The Netherlands: Europe’s property growth story

With investment volumes hitting record levels last year, lenders are making the most of a booming market. Ross Davies reports

To hear debt advisory specialist Robert-Jan Peters tell it, the mood among lenders operating in the Netherlands real estate market is one of “exuberance”.

While this is not the word everyone might choose to describe the sector – some may feel it perhaps hyperbolic – one first must contemplate the Netherlands’ economic recovery since the financial crisis, which burst the country’s real estate bubble in dramatic fashion and left the market in a deep downturn.

Since then, it has been a hard road to recovery, with the market enduring periods of oversupply, weak growth and poor investment. But Peters, who leads CBRE’s debt and structured finance team in Amsterdam, cites a landscape today that is in rude health, diverse and competitive, with sources of investment capital stretching the full gamut from big international players to the smaller domestic investors.

“It is really a very dynamic market at the moment,” he explains. “While it is still early days, we have seen a lot of deals recently involving local market investors. I would say 80 percent of the market is now small volume deals – meaning asset sales below €12 million. The market is now seeing more local lenders enter the fray.”

“At the same time,” adds Peters, “we have also seen a lot of big entrants to the market, including German lenders, who have been eyeing the market cautiously since last year, but are now making deals. It’s just getting good traction.”

The consensus among real estate professionals approached by Real Estate Capital for this article is that 2018 is shaping up to be a continuation of the Netherlands’ strong performance from last year, when it emerged as the third largest real estate market in Continental Europe, after Germany and France. A record-breaking year, according to JLL, during which investment volumes reached € 21.9 billion – 44 percent higher than the 2007 peak.

Such bumper figures reflect the performance of the Dutch economy, which has posted consistently strong growth. Even last year’s period of political uncertainty – in which the country went 208 days without government while coalition talks stalled – was not enough to deter an annual GDP growth rate of 3.1 percent in 2017, the country’s highest rate in a decade. The government expects growth of 2.9 percent in 2018.

According to a recent report by CBRE, Premier Mark Rutte’s “pro-business government”, elected for a third successive term last year, can take a decent chunk of the credit for spearheading the Dutch economy’s revival and, in turn, the fortunes of the country’s real estate market.

On the face of it, there appear to be parallels between the cyclical upturn the Dutch real estate market enjoyed in the couple of years leading up to the global financial crisis and the current situation. Just as before, foreign investment is high, with 70 percent of all purchases in 2017 made by foreign players. Similarly, the market has also experienced yield compression and investment volumes comparable with those seen in 2005-07.

However, there are key differences, market participants argue. In the lending market, loan-to-value ratios are lower than 10 years ago – by CBRE estimates, LTVs hovered around 55 percent between 2014 and 2018, in contrast to more than 70 percent between 2005-07 – despite experiencing a recent uptick.

When asked to characterise key lending terms, Arie Hubers, managing director at ING Real Estate Finance, says 2018 has been a year of “stabilisation” with “margins trending down and LTVs slightly upwards”.

Margins on senior loans range from below 100 basis points for prime assets, lowly leveraged, to around 175bps for secondary or value-add assets, leveraged to around 65 percent, Hubers suggests.

Erik Steinmaier, sector director for real estate at ABN AMRO, another major domestic bank, agrees that “healthy market conditions have driven stable lending”.

“I would put LTVs for senior loans in the 60 to 70 percent range,” he says. “Margin levels are heavily dependent on the competitive field, as larger tickets [north of €100 million] attract more international lenders.”

“It’s true that LTVs are up, and margins have gone down, but not massively,” adds Peters. “It really depends on what kind of time frame you are talking about. I don’t think we have really seen a marked shift in margin, for example, since the beginning of the second half of this year.”

Another difference between the upturns in the Dutch real estate sector of the mid-2000s and today is behaviour among lenders, best described as cautious, which Hubers attributes to caution about capital value increases over the past five years. There are also rising concerns, he says, of a “price correction, potentially triggered by higher interest rates”.

Interest rate rises are a matter of conjecture and some Dutch banks, like their peers across the eurozone, do not expect a sudden change, with the likes of Rabobank and ABN AMRO both claiming they see any near-future hike as unlikely.

ALTERNATIVE SECTORS

While demand may be strong across the market, current conditions are also defined by a paucity of prime investment product, meaning investors are having to be more inventive when it comes to spending their money. This has seen new investment classes, particularly healthcare, rise to the fore to compete with the more traditional asset categories of office and retail.

According to JLL, investment in the care space alone is forecast to reach €194.3 million in 2018; two years ago, that figure was €42.1 million. With investors identifying the demographic trend of an ageing population, the lion’s share of investment has been sunk into real estate around elderly care, such as nursing homes and private residential care homes.

The Dutch hotel space has also found itself in the crosshairs in the past couple of years, as highlighted by JLL data, which show investment volumes for 2018 standing at €671.9 million, compared with €82.8 in 2016.

Part of the paradigm shift has also involved investors looking for new opportunities beyond the well-known climes of Amsterdam. The capital, perennially popular with tourists – 47.2 million overnight stays were recorded in the city in 2016-17 – may remain an obvious target for investors, but the inevitable bottleneck in supply of prime locations means other cities may start to appear more lucrative than they did a couple of years ago.

“For instance, as Amsterdam has picked up now, it no longer offers a risk premium to larger markets, such as Germany and the UK,” says Hubers. “But there is still some premium to be found if you branch out of the capital to smaller markets, like Utrecht, Rotterdam and The Hague.”

“For smaller tickets there is definitely a risk premium compared with other European markets, especially Germany,” adds Steinmaier.

