Economy and demographics
Dutch economy shrugs off potential impact of Brexit vote
Despite the initial fears triggered by the Brexit vote, the Dutch economy continued its steady recovery in 2016 and economic growth with a level above 2% actually outpaced earlier projections. This economic growth was driven by rising business confidence and as a consequence a rise in business investments, on the back of a steady rise in manufacturing output and continuing export growth. The main negative uncertainties relate to events outside the Netherlands. The uncertainty triggered by the Brexit vote and the recent U.S. elections, plus a potential economic slowdown in China, may put a damper on growth and confidence, while geopolitical tensions in various parts of the world continue to pose a risk to the global economy.
Population growth continues
Recent decades have seen strong population growth and it is expected to continue in the coming years. The total population and the number of households are expected to continue growing until 2040, stimulating overall consumer spending. The current population is expected to increase from 16.9 to 17.6 million by 2025, while the number of households is set to rise by 70,000 each year from the current 7.7 million to 8.3 million by 2025 and 8.6 million by 2040. The largest growth is set to be in single-person households, which are expected to increase from 2.9 million to 3.3 million by 2025.
Trends and developments in the retail market
Dutch retail market continues to polarise, sees major shift in demand
In the early part of 2016, the retail sector was still reeling from the bankruptcies of department store V&D, retail chain Macintosh, Miss Etam, Perry Sport and pharmacist DA, all of whom failed to keep up with changing consumer preferences and shopping behavior. However, some of these retailers made a restart by restructuring their business through repelling non-core locations and reopening their best performing and potential healthy businesses. At the same time, the Dutch retail market has seen a marked upsurge in new leases with (international) formulas, such as Primark and Zara, who have adapted swiftly and now have a solid position on the Dutch retail market. In addition, much of the retail space in prime locations left vacant by these bankruptcies is currently being taken up by retailers entering the Dutch market or existing retailers expanding their floor space. In early 2016, Canadian retail giant Hudson’s Bay announced plans for 20 new stores in the Netherlands and by October had sighed 13 lease deals for its Hudson’s Bay and Sax Off 5th formulas in former V&D locations. Polarisation among retailers and investors is expected to continue in the next few years and like Hudson’s Bay, new and existing retailers – and investors - are likely to focus on opportunities in the Top cities, with Amsterdam leading the pack.
Major cities will continue to outperform
Occupancy rates are expected to remain high in large urban shopping areas and these areas are most likely to see continued healthy rental growth in the future. Major cities such as Amsterdam, Utrecht, Rotterdam and The Hague are in the best position to take advantage of technological, demographic and economic developments, with a number of regional cities with a strong economic and demographic outlook in the following pack. Central shopping areas that offer the ‘fun-factor’ in the form of cultural and leisure facilities are expected to continue to deliver strong returns, as are ancillary district shopping centres with a focus on daily shopping needs in strong catchment areas. Central shopping areas in medium-sized and small cities will generate lower returns, as will ancillary shopping areas with few square metres devoted to non-daily shopping and peripheral shopping areas.
Physical and digital shops converge
Online shopping continued to grow in 2016 and once again saw double digit growth in the first three quarters of the year, way above the modest growth seen in retail sales through physical stores. Once again, food sales from supermarkets and other grocery-related shops exceeded the growth in non-food sectors such as fashion and electronics. It should be noted that while online shopping is having a major impact on the retail sector, it is largely focused on certain sectors, such as travel, electronics, media and clothes. As a result, it has so far had a limited impact on the overall retail landscape, as these sectors make up only 7% of the total market. An increasing number of retailers are also waking up to the potential of multi-channel or omni-channel sales strategies, and many saw their highest sales increases via online channels in 2016. Large numbers of consumers now see online research as an essential part of their shopping experience and often combine online and physical shopping. That said, consumers are becoming ever more demanding and retailers are being forced to meet the high standards with respect to both online shopping options (delivery or pick-up) and the look and feel of their physical stores. On top of all this, pure online players are now exploring the possibility of opening physical stores and several major online retailers have announced plans for bricks and mortar outlets.
Redevelopment the key to healthy future for retail sector
Given the current overcapacity on the Dutch retail market, most players now agree the future of a healthy and vibrant retail real estate market will require much greater emphasis on redevelopment, commercial refurbishment, marketing and branding, rather than the addition of new retail stock. The redevelopment and modernisation of existing stock will help the sector to avoid a worsening of the supply/demand ratio in the Dutch retail market. Fortunately, government retail policy introduced this year, is aimed at safeguarding the existing retail structure and discouraging the realisation of new retail supply. We expect to see an increase in redevelopment opportunities, especially in prime high street areas where leading retailers are demanding larger floor plans. On top of this, the Netherlands has a large stock of district shopping centres in need of a qualitative transformation, from one-dimensional shopping centres (or shopping areas) to multi-dimensional centres. These represent a major opportunity for investors with a clear vision of the future of the Dutch retail sector and a strong commitment to ‘convenience’ retail.
