threats and opportunities in dutch office investment market · 4 general real estate fundamentals...
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Threats and opportunities in Dutch Office Investment Market
Alphons Spaninks Local Head of Asset Management Benelux & Nordics
Real Estate Investment Seminar 2013
9th April 2013
Dutch Real Estate: Office market
Content
Economy
Office market
What went wrong?
Situation today
Outlook
What next? Opportunities…..
3
Dutch GDP and office employment
Declining household spending, lower net exports and reduced government expenditure put the Netherlands into
recession
Due to austerity measures and low confidence, household spending will continue to decrease in 2013
Depressed growth will result in no private office employment growth and public sector office-jobs destruction
Foreign demand will drive Dutch exports and will drive the recovery from 2nd half 2013 but growth will remain
below average
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
2017F
% YoY
Source: Datastream, AXA Real Estate Research
Netherlands contributions to GDP growth
Household consumptionGovernment consumptionFixed investmentNet ExportsChange in inventoriesGDP
Forecast
-6
-4
-2
0
2
4
6
8
2000
2001
200
2
2003
2004
2005
2006
200
7
2008
2009
2010
2011
2012
2013F
2014F
2015F
201
6F
2017F
% YoY
Source: Experian, AXA Real Estate Research
Netherlands - office employment growth
Financial services
Business services
Public administration
Forecast
4 4 4
General real estate fundamentals in The Netherlands
Economy
Dutch economy is expected to contract by 0.6% according to the DNB in 2013
Budget deficit expected to reach -3.5% (DNB) in 2013, which could lead to a new round of austerity
Overall rising unemployment (reached 7.7% in Feb 2013 according to CBS)
Forecasted decline in office employment in the short-term (2013-2014)
Occupier markets-office
Due to consolidation, centralization and workplace strategies like the New World of Work, take-up dynamics will
remain modest
Supply will further stabilise within the major important office locations, partly due to conversions of vacant office
buildings into hotels and student apartments
Supply mainly concentrates on secondary, mono-functional and less accessible locations (public transport)
On a positive note, the current office development pipeline is relatively small and largely pre-let
What went wrong in offices?
Commonly said a collective mistake was made in the industry the first years of this century:
Municipalities offered great attractive office developments with relative low land prices in order to attract
business to their cities (creating revenues: land and tax)
Developers focussed on green field developments, motorway locations, satellite cities, not interested in
brown field re development (too many challenges)
Tenants were triggered by substantial incentives, compensation for moving costs etc from developers and
new (first grade) quality: office hopping
Investors were triggered by new grade stock and had pressure to invest, very competitive and pushing yields
down.
Wall of money, financiers were extremely competitive, LTV’s up to 90%, why not?
“Overbuild, under demolished”
But the real cause is in the last decade of the last century
1990 – 2000 13 million sqm of office space added
Most if it in the periphery
Office stock:
1992 30 million sqm
2002 44 million sqm
2012 49 million sqm
Office employment growth and office stock growth
1995-2002 employment + 31% stock + 36%
2002-2012 employment + 11% stock + 12%
Average sqm per office employee
2000: 24 sqm
2011: 16 sqm
Trend:
RGD is targeting 14 sqm
Periphery
Other
Central
Office stock per segment source EIB, 2010
7
High overall vacancy will force conversions if not demolitions
Vacancy is over 15% in the four major Dutch office markets
With a lack of net absorption expected for the next two to three years, conversions and demolitions will be
the only way reduce vacancy
0
5
10
15
20
25
198
8
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
%
Source: DTZ, AXA Real Estate Research
Office availability rateAmsterdam Rotterdam
0
100
200
300
400
500
600
Q4-1
98
8
Q4-1
98
9
Q4-1
99
0
Q4-1
99
1
Q4-1
99
2
Q4-1
99
3
Q4-1
99
4
Q4-1
99
5
Q4-1
99
6
Q4-1
99
7
Q4-1
99
8
Q4-1
99
9
Q4-2
00
0
Q4-2
00
1
Q4-2
00
2
Q4-2
00
3
Q4-2
00
4
Q4-2
00
5
Q4-2
00
6
Q4-2
00
7
Q4-2
00
8
Q4-2
00
9
Q4-2
01
0
Q4-2
01
1
Q4-2
01
2
'000 sq m
Source: DTZ, AXA Real Estate Research
