Maarten van der Spek: Social security for the real estate investor

October 31, 2023

^{This column was originally written in Dutch. This is an English translation.}

By Maarten van der Spek, Spek Advisory & Adjunct Professor of Real Estate TIAS Business School

Politicians are talking about it all the time: social security. Within real estate, we can conclude that politics mainly offers security for real estate investors, while leaving the consumer behind.

Real estate in itself is not very complicated. Pricing, like many other products, is determined by supply and demand. In real estate, however, this takes place at two levels, namely on the rental market, resulting in the rental price, and on the investor market, resulting in the (sales) value.

Due to the recent increase in interest rates, demand from investors has disappeared, causing the value of real estate to fall. Both Dutch commercial real estate (-14.1%, source: INREV) and residential real estate (-13.3%, source: INREV) have shown a significant decline in value over the period Q3 2022 - Q2 2023.

US real estate market in dire straits

However, the most negative stories come from the US. For example, financial problems are expected in the next two years due to necessary refinancing. These have to be done in an environment of substantially higher interest rates, lower real estate valuations and excessive leverage. Banks will demand that investors contribute substantially more capital and the question is whether that is available. The result is that we are already seeing and can expect more defaults. This therefore broadens the investor offering.

Another problem in the US is the office market. This is significantly affected by the effect of working from home. Employees have had their first taste of working from home and many have decided to come to the office much less often. This means that many office meters are vacant and companies are therefore reducing office space. The demand for square meters decreases, the supply increases, so rents decrease. The vacancy rate in San Francisco, for example, has now risen to above 30%. This has led to a rental decrease of almost 17% since 2020 (source: CBRE).

Dutch policy leads to a decline in supply

The contrast with Europe and the Netherlands is great. The working from home effect is much less here, as we had already partly incorporated it into our way of working. The government in most European countries also applies a much more stringent development policy. The result is that supply is still limited and rents are still rising in many cities, especially in inner-city areas.

Rents in the Dutch housing market also continue to rise. This increase is driven by high demand and a structurally limited supply. The government's new rental restriction only causes a further decline in this supply. This creates even more pressure on the average rental price in the private sector, which is good for the investor in this market. In addition, the affordability of the average owner-occupied home is currently very low, mainly due to increased interest rates and historically high house prices. The consumer therefore has few options to buy anything and is forced to rent.

A possible recession could cause a drop in demand in the short term, an increase in supply and therefore a cooling of prices. But if the government seriously intends to keep the housing market affordable in the long term and thus guarantee social security for consumers, then they will have to implement a real policy to structurally expand the supply.

Spek Advisory is an independent consultancy firm that focuses on helping investors and managers optimize the strategy of the private investment portfolio, with the aim of improving the return risk profile.