We’re not out of the woods yet, but 2023 has much to offer
January 26, 2023
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Managing Director CBRE Netherlands
My New Year's speech included words like ‘happy’, ‘proud’ and ‘energy’. I usually avoid such clichéd terms, but on this occasion they were completely warranted, especially considering the state of the market a few months previously. That is, until we suddenly got the wind back in our sails in December. So, all things considered, I can look back with a sense of satisfaction, and look forward with a feeling of optimism. Not only because in the wake of the coronavirus lockdown we chose to keep seeing each other in person instead of working from home, but also because both sellers and buyers showed courage, the market has normalised and therefore become healthier, and because fewer offices are vacant and Dutch retail real estate is becoming interesting again. And although we’re not yet in full celebratory mode, there’s definitely no cause for a sombre mood. Allow me to explain.
If you sell under pressure when your property is rapidly depreciating, you’ll probably have to explain yourself and you won’t make any friends by doing it. I guess you just have to have the guts for it. Respect for the sellers who went ahead and did it.
Praise for pluck
The mood was not so great last October, around the time of EXPO REAL. Trading volume had slumped dramatically, due particularly to the rise in interest rates, and it appeared that it was even heading toward the crisis levels seen in 2009. Consequently, expectations for the rest of 2022 were downright bleak. We weren’t the only ones for whom the phones went silent: the whole market was holding its breath and wondering where this was going. Everyone was watching everyone else and biding their time. And that’s why it was so exceptional that some parties stepped up despite the circumstances and made that first, difficult move. In this, I would specifically like to mention owners. If you have something worth 100 million on your books, and you know that in six months its value will be down to 80, maybe even 60, selling quickly is the obvious thing to do. But you have to be able to explain such a move, and it will not win you many friends. I say: you just have to have the guts to do it. In the end, both buyers and sellers showed courage, made decisions and restored liquidity to the market.
For years, both buyers and sellers knew that they were actually paying (and getting) too much. When you’re at the top of the market, the only way is down. Your returns are now once again in proportion to your risk, which is a healthy development.
Back to normal
You see how important those first, courageous players are, because by the end of December, there was plenty of action in the market again and a huge willingness to invest. Remarkably, the challenges that had crippled the market for almost a quarter were still as relevant as ever. The only change was a normalisation of the market. Over the past years, you’d gritted your teeth while buying real estate because you knew that you were paying too much. Sellers must also have felt ambivalent. Cashing in disproportionately seems like a good thing, and you’re entitled to profit at the top of the market, but the earnings were not realistic. Ultimately, everyone came to the realisation that the only way was down. That said, from a sound trade perspective this is open to debate. Because now that your returns are once again proportionate with your risk, real estate is an excellent investment product. Even better than stocks, for example. So that’s good news, even though it creates polarisation in the market with the good getting better and the bad getting worse.
Investors see opportunities at the lower end of the office market, with relatively low entry, properties ESG-proofed for the coming thirty years, and sufficient interest from tenants. It’s also a great gift to big cities.
New construction – ‘the luck of the draw’
New construction, or rather the long-term lack of it, naturally remains a cause for concern, but with a surprising side effect. When offices were still being built, Dutch entrepreneurs moved in en masse. Meanwhile, vacancy rates at the lower end of the market were increasing. With no extra surface area being added for the time being (or at least, far too slowly), and the office market continuing to grow, those vacancies are necessarily meeting a need. There are opportunities for investors as a result, such as buying relatively low and ESG-proofing for the next 30 years, with the luxury of multiple potential purposes. Transformation is actually an excellent plan B, since new home construction is also on hold for the time being So, what was originally a structural problem is turning out to have an unexpectedly positive side effect, particularly in major cities where rapidly shrinking vacancy rates are combined with a very welcome move towards sustainability.
The rise of online commerce seems to have plateaued and innovative retailers are making healthy profits. For the first time in a decade, I am once again seeing opportunities for a high street retail strategy in the Dutch real estate market.
Dutch retail: new vitality
And finally, an upbeat message about the Dutch retail market. Specifically, some investors are no longer avoiding this market, which is a change from how it has been in recent years. Up until 2010, retail was still happily participating in the buying frenzy. After that, results declined sharply for more than a decade, mainly due to the rise of online retail. But now that the effect of this seems to have plateaued, the tide seems to be turning. Innovative retail formulas and quality stores are turning healthy profits. They are a compact and sound basis after a rather drastic clear felling. So I understand why the market is still hesitant, but am also convinced that there is room for a new retail strategy. So I am now making an appeal at the start of 2023, especially to international institutional investors: take a walk past a few Dutch high street retail windows and shopping centres to see what they actually have to offer.
Going against the grain, we deliberately chose to maintain contact with each other at the office. We got a lot done as a result: everyone knew what was going on, and we stayed on the ball.
Strength in numbers at work
Finally, I am perhaps most satisfied that we continued to have personal contact with each other at the office during and after the pandemic, rather than just online. When I look around, remote working still prevails in many organisations. In that respect, our choice seems atypical, but it was a deliberate one. We all believed that you get less done as individuals behind a screen than you do together in one building. Specifically, that environment fosters the emergence of ideas, and because you’re together, you all know exactly where everyone stands. The office was almost fully occupied every day, and everyone knew what was going on and immediately shared the latest information. We stayed on the ball and accomplished a lot – more than we would have done if we’d just worked from home, I’m sure.
Real Estate Market Outlook 2023
Interested in our expectations for the new investment year? You can find them in our brand new report.
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