Office take-up, 12 months rollingAmsterdam Rotterdam
8
Scarcity of prime office space to drive rental value growth
Occupier’s interest is focused on more centrally located modern office space
But negative growth will limit prime rental value growth in 2013
Secondary assets are undergoing a significant repricing that will continue into 2013
However, due to IPD universe asset quality, Dutch IPD equivalent office total return will outperform the
European average although it will be impacted by yield rises in 2013
0
2
4
6
8
10
12
201
3
201
4
201
5
201
6
201
7
% pa
Source: AXA Real Estate Research
IPD - total return forecastsNetherlands Europe
0
50
100
150
200
250
300
350
400
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3F
201
4F
201
5F
201
6F
201
7F
EUR / sq m/ pa
Source: JLL, DTZ, AXA Real Estate Research
Prime rents Rotterdam Amsterdam
Forecast
9 9 9
Very weak outlook for secondary office property
Average/ secondary rents are forecasted to see a further fall in values reflecting the on-going obsolescence
in this segment
The prime end of the market is projected to see some, but very little rental growth at the end of the forecast
period due to demand recovery from 2015 onwards (more effective growth than headline rental growth)
A recovery for the secondary segment of the Dutch office market is not expected within the next five years
150
200
250
300
350
400
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3F
201
4F
201
5F
201
6F
201
7F
€/ sq m pa
Source: JLL, PMA, AXA Real Estate Research
Prime office rents versus average rents
Average rent Prime rent
Forecast
Prime Yields: Slight adjustment and stabilisation
Yields will adjust further into 2013 - 2014
Stabilisation is expected from 2015 – 2016 onwards
4.0
4.5
5.0
5.5
6.0
6.5
7.0
20
00
2001
20
02
20
03
20
04
20
05
20
06
2007
20
08
20
09
20
10
20
11
20
12
201
3F
2014F
201
5F
201
6F
201
7F
%
Source: PMA (historic data), AXA Real Estate Research (forecast)
Prime net yields Amsterdam Rotterdam
Forecast
11 11 11
Secondary Yields: Further downward pressure expected
7
8
9
10
11
12
2012
2013
2014
201
5
2016
2017
%
Source: AXA Real Estate Research
Secondary yield forecast
office retail
Average/ secondary yields have already seen some major adjustments, in particular on the retail side
Office yields have also increased, but to a lesser extent than retail
In line with more distressed properties entering the market, we expect secondary yields to move out further,
in particular in 2013
We expect yields to move out until 2014 and to remain flat between 2015-2017
4
5
6
7
8
9
10
Dec-0
6
Dec-0
7
Dec-0
8
Dec-0
9
De
c-1
0
De
c-1
1
De
c-1
2
%
Source: CBRE, AXA Real Estate Research
Secondary yields Netherlands
Offices Shopping Centres
12 12 12
Very little liquidity in recent years
Investment volumes in 2012 were almost 80% below their long term trend (2002-2011)
Remaining investors are focussing on prime assets with long lease profiles (10y+)
There is still a large gap between sellers and buyers expectations, at the same time there is a lot more
property to come onto the market
0
2
4
6
8
10
12
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
EUR bn
Source: DTZ, AXA Real Estate Research
Netherlands investment volumes Office Retail Industrial Mixed Use Other/Unknown
13 13 13
German-open-ended fund disposals
German open-ended funds under liquidation still have an asset value of over EUR25 billion (12 funds)
Around €2.7 billion are located in The Netherlands (96% office)
The majority of the GOEF’s under liquidation have to sell their properties by the end of 2014
However, as the largest funds have their liquidation date by end 2017( SEB ImmoInvest, CS Euroreal), only 31% of the
assets have to be liquidated by 2014 (EUR8 bn)
The average annual amount of office assets to be sold in the Netherlands is almost 30% of the average
annual office investment volumes over the last 10 years (excluding exceptional years of 2006/2007)
0
1
2
3
4
5
6
7
8
Germ
an
y
Fra
nce
Ne
the
rla
nds
Italy
UK
Be
lgiu
m
Sp
ain
Luxe
mb
urg
Po
land
EUR bn
Source: AXA Real Estate Research
Assets within GOEF's in liquidation by country
Office Retail Others
Annual average
GOEF office
sales 2013-2017
relative to LTA
transaction
volume
0
10
20
30
40
50
60
70
80
20
13
20
14
20
15
20
16
20
17
20
13
20
14
20
15
20
16
20
17
20
13
20
14
20
15
20
16
20
17
20
13
20
14
20
15
20
16
20
17
20
13
20
14
20
15
20
16
20
17
20
13
20
14
20
15
20
16
20
17
20
13
201
42
01
52
01
62
01
7
