The heaviest blows from the economic slowdown in the Dutch real estate industry are likely to fall on sectors most dependent on discretionary consumer spending, including retail — outside of basic daily necessities — hotels and restaurants, as well as those where short-term leases are prevalent, particularly co-working offices, the latest research from Amsterdam-based investment manager Bouwinvest concludes.
Marleen Bosma, Bouwinvest Head of Research & Strategic Advisory, said: “The coming economic fallout from the coronavirus pandemic is going to hit all areas of the Dutch real estate investment market, but those sectors where consumers and businesses can quickly choose to cut spending, such as non-staple retail, hotels and restaurants and the relatively small co-working office niche, will probably be most affected. Sectors like residential and healthcare should be more resilient because of the underlying strong demand trends and mismatch with supply that have been evident for many years, but there are risks here too. General offices could receive some protection from longer lease structures and the running down of surplus stock that has occurred in the last few years. Logistics real estate lies somewhere in between these two poles for now, with the severe disruption in supply chains in the short term being more than compensated by the robust ongoing growth in e-commerce.” The main highlights of Bouwinvest’s research into the impact of the coronavirus crisis on the Dutch real estate investment market are detailed below by sector:
Since the onset of the coronavirus crisis, footfall in the main central shopping streets of the largest Dutch cities has fallen by around 45% to 65%. Local neighbourhood shopping centres, in contrast, have seen an increased footfall, particularly for supermarkets and some other specific sectors, where sales have jumped. Local shopping centre turnover figures point to higher levels than at regular peak periods during the year. Supermarkets have been the biggest beneficiaries of the closure of restaurants, cafes, bars and other hospitality venues, along with the increased number of people working from home and large-scale stockpiling purchases by some customers. Stores focusing on non-staple goods and services, in comparison, have been negatively affected by the coronavirus. So far more than 2,000 stores have closed their doors in the Netherlands. Online shopping is rising and retailers who are no longer open are now focusing on e-commerce.Retailers are depending on support measures from the Dutch government, which can’t head off the impending heavy blow to the retail sector, but it can certainly help mitigate it. Bouwinvest expects the coronavirus crisis will result in more vacancy and falling rents, but demand may recover quickly provided a deep recession does not take hold.
The Dutch residential market is expected to be relatively resilient in an economic recession due to the structural shortfall in supply estimated at approximately 300,000 homes. The number of mortgage applications is running at high levels for the time being, but this could be dented by rising interest rates and buyers’ concerns over job security and loss of income – factors that will also pressure the rental market to some extent. The Dutch government has not yet introduced any measures for the building sector, but Bouwinvest expects development projects to be delayed as foreign workers return home and disruptions arise in the supply of construction materials. The government is endeavouring to limit the effects of the crisis on the vitally important housing market by implementing a supportive emergency financial package, but the stabilisation or some softening of prices is to be expected.
Office buildings across the Netherlands have emptied out with the government and companies encouraging employees to work from home. But as the majority of these firms have long-term lease contracts with landlords, the direct effects on the rental office market further ahead are expected to be limited. The impact on the most flexible area of the market, the co-working segment, could be dramatic, however, although this comprises a relatively small part of the total office sector. While the overall impact of an economic slowdown on the Dutch office market is likely to be limited to a temporary fall in demand, this could have a stabilising effect on rents after the significant increases of recent years. The repercussions of any recession are likely be less than during the global financial crisis of 2007-08 when the market was characterised by high levels of over-supply.
The hotel market was hit immediately and severely by the pandemic with room occupancy rates collapsing to unprecedented low levels and many operators shutting their doors. Hotel chains with low levels of capital reserves are being particularly hard hit, especially if they are spread over a number of European markets under lockdown and as alternative sources of income, such as hosting events and restaurants, dry up. Further consolidation of the hotel sector is a likely outcome as European markets emerge from the crisis.
The long-term demographic trend of an increasingly older average Dutch population means the intrinsic demand for healthcare real estate has been strong for years. Sadly, if the pandemic spreads further, it will mainly affect the elderly, but we expect demand for healthcare real estate will remain strong. Some institutions may run into financial problems, but Bouwinvest does not see any major dislocation of the sector’s solid fundamental underlying drivers. The short-term pressure from the pandemic will be felt in the ‘cure’ healthcare sector, but as care for coronavirus patients is covered under basic health insurance the financial risk of non-payment is low and most healthcare providers will be able to continue paying the rent. In the event of a surge in the number of infections of a scale recently witnessed in Italy, healthcare providers could face liquidity problems as a result of rising prices for equipment and medicines, although Bouwinvest expects the government would step in to provide financial aid under that scenario.
Logistics supply chains have come under severe pressure from the Covid-19 pandemic with some production and distribution processes at a complete standstill and the threat of widespread redundancies looming. As a result, logistics companies may end up with empty distribution centres while still having to meet rental payment obligations. Given that the retail market share of e-commerce is expected to continue to expand strongly, we expect that the logistics market will prove to be resilient once the situation normalises.