The 2008 financial crisis left its mark on property prices across continental Europe with prices now only recovering gradually.
This development has been particularly pronounced in the Netherlands, but over the last two years, as residential property prices started to recover, opportunities for institutional investors have opened up.
The Dutch residential property sector is unusual due to the significant form of government subsidies for home buyers, known as the Hypotheekrenteaftrek, which allows home owners to deduct interest on mortgage debt from their taxable income.
In addition, mortgages of up to 120% were widely available – in 2013, twothirds of mortgages opened since 2004 were in negative equity. But growing regulatory pressures on banks, combined with gradual restrictions on the Hypotheekrenteaftrek having tightened lending conditions.
Nevertheless, the Dutch residential property market appears to have picked up, according to the data for the first quarter of 2016 released by the Dutch Association of Estate Agents (NVM).
The number of sold residential properties increased to 34,810, compared to 29,080 in the same quarter a year earlier, representing an increase of almost 20% while prices still remain 9% below pre-crisis levels. However, as of the first quarter this year property prices increased by 5.5% year-on-year.
Ger Hukker, at the time chairman of NVM, comments: “While the figures are as such are positive, the flip sides of a growing market, such as the relative caution of consumers, the lack of supply in houses for sale and affordable rental property becomes all the more obvious. This is surprising, given the current price level of properties, the ridiculously favourable Hypotheekrenteaftrek and the growth of consumer confidence.
“Regional differences remain pronounced. It is mainly in urban areas, in particular the triangle of Amsterdam, Leiden, Utrecht and the city of Groningen where we see above average growth,” he adds.
For John Danes, Aberdeen Asset Management’s head of European Property Research, these recent trends – lack of supply housing, regulatory
changes, gradual price growth – are making the Dutch property market relatively more attractive. “The Netherlands is currently one of the most interesting European
markets. We are looking to invest more in Dutch residential property.”
According to Danes, the growing pressures on Dutch house buyers generates opportunities for institutional investors.
“Reducing tax rebate on mortgage interest, as well as reducing LTVs for mortgages makes private rented property more attractive. We expect higher rental growth rates in the private rented sector as a consequence.
“Across Europe, we can see a shortfall in residential housing being built, combined with increasing population in major cities. This is particularly the case in the Netherlands, where we can see a process of population growth, particularly in the Randstad and especially Amsterdam, while regulatory changes are encouraging more people into the rental sector.
“Institutional investors can step in to answer some of that demand,” Danes argues.According to Aberdeen, 43% of residentialproperties in the Netherlands are currently rented, of which more than 70% are operated by housing associations, while 29% are held by investors. However, Danes expects the share of the latter to increase, due to government deregulation of the housing market.
At the same time, Aberdeen aims to diversify in order to reduce the risk of residential property by holding a portfolio which combines residentialand commercial holdings – for example, a housing block which also includes supermarkets and other shops.
A DIFFERENT ANGLE
Venn Partners, an investment management firm specialised in property, approaches the challenging lending environment for consumers from a different angle. The group, which recently launched Venn Hypotheken, a residential mortgage lender aimed at theDutch market, aims to offer alternatives to traditional lenders. Over the next two years, the group hopes to expand its mortgage lending to €2bn by offering lower cost mortgages through channels which were historically restricted to banks.
Loans will be financed through residential mortgage backed securities, fund products and direct investment, with the majority of its funding expected to come from institutional investors such as pension funds and insurance companies. Gary McKenzie-Smith, managing director and co-founder of Venn Partners considers the Dutch market to be particularly open to non-bank lenders.
“In the Netherlands, circa 70% of mortgages are distributed through intermediaries and IFAs or mortgage brokers, and we are able to engage with them directly, compared to, for example, Germany where it is a lot harder to enter the market because most of the loans are arranged through bank networks.”
While McKenzie-Smith acknowledges the risks of negative equity in the Netherlands, he argues that other indicators, such as the level of unemployment or the general development of wages are much more meaningful when it comes to assessing whether a loan will be repayed.
“Dutch borrowers were very disciplined in maintaining their mortgage payments, and in the end, indicators such as loan-to-value are not strongly correlated to mortgage performance.
“What really affects mortgage performance is, for example, unemployment, which is relatively stable at 6% in the Netherlands,” he argues.
ALTERNATIVE FINANCING STRATEGIES
According to McKenzie-Smith, a key trend favouring the growth of nonbank lending in the Netherlands is the fact that while a lot of borrowers were bound to long-term fixed mortgages throughout the crisis, as house prices start to recover, mortgage owners are increasingly looking for alternative financing strategies.
“At the same time, a lot of banks are facing balance sheet constraints. The combination of these two factors really is the perfect storm,” he argues. Regulatory changes also affect the investor point of view, according to McKenzie-Smith.
“With our offering, we target institutional investors in particular. We increasingly see Dutch institutions investing through third-party platforms “The Solvency II Directive has resulted in tighter capital requirements for insurance companies– exposure to the Dutch mortgage market through whole loan exposures, which offer less subordination and higher margins of return, makes for an attractive investment opportunity for these investors.”