A mortgage rate that is steadily rising, an ambitious plan to build 900,000 homes and the shift from “bricks” to “clicks”. The real estate market is always on the move. What does this mean for the portfolio of a major real estate investor like APG? Robert-Jan Foortse, Head of European Real Estate, talks about the housing market, sustainability and criticism of the “verdozing” of the Dutch landscape (turning landscapes into collections of big boxes).
Summarized
• Ever-changing housing market rules are a bigger problem for investors than regulation per se.
• It is impossible to raise rents on Dutch housing as much as an inflation rate of about 10 percent. But it can be done for hotels.
• Real estate is one of the biggest carbon emitters. It could still be made more sustainable, but that will require new technologies.
From bricks to clicks; from bricks to the internet. That is one of the most prominent real estate trends since the 2008 credit crisis. “People have increasingly been buying more online and less in stores ever since,” says Foortse. “That means less turnover for retailers and therefore less ability to pay the rent, which is at the expense of the attractiveness of physical stores as an investment.” In the Dutch housing market, developments also followed each other in rapid succession, resulting in opportunities as well as uncertainty for investors.
Currently, the housing shortage in the Netherlands is as severe as it was just after World War II. That is why (the now outgoing) Minister De Jonge unfolded ambitious building plans earlier. Does this mean golden times are ahead for a housing investor like APG?
“We are eager to contribute to this housing challenge on behalf of our pension fund clients. So the fact that we will focus more on the Netherlands in the coming years also means that we are looking explicitly at investments in housing. But don’t forget: we have already invested EUR 2.5 billion in Dutch rental housing in the middle rental segment. That could still increase, but we can also invest in retirement centers, starter houses or care homes. We are now at the drawing board for the how and what. We are emphatically doing the same with other parties in the Netherlands, to see what works for them and what works for us, in order to achieve both the financial and social return that our clients are looking for. Due to the fall of the government, however, it is uncertain whether outgoing Minister De Jonge’s plans will go ahead, either in their current or amended form.”
The point system that currently applies to the social rental sector will also be applied to homes with rents of up to 1,000 euros starting next year. This means that the rent of some 300,000 homes will go down by an average of 190 euros. Does this make investing in Dutch rental housing less attractive for APG?
“Regulating a housing market does not necessarily affect its attractiveness. Investors do struggle when the rules change every year. That creates uncertainty, which leads to higher required returns. Incidentally, we understand the political desire to keep housing affordable; that is our desire as well. However, we see in other countries that more regulation usually leads to fewer new homes. And I think everyone agrees that we actually need more new housing. So amended regulation can lead to increasing affordability in the short term, but in the longer term it leads to less new supply, which in turn will drive prices up. For APG, the Dutch housing market remains just as attractive in the longer term. In the shorter term, the situation is somewhat more challenging due to higher inflation, higher interest rates, higher construction costs and falling house prices. As in any cycle, this will also create opportunities for us, and we are specifically active in identifying those opportunities.”
Now that the Covid crisis has been behind us for a while, and the days of free shipping and returns also seem to be over, physical shopping is becoming more popular again. Does that match the picture you have as an investor?
“Yes, we are seeing that too. E-commerce grew very fast for a long time. When Covid broke out, that growth happened even faster, and everyone thought that the e-commerce share would stay that big. Now that the Covid crisis is over, the growth of online shopping seems to be back to the long-term growth rate previously predicted. The underlying trend toward more e-commerce is still there, but it is currently doing somewhat better in the shopping mall. People have spent two years ordering everything on their computers and can now go back to a store to touch or try on the product. That proves that visiting a mall or a downtown is also a form of leisure activity. So, the physical store is not dead. But consumers do have demands. They want the fullest possible range of brands, the latest collections and somewhere to eat and drink while shopping.”
How do current economic conditions like inflation and rising interest rates affect real estate?