District shopping centres offer opportunities for value growth
The strong and stable sales growth in the food segment seen in 2016 continues to boost ancillary shopping areas with a strong focus on daily shopping and this is expect to continue for the foreseeable future. The best district shopping centres tend to include a number of complementary specialty shops, such as bakeries and quality butchers, in addition to their anchor supermarket(s), offering consumers a wider selection, greater service and higher quality. That said, even in this segment, urbanisation and ageing divide the landscape into locations that are future-proof and locations that are less viable, as they are located in areas where purchasing power is expected to decline. District shopping centres attract considerable capital due to their historically high yield gaps. When location and the retailer mix are well matched, the risk of vacancy is relatively limited. Thanks to the ongoing recovery in economic growth, there is some chance of value growth in the medium term.
Another development on this front is the growth of new food formulas responding to consumer trends, such as local sourcing and ecological responsibility, and winning continued repeat business. These are helping the larger district centres and small district and neighbourhood centres to keep both occupancy and lease rates at a healthy level.
New leasehold conditions Amsterdam
Currently the municipality of Amsterdam is in a process of renewing the current leasehold conditions. Concept lease hold conditions have been published, which has led to quite some response and turmoil. The reaction of the municipality on this turmoil was that the municipality will review and analyse all reactions and that this may lead to an adjusted concept. At this moment it’s unclear what the final version of the lease hold conditions will encompass and if and to what extent these possibly adjusted lease hold conditions will affect the value of the investments of the Fund in Amsterdam. The Fund has € 57 million exposure at year-end 2016 in Amsterdam for in total 4 properties. Bouwinvest is monitoring this matter closely and possible steps to mitigate any loss of investment values will depend on the outcome of the new leasehold conditions.
Implications for retail real estate
Strong demand for Dutch real estate investments
After climbing to their highest level since 2007 in 2015, Dutch real estate investment volumes came in at € 13.5 billion in 2016, which is about 9% higher than the level in 2015. Of this figure about 2.1 billion euro was invested in retail real estate, which is 22% below the total retail investments in 2015 of € 2.7 billion, however still a high level. Foreign investors now account for around 55% of the total investment volume and are showing continued interest in the investment market. With interest rates in the U.S. slowly increasing and real estate prices in other key markets such as London, Paris and Munich having already increased, investment momentum is picking up in continental Europe, including the Dutch real estate markets. More risk-seeking investors have become more active on both the buy and sell side. Supported by the economic recovery across the country, prices of secondary locations are expected to increase. However, the continuing interest of both Dutch and international investors is quickly pushing up prices. This trend is expected to continue in the coming years. For core investors, it is now essential to have the right relationships in the market and to be a partner in the early stages of development or buying processes, as this enables them to select the right assets for an attractive risk-return profile. Compared to more opportune competitors, investors with in-depth real estate knowledge and active asset management teams will be the ones that can add value and that will therefore outperform in the long run.
Experience is major advantage for high streets in big cities
The ongoing growth in online sales will have less of an impact on A1 shopping areas in big cities. And thanks to the urbanisation trend, larger Dutch cities have by far the best demographic and economic outlook. These cities also offer the best ‘shopping experience’ for consumers, as they tend to offer a wide range of additional attractions, such as historical centres, museums, restaurants and other amenities. Location is another major factor in terms of adding the experience element for both local consumers and visitors. On top of the continuing demand from traditional high street retailers, new opportunities are emerging from the recent trend of online retailers opening physical shops to bolster their brand.
Large and top located retail units in prime shopping streets still in demand
The trend of retailers looking for larger retail units or units on top locations continued in 2016 and is gaining pace. Major national and international fashion chains in particular are demanding more retail space per outlet, especially in the major urban centres of the Netherlands. Due to the relatively small amount of suitable space currently available, demand will continue to be strong, particularly in cities like Amsterdam, Utrecht and Rotterdam. This is helping to compensate for the loss of both large and small retailers in the troubled fashion sector and 2016 saw the fairly rapid take-up of vacant space created by the bankruptcies of a number of leading retail groups.
Consumer convenience drives focused shopping centres
District shopping centres with a focus on daily groceries are also well positioned to thrive in the online environment. Food has proven to be a resilient segment of the Dutch retail market and has seen consistent growth over the past few years. The combination of a local meeting place with supermarkets as strong anchor stores accompanied by a complete offering of high quality daily products and services also means these centres have felt little impact from online shopping. This type of retail real estate remains an attractive long-term investment. Good accessibility and parking facilities are vital.