalbankiers and funds managed by CBRE Global Investors. It also completed the €89m acquisition of a 976-unit Propertize portfolio. These deals were again financed by ABN AMRO.

Local banks have come back strongly in the past 18 to 24 months, while German pfandbrief lenders have moved in as German spreads have contracted. “The differentiator between local and international lenders has largely disappeared,” says Peters.

“International lenders used to focus on larger multi-family complexes, which are easier from an underwriting perspective, and turn away from granular real estate portfolios, but this has changed. Even portfolios that span the entire country are financed by international lenders.”

The market has also drawn insurers and pension funds, which used to avoid Dutch housing owing to perceived overregulation. “They recognise that tenant-friendly regulation can limit investors’ upside, but is not a problem for lenders; if the worst came to the worst they would be exposed to stable income, because tenants are unwilling to let go of favourable rental contracts,” Peters says.

Netherlands Resi Investment Market

Insurers “piggy back” with banks

The likes of M&G, AXA, Allianz, AEW, TH Real Estate and Aviva are pushing into the segment, looking to “piggy back” local and pfandbrief lenders by taking on secondary positions in bank underwritings, he adds.

New international banks are also looking to enter the market, but want critical mass. One solution is to aggregate larger portfolios of assets for financing; Round Hill is in

discussions with one such lender. Increased liquidity has caused margins to narrow from 170-180 basis points to 150-160bps for deals leveraged at 55-65% loan-to-value ratios in the past year. At 40-50% leverage “you get into pfandbrief refinancing territory and pricing drops to around 100bps – local lenders cannot compete, especially on larger deals”, says Peters.

This was how Deutsche Hypo outmanoeuvred competitors to secure one of the year’s biggest financing mandates, providing a 20-year, €100m refinancing facility at low leverage, secured against a family-owned portfolio of large housing blocks in central Amsterdam before the summer.

The loan includes a “hunting line” for buying new properties by JHF Schopman and Sons, says Wouter de Bever, a director in the bank’s Amsterdam office.

Healthy housing portfolio market reflects end of pain in Spain

Now that Spain’s residential market has bottomed out, a range of investors are looking to “get in”, with multi-family financing coming from domestic and investment banks at margins of around 200 basis points.

The list of bidders circling a €300m portfolio of 1,500 homes being sold by Testa, part of Spanish builder Sacyr, stretches from Goldman Sachs and Blackstone to Germany’s Patrizia and Spanish REIT Hispania.

Javier Kindelan Williams, president of valuation advisory at CBRE in Spain, says: “Most investors recognise prices hit rock bottom towards the end of last year and are showing signs of rising, particularly in the main cities and certain coastal areas.”

Prices are more than 30% lower than in 2006 and 2007 and have begun climbing over the past quarter, driven by increasing mortgage availability and transaction volumes.

James Seppala
James Seppala

“The market is pointing to recovery,” says James Seppala, head of Europe acquisitions at Blackstone, which invested in single and multi-family housing in the US following big price falls. “The thesis continued in Spain.”

This year Blackstone added to a big multi-family housing portfolio it has acquired mainly in Madrid, some assets bought from Madrid’s local authorities, the rest from developers and other owners. It secured financing from local banks, possible thanks to “a reasonably deep financing market for cash flow-producing assets”, says Seppala.

Lenders including Bankia, Caixa, BBVA and Santander are looking at financing the asset class, which is Spain’s largest real estate sector. Sareb and most financial institutions are still trying to sell stock, on which they are prepared to attach finance. One such deal saw Sareb’s shareholders finance the buyers of 939 repossessed homes US distressed investor HIG Capital acquired as part of Project Bull in 2013.

Spanish banks are also financing development, albeit with restrictions. Debt is available for 100% of construction costs, subject to minimum 40-50% pre-sales, but is almost impossible to source to buy land.

Investment banks from Goldman Sachs to Credit Suisse and Deutsche Bank are financing investors’ loan acquisitions.

Seppala says Blackstone’s debt purchases, including a €3.6bn portfolio of performing and non-performing residential mortgages from CatalunyaCaixa in April and other non- performing portfolios backed by multi-family housing or condominiums, have been “investment bank financed for the most part”.

Less is happening in Italy’s residential market, which is about 80% owner-occupied, leaving scarce opportunities for institutional investment. It is also at an earlier stage in the European deleveraging cycle.

“The NPL financing trade there is less obvious as NPL resolution timelines have been much longer and less predictable than in other jurisdictions,” says Niall O’Rourke, Morgan Stanley’s European head of the deleveraging and lending group, while “the NPL story is led by consumer loans”.