Waiting for a new price equilibrium in Dutch real estate

Savills latest research report about the Dutch real estate market suggests investors are eagerly anticipating a new price equilibrium amidst changing economic conditions.

The report reveals that investment market activity significantly declined during the first quarter of 2023. Investors have adopted a cautious approach due to interest rate hikes by the European Central Bank (ECB) and persistent high inflation levels, which are expected to continue into 2024. As a result, only €1.7 billion was invested in the Dutch real estate market in Q1, compared to an average of €4.7 billion over the previous eight years.

Alongside the weaker investment market, the report also highlights a slowdown in occupier activity, particularly in the logistics sector, which had previously benefitted from demand during the Covid-19 pandemic. Requirements from e-commerce and logistics service providers has declined due to reduced household consumption and international trade in goods and services. The lack of new development and limited availability of existing stock have further contributed to the drop.

According to Savills, office take-up has also decreased significantly, down by 50% in the first quarter of 2023 compared to the same period in the previous year. While tech companies enjoyed strong figures during the pandemic, their demand for office space has reduced. In general, the office market is witnessing changing patterns of demand. High-quality offices in central, accessible locations are increasingly sought after, as employers attempt to keep their staff engaged with company culture. This in turn is leading to a divergence in demand between prime and secondary locations.

The retail sector has also experienced a slowdown, with prime rents in high street locations down 8% year-on-year in the first quarter of 2023. More encouragingly, despite negative consumer confidence, household consumption increased by 2.7% in February 2023, suggesting a more positive outlook for the retail market.

Not surprisingly, Savills says, given weaker leasing activity and declining investment volumes there have been meaningful price corrections in the market, with increases in gross initial yields (GIYs) across all sectors. Prime residential real estate saw a 40 basis points increase in GIYs, while logistics yields rose 50 basis points. Recent interest rate hikes by the ECB, with the deposit rate raised to 3.25% in May, have yet to be fully priced in, potentially leading to further upward yield movements in the short-term.

Clive Pritchard, Head of Country at Savills in the Netherlands, says: “The widening bid-ask spread in the market has led to a drop in investment activity, with volumes down by 62% in the first quarter of 2023 compared to the previous year. However, we anticipate a pick-up in investor activity after interest rates and financial markets stabilise, which is expected in the second half of 2023.”

Despite a more challenging economic backdrop, Savills says that real estate market fundamentals remain relatively sound. The report suggests that rental growth prospects are triggering a shift towards less leveraged, core investment. Logistics, prime offices and residential properties in desirable locations are expected to experience rental growth due to a shortage of high-quality stock. Meanwhile, less attractive assets, such as offices in secondary locations, may face difficulties in terms of keeping and finding new tenants, and maintaining value.

Pritchard adds: “As the market waits for a new price equilibrium, we see that investors are watching the economy and waiting for the right time and opportunity to step back into the Dutch real estate market.”

Read the full report here.