Residential
Keypoints
- Transaction prices fall, bottom does not seem to be reached yet
- Rents rise, vacancy rates remain low due to scarcity
- Lowest investment volume since 2017
- Initial yields rising, gap with interest rates narrowing
- Impact of sustainability on residential investments is increasing
Negative trend in house prices
The decline in house prices that started in mid-2022 continued in the fourth quarter. NVM figures for the fourth quarter show a 3.7 per cent quarter-on-quarter decline in the transaction price of existing owner-occupied houses. On a year-on-year basis, the drop was 6.4 per cent. The Amsterdam region saw the biggest drop at 9.6 per cent, but all major housing markets saw a decline. Only four regions outside the big cities still saw a slight increase year-on-year. The number of transacti ons fell by 8 per cent in the fourth quarter compared to a year earlier. As supply rose sharply, the tightness indicator widened from 2.8 in the third quarter to 3.2 in the fourth quarter, the highest level since 2019. Only half of all homes are still being outbid, up from 4 out of 5 at the end of 2021. As a result, across the board, the gap between the asking and selling price has disappeared. The new-build market again saw a sharp drop in the number of homes sold.
For three quarters in a row, the number of new homes sold has been at a low level. Due to high construction costs, there is limited room to lower prices and developers find it difficult to get rid of new-build homes.
The NVM figures are based on the average transaction price and give a rough but up-to-date indication of house price development. The existing house price index (PBK) from CBS and Kadaster gives a more accurate, but delayed indication. In December, the price index fell for the third month in a row, by 2.3 per cent compared to November. In October and November, the price index already fell by 0.5 and 1.0 per cent respectively compared to the previous month. The Home Ownership Market Indicator fell further in December to 73 points (100 is 'neutral' on a scale of 0 to 200). Consumers were not this pessimistic about the housing market since 2013.
INDEX OF PURCHASE AND RENTAL PRICES (2010=100)
Source: Kadaster, MSCI, Oxford Economics (2023), edited by Syntrus Achmea
Shortage in rental market remains high
Market rents of homes owned by institutional investors were 4.2 per cent higher in the third quarter than a year earlier. Compared to the second quarter, market rents rose 0.7 per cent. Vacancy in complexes rented by institutional parties remained stable at around 1.5 per cent. Figures for the fourth quarter for both rents and vacancy rates are not yet known at the time of writing this update (source: MSCI). Vacancy rates have never been this low since the MSCI series began in 2008. The low vacancy rate shows the tightness for rental housing in the freehold sector. With limited new construction activity and proposed mid-lease regulation, this tightness is expected to continue.
MEERSTAD - GRONINGEN
Source: Syntrus Achmea
Invesment market activity remains limited
Transaction volume in the fourth quarter of 2022 was again low at around 0.6 billion euros. This is well below the 1.6 billion euros of the fourth quarter of 2021. Based on these preliminary fourth-quarter figures, the investment volume for 2022 is likely to be the lowest since 2017 at around 4 billion euros. Increased financing costs, high construction costs and uncertainty over regulation have led to volumes remaining low. Another factor is that many institutional investors are overweight real estate due to declines in value in other asset classes such as bonds and equities. These asset classes react faster to changing market conditions than real estate. As a result, falling property values are expected to reduce this overweight.
RESIDENTIAL INVESTMENT VOLUME BY QUARTER (x € BLN.)
Source: RCA (2023), edited by Syntrus Achmea
Higher yields amid rising bond yields
Prime initial yields in the Netherlands rose by an average of 5 basis points in the fourth quarter compared to the third quarter. Compared to a year earlier, the increase is almost 20 basis points (source: C&W). Risk-free interest rates remained stable in the fourth quarter, causing the spread to widen slightly. Average initial yields of rental properties owned by institutional investors rose slightly in the third quarter of 2022 and remain around 4 per cent (source: MSCI). Figures for the fourth quarter will be available later, but given the trend in prime yields, a further rise seems almost certain.
PRIME YIELDS
Source: C&W, MSCI (2023), edited by Syntrus Achmea
Middle-rent regulation emphasises importance of sustainability
In December 2022, Housing and Spatial Planning Minister Hugo de Jonge announced more details on the regulation of the middle rent in a parliamentary letter. As already known, rental properties with less than 187 points will be regulated, giving them a maximum reasonable rent according to the housing rating system (WWS). Meanwhile, it has also been announced that the WWS will be renewed. The WOZ cap will disappear to 187 points, outdoor areas will get more points and there will be a temporary rent cap of 5 per cent for projects under construction or planned. However, the most important change is that houses with an energy label A will get more WWS points for the sustainability label. A dwelling with the label A++++ will get 10 points more than in the old system, for a house with label A it will be 4 points more. In addition, houses with a low energy label (E, F and G) receive a point deduction of 1 to 10 points in the new system. The result is that the difference in WWS points between a house with A++++ and G increases by 20 points. Converted to the allowable rent, this leads to a maximum reasonable rent per month of about 105 euros higher for the label A++++ dwelling compared to the dwelling with label G. This means that recently built complexes are better valued in the new system and that investments in sustainability in existing buildings are also compensated by higher rental income. For tenants, higher rents are compensated by lower energy costs and greater living comfort.
The higher rental potential for sustainable homes will lead to higher valuations. Other regulations such as the requirement of a label D or higher for a rental property by 2030 will reinforce this. Valuers' organisations are also placing increasing importance on sustainability. For instance, in early 2022, the international valuers' authority RICS called for better inclusion of ESG values in valuations and in November 2022, the NVM issued a practice guide to valuers on how to include sustainability in valuations.
In the owner-occupied housing market, sustainability is also playing an increasingly important role. Due to high energy costs and increased renovation costs, owner-occupied houses with a good energy label are in demand. Research by Brainbay (2022) shows that the number of sales of houses with label E or lower has fallen sharply compared to higher labels. The research firm also concluded a sharp increase in house value with a label jump. When a home was made more sustainable from label G to label C, the jump in value in the third quarter was 12 per cent, from label C to label A another 10 per cent. The increased awareness of residential consumers about the energy consumption of the home has also led to a greater difference in home values. Estate agents endorse this and see a growing difference in homebuyer interest between sustainable and less sustainable homes.
We conclude that the effect of the energy crisis as well as future regulation, when investing in sustainable (rental) homes, brings more financial returns in addition to social returns.
EXTRA WWS-RENT FOR ENERGY LABEL
Source: Syntrus Achmea
Outlook
The end of the price decline in the housing market is not yet expected. Although high inflation is easing, (mortgage) interest rates are not expected to fall sharply. As a result, affordability in the owner-occupied housing market will remain poor. Rising wages are still keeping house prices in check to some extent, but the price decline is expected to continue before early 2023. However, scarcity remains high, with high interest rates and construction costs making new construction difficult to get off the ground. As a result, vacancy rates for rental properties will remain low, limiting rental risk and raising market rents.
The announced details on the mid-lease regulation provide clarity in the investment market for rental properties. Owners of nonsustainable rental properties will start offering them on the investment market or leasing them out. Investors will start making more strategic buying and selling decisions. It is therefore expected that there will start to be more movement in the market than was the case in 2022. However, due to high interest rates, investor interest is likely to remain lower than in previous years and the upward movement of initial yields will continue.