% of LTA total transactions
Source: DTZ, AXA Real Estate Research, *2003-2012 annual transaction volumes excluding exceptional years of 2006/2007
Expected GOEF office sales
Nether-
lands Germany Italy Belgium France Spain UK
Annual average
GOEF office
sales 2013-2017
relative to LTA
transaction
volume
14
In a normal cycle, a substantial proportion of the assets are not valued to reflect the reality of the market in the
down-phase. Investors hope to ‘bridge’ the trough so that they never acknowledge the real depth
In this cycle, however, such a strategy is far less effective because
– The recovery phases will be slow and extended
– The banks are coming under increased pressure to reveal their true losses
We believe that investors/valuers will be forced to switch from being ‘in denial’ to ‘accepting’ of the reality
‘Normal cycle’
‘Market
in denial’
‘Market accepting’
Recovery slower than usual
caused by slow economic recovery
Current position in cycle
Peaking at a lower level
Valuation perspective
Source: AXA Real Estate Research
Pressure of sales not yet reflected in valuations
Summary
Threats:
Refinancing and fund liquidations
Continuing uncertainty and lack of confidence
Shrinking office employment
More efficient use of sqm (RGD 14sqm / office user)
Municipalities reducing land costs for new office developments
But:
Is 15% vacancy really dangerous or is it acceptable overcapacity?
Will trends continue? Office employment & efficiency?
Will trends be compensated by other trends?
Good news, opportunities:
Asset selection in each sector
Office occupiers in general have survived the crisis so far and became leaner and meaner
Office: Prime, core, value add
New entrepreneurial business models, investors will become entrepreneurs in real estate, customer focus
Sustainability by re using existing offices
Development pipeline has dried up
Is it all that bad in The Netherlands? A brief European comparison
CBRE, February 2013
17
Amsterdam Zuid-As (CBD) vacancy rate much lower than market average
Amsterdam has one of the highest vacancy rates (18.8%) amongst the European cities
Much lower vacancy rate in Zuid-As (CBD) with strong improvements over the last three years
(from 16% to 7%)
Zuid-As has a high attraction for national and international occupiers
Frictional level
0
5
10
15
20
25
30
2006
2007
2008
2009
2010
2011
2012
%
Source: DTZ, CBRE, AXA Real Estate Research
Amsterdam vacancy rates by subarea
Zuidoost West Zuid-As (CBD) Total
18
...and vacancy is expected to remain low
Zero net additions in the last two years have supported the fall in vacancy rates
No further additions to the market until 2014 in Zuid-As (CBD)
Vacancy rates in Zuid-As (CBD) expected to decline further – even with low demand
– Employment growth forecast for Amsterdam is very weak – Zuid-As (CBD) is expected to see positive net absorption due
to continuing relocations of companies from other parts of the market
Prime rents have remained stable since 2008
– Headline office rent still insulated by incentives
0
5
10
15
20
0
20
40
60
80
100
120
140
200
6
200
7
2008
200
9
201
0
201
1
201
2
201
3
201
4
%'000 sq m
Source: JLL, AXA Real Estate Research
Zuid-As (CBD) office demand and supply
Net absorption
Net addition
Vacancy rate (RHS)
Forecasts
-6-4-2024681012141618
-2
-1
0
1
2
3
4
5
6
2006 2007 2008 2009 2010 2011 2012
%%
Source: JLL, DTZ, AXA Real Estate Research
Zuid-As (CBD) headline and effective rental growth
Effective rental growth Headline rents growth Vacancy (RHS)
19
Proposition: Taking re-leasing risk in 2014
Yields in Amsterdam are expected to adjust further
- Current mispricing of Amsterdam
Moderate effective rental growth can be expected from 2015 onwards
Investment strategy: Buy office building with single tenant and remaining short lease term
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Q4 2
001
Q4 2
002
Q4 2
003
Q4 2
004
Q4 2
005
Q4 2
006
Q4 2
007
Q4 2
008
Q4 2
009
Q4 2
010
Q4 2
011
Q4 2
012
%
Source: PMA, AXA Real Estate Research
Prime net office yields
Munich Amsterdam Madrid Central London Paris
Conclusion
The Dutch office market will on a macro level continue to face challenging times
On a micro level prime / central office locations will continue to perform
Pricing for prime might slip a bit further before stabilising or even some growth is expected
In-depth local knowledge will be key when investing in value add or core
21
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