The €660 billion Dutch residential mortgage market has been attracting increased interest and looks set to be a significant feature of the European real estate investment landscape in 2017, as institutions across Europe have intensified their search for yield. The market has a host of attractive investment features and institutions have a range of options in terms of how to gain access and invest in this asset class.
Dutch mortgages represent one of the strongest credit markets in Europe on a risk adjusted basis. Mortgage rates remain higher than other comparable markets as the limited influx of foreign capital in recent years has not fully addressed the funding gap created by the financial crisis. Furthermore, Dutch mortgage portfolios have consistently experienced one of the lowest loss rates in Europe, even during the last financial crisis. The tendency for Dutch borrowers to meet their mortgage obligations is explained by the full recourse nature of mortgages classified as personal credit. This is further reinforced by the Dutch social security system which provides generous benefits for individuals following unemployment or illness.
The Dutch tax system allows for full deductibility of mortgage interest payments from taxable income, which has resulted in the Dutch mortgage market offering high Loan-to-Value (LTV) ratios. However, the Dutch government overhauled tax benefits and mortgage regulations in 2011 by gradually introducing LTV caps (which will go down to 100% by 2018) and limiting tax benefits from the present regime of being applicable to all mortgages to repayment mortgages only. These changes to the regulatory framework in the Netherlands are consistent with the government’s objective to encourage a reduction in household debt.
Currently, Dutch mortgages are more affordable than ever, due to lower interest rates and higher disposable income. However, mortgage loans are being granted based on tighter affordability criteria and collateral values than before the financial crisis. It is important to highlight that on average only 16% of net income is spent on mortgage payments. Thus, it can be argued that new mortgage loans have better risk characteristics than older vintages.
A recent feature of the Dutch mortgage market is the emergence of non-bank lenders looking to take advantage of the reluctance or inability of some banks to lend in this space. Non-bank lenders are expected to account for more than 20% of new mortgage lending in 2017. Last year, Venn Partners launched their own residential mortgage platform, Venn Hypotheken, with ambitions to originate €2billion of mortgages per annum by 2019. The loans are financed through a range of long-term financing solutions, including RMBS, fund products and direct investment.
Institutional investors have a number of ways through which they can participate in the market, namely RMBS notes, secondary acquisitions or whole loans. Changes to the regulatory framework and capital adequacy rules have made it more challenging for some investors to invest in RMBS notes. Hence the market has seen a shift of investor interest looking to gain access to mortgage products through whole loan formats rather than RMBS, as they adapt to regulatory changes.
The shift to mortgage investing through whole loans was also accelerated by the disintermediation of the banking sector in the Netherlands. Across most of Europe, the mortgage market was an area of dominance for large banks. This left RMBS or covered bonds as the only entry points into the mortgage market for institutional investors. Since banks were also focused on maintaining market share and their balance sheets, there were few opportunities for non-bank lenders to acquire secondary portfolios.
This trend continued in the Netherlands after the financial crisis as the banks remained active issuers of RMBS and covered bonds to fund their mortgage books. De-leveraging was less common in the Netherlands compared to the UK as there was less pressure on the balance sheet of Dutch mortgage lenders. The recent emergence of new lenders provides institutional investors with the opportunity to invest directly into mortgages. Operating with greater independence than the large banks gives these new platforms greater certainty on how investors are offered up product. Venn Partners’ identified the gap in the market at an early stage and launched its Dutch mortgage origination platform to satisfy the increase in demand for direct investments into mortgages by institutional investors.
Investing directly in Dutch mortgages entails consideration and solutions of a variety of regulatory and structuring challenges depending on investor jurisdiction and risk appetite, offering an attractive yield for low credit risk with a WA duration of 10-15 years. The asset manager that can guide investors through the structuring process and the associated legal and investment requirements whilst delivering the quality and volume targets will be the ideal investment partner.
Marc de Moor is CEO of Venn’s Dutch residential business Venn Hypotheken