Residential market
Turbulent market dynamics and sustainability challenges
Executive Summary
In this section
Migration more important and volatile
How will demographic developments affect the housing market? It has been known for some time that the Dutch population and the number of households will continue to grow in the coming years. The only difference is that in the future the population development of the Netherlands will be more dependent on migration and this is less predictable than, for example, birth and death forecasts.
Recent examples are the number of Ukrainians who settled in the Netherlands after Russia’s invasion of Ukraine and the absence of expats during the Covid-19 pandemic.
Migration is expected to remain positive in the coming years because the Netherlands remains attractive for migrants to settle, due to its favourable socio-economic and political climate. This applies to both highly educated migrants and those with little formal education.
The demand for housing will therefore not only increase in the future among a broad group of households, but will also be more volatile than in the past. The housing stock will simply not be able to absorb these shocks, partly because current construction procedures are significantly slowing down the development of new-build housing.
Shorter development processes are therefore necessary to anticipate and respond to more volatile demand more effectively in the future. In addition, temporary housing concepts and easy-to-transform/flexible real estate could play a significant role in absorbing these migration shocks.
44%
of the total population will live in the Randstad by 2035
“Increasing demand in the Randstad is creating an additional upward price pressure on the rental market.”
Who are these new households and where will they settle? Forecasts show that the share of the total population living in the Randstad1 will increase even further. This percentage is currently 42.5% and will increase to 44.0% over the next 15 years.
The reason for this growth is the influx of migrants, who want to settle in the Randstad combined with the natural growth of the population. When the population development is broken down by age structure, it is striking that the growth of the younger age groups remains positive in and around the major cities of the Holland Metropole2 and that the more rural parts of the Netherlands show a negative development. The number of elderly people is increasing in all regions as a result of the ageing population. But here, too, growth is strongest in the Holland Metropole. Finally, the number of households with a lower income is expected to increase sharply in the short term as a result of a sharp decline in real household income. The demand for affordable (rental) homes will therefore increase sharply, especially in urban areas.
1 Randstad is a conurbation in the Netherlands including its largest cities Amsterdam, Rotterdam, The Hague and Utrecht.
2 Holland Metropole is an alliance between the five largest cities in the Netherlands (Amsterdam, Rotterdam, The Hague, Utrecht and Eindhoven) and the most import real estate developers and investors.
Population growth of young people and the elderly largest in the Randstad (in percentage)
Source: ABF Research (2023)
New-build supply and growing housing shortage
The growing number of households will therefore contribute to increasing demand for housing. Nevertheless, it is not possible in the short term to take the development of new-build homes to a level that will meet this demand. In fact, the opposite is true.
Due to rising construction costs, increasing regulation, nitrogen emission problems and long procedures, it is becoming increasingly difficult to arrive at a healthy business case for new-build projects. We therefore expect the housing shortage to increase even
further in the period 2024-2026, supported by the negative trend in the development of the number of permits issued for new-build homes since the beginning of 2022.
Why are issued building permits a good indication of the development of the housing stock in the near future? On average, the completion of a new home takes nine quarters after a permit is issued. This means that if a building permit for a home is obtained at the end of 2023, it will not be ready for occupancy until early 2026.
The current situation shows that the Netherlands has been in a downward trend in terms of the number of permits issued since early 2022. The number of new-build homes being completed will therefore also decline. We expect that the current quantitative mismatch of 390,000 homes can increase by approximately 27,000 homes each year over the next three years.
The current housing shortage of 390,000 is expected to increase over the next three years.
The mismatch on the housing market
The quantitative housing shortage will continue to increase in the coming years. However, the qualitative housing shortage will be even greater. Among other things, supply and demand are getting further out of balance in the rental housing market.
Particularly in urban areas and among certain target groups (single person households, both young and old), resulting in upward price pressure. In particular, the demand for affordable rental housing will continue to increase. Affordability of housing is and will remain an important theme also in the owner-occupied housing market.
Last year, the financing of owner-occupied homes deteriorated for many households due to rapidly rising interest rates. The result was a declining number of transactions, falling house prices and limited deal flow. The financing of housing is now improving somewhat due to wage increases and is expected to continue to gradually improve in the coming period.
Growth in house prices and an increasing number of transactions will only be possible when financing and affordability are more in balance. We therefore expect a moderate price development and a relatively low number of transactions in 2024.
From 2025 onwards, we possibly will see a stronger recovery in house prices and the number of transactions. However, it will remain difficult for first-time young buyers in the owner-occupied market. This group is expected to become more dependent on the rental market, whether or not in alternative household forms, or will be forced to continue living with their parents for longer.
Challenges and opportunities on the residential investment market
The significant decline in residential real estate values since Q3 2022 seems to be stabilizing. The number of transactions and investment volume is still limited and is not expected to increase in the short term, driven by negative investor sentiment.
This sentiment is influenced by uncertainties surrounding new rental regulations and the swift, significant rise in interest rates. The social problems on the housing market have increased the political pressure to intervene. Proposed policies often overshoot their target or even exacerbate the problems on the housing market and make investors reluctant to make new investments. Short-sighted policies therefore have a counterproductive effect in terms of reducing the housing shortage.
Some investors are now reconsidering their residential activities in the Netherlands. Some large portfolios are known to be currently on the market. Under these market conditions, the potential group of buyers for these large portfolios is very small; they operate according to more opportunistic strategies and more often than not are working with leverage.
We therefore expect these transactions only to be realised at significant portfolio discounts, offering potential buyers their higher sought after yields. Finally, financers are increasingly demanding that investors draw up a sustainability plan when purchasing existing complexes. Investors will also price this in. Both these trends are reason for us to expect a higher upward yield correction in the short term for older, non- sustainable real estate and for large portfolio transactions.
At the other end of the yield spectrum, we see an increasing group of investors who, given increasing urbanisation and the decline in the affordability of housing, are looking with great interest at the possibilities of impact investing, with its stable income flows and the low-risk profile of affordable rental properties.
These trends are also reflected in the development of yields. The figure below shows that the yield spread between core and lower quality residential real estate and the median gross initial yield for residential investments has been decreasing since 2013 until 2022.
A result of a maturing market gaining more traction from investors. Higher interest rates and negative market sentiment have resulted in an higher median yield and a bigger yield spread in 2023. At Bouwinvest, we expect that the yield spread will further increase the coming years. This will be the result of a bigger variety of investment opportunities (brown vs. green, new-build vs. existing) but also investment strategies (opportunistic and value-add vs. core and impact investments).