By Rogier Bos, Head of Berlin Hyp’s Amsterdam branch office
The Dutch office market continues to be in the focus of international investors, who, with a share of 60%, largely come from the US and the UK. An impressive office transaction volume of €2.9bn was reached in 2015. Amsterdam accounted for the majority of the volume, contributing an all-time high of €1.3bn or about 45% of the overall sum. In 1H16, office building transactions reached a total of €2.4bn, exceeding the 1H15 figure significantly. Companies and thus tenants prefer to locate their operations in economically dominant regions such as Amsterdam, Utrecht and Rotterdam. The economic framework in the Netherlands confirms the positive expectations of office investors: At 2%, growth was above the EU average last year and the country’s economy is still AAA-rated with a stable outlook. The Netherlands also offer one of the largest gaps between the 10-year bond rate and prime yields in western Europe.
Similarly, high or slightly higher economic growth is expected for 2016, with growth in 2Q16 reaching 2.3%. The job market is also sending positive signals as the number of unemployed continued its fall from last year, after having continually risen since 2012. Meanwhile, deficit spending is also down, which should be seen as positive.
In this positive economic environment, change is taking place – particularly in the Amsterdam office market. The segment is characterised by a lack of available large space in prime locations, but also by a still relatively high vacancy rate well above 10%, with significant differences between locations. The best office locations are the CBD (Amsterdam-Zuidas) and the city centre. Yet other sub-markets such as Amsterdam-West and especially Central Amsterdam Zuidoost have become in stronger demand. The north will become a more attractive location with the completion of the new north-south underground line. De Omval and Amstel Business District offer very attractive alternatives. If we look at other cities, central Utrecht stands out, also highly coveted by investors.
B properties, and real estate in secondary locations still often have higher vacancy rates but those are falling. Addressing structural vacancy is a particularly interesting issue. At the moment, office space is being removed from the market through conversions into residential or hotel use. This trend underlines the fact that Amsterdam is an active redevelopment market. As a result, total office space has been reduced by at least 2% to 3% in the last five years. Speculative developments are also being restricted as much as possible by public authorities to avoid introducing additional space to the market. Both of these measures have led to a fall in vacancy rates in A and B locations, even though they still remain among the highest in Europe.
Prime nominal rents made a leap forward in 2015 due to a lack of supply. Compared to the previous year, they grew by 1.3% to €320 per sq.m. per year, with peaks above €370. It is not surprising that hardly any rental incentives are provided to tenants in top locations. In B and C locations, significant reductions are granted in order to retain tenants. The rising market values are also a result of the aggressive monetary policy of the European Central Bank, which pushes investors into seeking alternative assets for returns. Net prime yields (NPY) fell to 4.8% in 2015 and to 4.25% in 1H16. I believe that they may continue to fall even further in Amsterdam in the short term, since they are still relatively high compared to the rest of Europe. In B locations in the larger cities and Dutch provincial towns, NPYs are at 6% or over. It is possible that this difference between prime and non-prime properties could further increase demand outside the top locations.
Last year, Amsterdam posted a total return of 16%. It was only outstripped in Europe by Berlin, which stood at 21.3%, Paris (19.4%) and Munich (19.2%). For the current year, only 8.4% is expected. However, the market requests low leverage in case of low yields, which is an important deviation from the 2006/07 market and a risk-reducing element. It will be interesting to see how companies, both tenants and investors, will react to the scarcity of supply. At the moment, they are discovering new locations in Amsterdam that better meet their expectations. The creative sector, for example, is currently moving to the harbour area. rb