“Part of the attractiveness of real estate investments is that there is some correlation with inflation: in fact, rents are usually indexed when there is some form of inflation. On paper this works, but there is always the risk that the tenant may not be able to pay the increased rent. This is why we look for sectors where there is a high probability that tenants will not have payment problems. In the logistics sector, for example, the rent of a building is only a limited part of the operating costs. So there is room there to bear the rent increases. In contrast, it is impossible to raise the rents of Dutch homes as much as an inflation rate of about 10 percent. For hotels, on the other hand, it can be done. After the Covid crisis, people started traveling en masse again, and we expect this trend to continue this year as well. Because of Covid, hotels took a big hit, but the recovery is shaped like a very steep ‘V’, while the trend for other sectors is more like a ‘U’.”
The more energy efficient we can get our buildings, the more we contribute to a better world
In recent years, APG investments in logistics real estate, particularly distribution centers, have doubled to 20 percent. There is also criticism in the Netherlands of the “verdozing” (turning landscapes into collections of big boxes) of the landscape. Does that still play into decisions about whether or not to invest in distribution centers?
“We certainly take that into account. At the beginning of the trend toward more online shopping, we were very focused on investing in those new large facilities. There was a shortage of those at the time, so they were an attractive investment. At some point we said we wanted to get closer to the consumer with distribution centers, because locations close to cities are currently scarce. We are also looking at how best to deal with these ‘boxes’ in terms of ESG, for example by looking at how sustainably they are built. As an investor you are there primarily for financial returns, but in everything we do we are also looking for social returns, or ways to make the world a better and greener place. It’s about looking for the right balance between containing the potential negative impact of distribution centers and their positive impact. That includes ensuring that these centers create much-needed jobs.”
Sustainability is an important factor in APG’s investments. In what ways does the real estate portfolio contribute to this goal?
“Real estate is one of the biggest carbon emitters, so the more energy efficient we can get our buildings, the more we contribute to a better world. Specifically, we are asking all of our real estate investments to participate in GRESB so that we can compare what they are doing in terms of sustainability. We also ask the managers of our investments to measure all individual assets against a certification standard such as BREEAM. This gives us insight into data on the energy consumption of buildings. Finally, we ask all our investments to measure their performance against the CRREM Global Decarbonization Pathways. This initiative, co-founded by APG, shows the extent to which a building meets the requirements of the Paris climate agreement. If buildings exceed the relevant curve, we enter into discussions with the managers of our investments to see how we can ensure that these investments also become Paris-proof.”
At some point all the measures will have been taken. To what extent is there still room for further increasing the sustainability of real estate?
“For now, there is still some room. Even though a report came out last year that said that with all the current technology we have, we can reduce carbon reduction by up to 50 percent. For the other 50 percent, new technologies will have to be invented in the next 20 years. That is why we are already investing in companies that are looking for new technologies that can create more of that room. To this end, we recently added three stakes in PropTech (Property Technology, or real estate technology, ed.) funds in our European, U.S. and Asian portfolios. These funds look for companies that want to use technology to further develop real estate and make it more sustainable. Promising technologies can then be introduced to our assets in order to make our clients’ portfolios more sustainable. Partly because of initiatives like these, APG is seen as a frontrunner in the real estate world.”
Since 2012, APG has been investing less in U.S. real estate, and more in Asia. Is that a result of that continent becoming more important economically?
“This is mostly a snapshot in time, but it is a fact that Asian markets have grown more than those of Europe and America in recent years. Asia is partly about emerging, fast-growing economies with young populations. On top of that, we opened an office in Hong Kong in 2008, giving us access to local networks and real estate markets. This puts us in a better position to invest there and make decisions tailored to local markets. After all, at APG we believe that real estate is a local business. But, like I said, our pension fund clients also have an explicit desire to invest in Dutch real estate and that way make a positive contribution to the participants’ living conditions. So, I think we will focus a bit more on the Dutch market in the coming years.”