Investment in Dutch residential property has outstripped sectors such as healthcare and hotels. According to JLL data, it is due to reach €3.1 billion this year – a year-on-year increase of roughly 63 percent.

One such notable debt deal in the space this year is Orange Capital Partners’ refinancing of the acquisition debt for a portfolio of residential properties – spread out primarily across Amsterdam, Amstelveen and The Hague – consisting of 700 units with a total net market value of more than €135 million. ABN AMRO and PGIM joined forces for a €78.5 million, seven-year financing of the portfolio in June.

According to CBRE, deals in the office space, which constituted 59 percent in the boom period before the recession, have fallen away somewhat, representing 36 percent, going on the latest data. However, there is scope for investors and lenders in Dutch offices. Recent economic growth has led to a reduction in office vacancy rates from 14.9 percent in 2014 to 12.6 percent in 2017, while unemployment is forecast to fall to 3.5 percent next year – its lowest rate since the turn of the century.

As Frank van der Sluys, head of research in the Netherlands at Cushman & Wakefield, posited in a recent report: “Demand for well-located, high-quality, office space remains unrelentingly high.”

INTERNATIONAL LENDERS

The Dutch real estate sector has seen increased competition among debt providers, with borrowing costs seen to be generally favourable for real estate investors. In its report, CBRE cites the revival of the Commercial Mortgage-Backed Securities market as a contributing factor to foreign lenders working up new loan portfolios.

This was demonstrated in June with the announcement that US bank Goldman Sachs, in its second European CMBS deal of 2018, had chosen to offer bond investors access to the Netherlands office sector, having securitised €247.8 million across two senior loans, including a capex facility. The largest loan in the deal was a €184.97 facility, sponsored by Dutch investment group PPF, which refinanced a portfolio of eight office properties, in addition to one retail property.

With growing competition, international players already present in the market have been compelled to lower their minimum lending volumes to capture business, sources say.

“There is a very high level of competition between banks and other lenders,” says Wouter de Bever, who heads the Amsterdam Office of German bank Deutsche Hypo. “However, I do think we’re reaching a point where banks in general are becoming increasingly reserved.”

Much of the caution de Bever alludes to boils down to yield compression. Greater competition for prime properties, he says, has created the corollary of today’s low yields – particularly for the retail assets. “Everybody is aware of yield compression,” says de Bever, “especially the local Dutch lenders, who are holding back. Looking at the current low yields on prime locations, I think the gap with regard to risk premiums is smaller than it was a year ago.

“It comes down to a lack of good products – everybody pitched on core products, which resulted in yield compression of all asset classes in prime locations.”

CBRE’s Peters has also noticed what he describes as “back-pedalling” by the local market leaders, which he attributes to a recent warning from the European Central Bank that Dutch banks had become overexposed to commercial real-estate lending.

“Some banks are now basically cherry-picking when it comes to deals,” he says. “A kind of ethos has been implemented within them where they feel the book does not need to grow and things need to be improved from a risk-return profile.”

LOAN SALES

This air of caution among some local banks is perhaps best underscored by Rabobank’s recent decision to sell the majority of Bouwfonds Investment Management, its real asset investment arm, in a bid to reduce its balance sheet.

In March, Rabobank’s FGH Bank sold a €1.3 billion loan portfolio, known as Project Purple, to RNHB, a buy-to-let and mid-market commercial real estate lending business, which is expanding its loan book through strategic acquisitions. RNBH was previously a subsidiary of FGH before being acquired by Carval Investors and Vesting Finance in 2016.

The loan sales market in the Netherlands has been decidedly quiet in the past year, especially in the non-performing loans space, which for a time provided opportunistic debt investors with an entry into the Dutch real estate market.

Some, including ING’s Hubers, trace back the beginning of the end for the NPL space to when the Netherlands sold off Propertize – the real estate portfolio of nationalised bank SNS Reaal – to JPMorgan and private equity firm Lone Star in 2016. The deal, worth €895 million, was viewed as a crucial step in the country’s recovery from the financial crisis. SNS Reaal had been bailed out by the state in 2014 following the crash of its property portfolio.

“After the dismantling of both Propertize and the FGH story earlier this year, I don’t see a lot of activity ahead in NPL space,” says Hubers.

“At the moment it’s almost silent, and it looks like it’ll only get quieter,” agrees de Bever, while Peters states that barring “one or two potential deals tentatively hovering about the market, the Dutch NPL story is “practically all but over”. With increasingly favourable market conditions, “value-add and opportunistic lending opportunities have also been diminishing,” claims ABN AMRO’s Steinmaier, “which also implies that NPL sales have been fading as well.”

John Bigley, principal at DRC Capital – a UK-based alternative lender active in the Dutch market – argues that, although most loan sales have taken place, the resolution of these loans is still ongoing, creating new lending opportunities, especially on assets that have been undermanaged.

“We expect that a range of opportunities will continue to present themselves; discounted pay-offs as well as straight sales and refinancing opportunities,” he says. “The Dutch market is generally characterised by smaller deals than many international lenders target.”

The Dutch real estate market has taken its place among Europe’s major investment destinations, meaning lending opportunities have also changed. While the Netherlands was a target for NPL buyers and opportunistic lenders a few years ago, it now attracts a greater breadth of debt providers.

JLL research shows 2018 investment volumes to the end of Q3 were €12.5 billion, with up to €19 billion expected for the full year, not quite matching 2017’s high. The Dutch real estate story is expected to continue for some time, meaning greater opportunities for lenders.

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