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Bouwinvest on going Dutch for affordable housing

Bouwinvest’s Michiel de Bruine outlines why it pays to take the long view on affordable housing investing

This article is sponsored by Bouwinvest Real Estate Investors

There is a notable housing shortage in the Netherlands, illustrated not least by last year’s pledge by one group of 34 organizations to build one million new homes in the country within a decade. Michiel de Bruine, director, Dutch residential investments for Amsterdam-headquartered Bouwinvest Real Estate Investors, believes that target will be difficult to reach with costs rising, but that institutional investment can play a significant role in addressing the nation’s supply shortage.

Michiel de Bruine

How might the goal of one million new homes in the Netherlands translate into investment opportunities?

In the Netherlands, the population and number of households is increasing. That, coupled with construction stopping during the financial crisis, and the changing needs of the aging population, has resulted in a housing shortage.

As a result, prices have risen dramatically over the past few years and made it very hard, especially for first-time renters or buyers or for young families, to find an attainable home. There is really a lack of affordable rental or owner-occupied homes in the Netherlands, particularly in the larger cities.

To change this, we think more housing should be built and that institutional investors can help solve this problem, along with investments from pension funds, which are highly interested in this area.

We want to invest in the affordable segment especially as it is the one where the demand is the highest and the supply is the lowest. This makes it a great opportunity for institutional investors.

Beyond addressing the housing shortage, these investments also help to improve and make cities more livable, and they align with our strategy of creating inclusive spaces where people want to live, both now and in the future.

Should institutional investors make any concessions to help solve the housing shortage?

The only way to solve the problem is to work together with local governments, housing corporations and development companies. The mentality of working together fits institutional investors very well – they are used to working together to solve a problem. This fits very naturally with the long-term investment character of our investment strategy.

However, working together also means that you have to make concessions; when the different parties understand each other, these concessions can be balanced. The concession that institutional investors make is not focusing on a maximum return, for example, but rather accepting a more stable income-generating return, making moderate rent increases instead of the highest increases possible. Investing in affordable homes generates stable returns as the supply shortage as well as the demand remains high.

We also want to keep our homes really up to date technically, so we do that constantly, and not only when tenants are calling us about it and they are unhappy in their home! It is a more proactive way of managing the real estate.

Institutional investors also need to accept a long-term investment horizon, which in our case is 20 to 30 years. The average age of properties held in our portfolio is 18 years, and we invest €200 million-€300 million per year. By keeping properties for a long time, it behooves us to manage those properties in a more resident-friendly manner.

How will rising construction costs and a labor shortage affect residential construction and investment in the future?

What we do see now is that we are confronted by increasing construction costs. This is really worrying, as the ambition to add one million new homes in the Netherlands is getting more and more difficult when the construction costs of homes are rocketing.

In the past few years, the government has also increased its regulation of the rental market. There is a social pressure to act to counter rising rents and house prices, and we see that the government and politicians are tempted to take measures in the short term. Along with new sustainability measures, this makes the development of new housing quite an ambitious feat. It is getting more and more difficult to buy the right products at the right location.

What are some of the key risks to consider when investing in new housing?

Unfortunately, as described above, there are a few key risks at this moment.

But on the other hand, we have a new housing minister who has acknowledged the importance of institutional investors. And I must say I have good hopes he will really take our view on the market into account: that regulation is fine, but you shouldn’t overregulate, and they should listen to institutional investors as we are the ones who can really help solve this problem.

For us, one of the biggest risks we have our biggest focus on is the climate. The real estate business has a huge climate footprint at this moment, but it also has the opportunity to pull all the plugs to really decrease the footprint and make real estate climate positive.

When I look at our company, I believe that we are very well equipped to operate in this challenging environment. We are a Dutch housing market specialist, with the right network and have people in the market who enable us to offer low-risk, sustainable investments. Our company started in 1952, and up until 15 years ago we were building the houses ourselves, so we can speak the language of a development company when we are negotiating with them.

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How will climate change and carbon footprint concerns affect future investment in new housing?

One of our fundamental strategy pillars is sustainability. We have a Paris-proof roadmap ready and we are already implementing it, meaning that by 2045 our entire portfolio will meet the Paris Agreement’s net-zero carbon emission goals for 2050.

When we acquire new properties, these have to be Paris-proof. But we also see these sustainability goals from another perspective: energy-efficient, carbon-neutral buildings keep their value longer and in the long run deliver higher returns.

Climate change measures may be expensive to implement in the short term, but over the long term their benefits will provide a greater return on investment. So, there is a benefit for investors and for society as a whole. Users benefit from the low energy cost and greater comfort, and we benefit from creating environments where people want to live, work and be. This also gives us a greater guarantee that our income for our clients will be stable.

Sustainability is an intrinsic part of our DNA. I see so much enthusiasm within our team to do our utmost and reach our sustainability goals. That really gives inspiration to walk an extra mile.

Last year, for example, we ran a climate risk scan on our entire portfolio as a first step toward making it climate resilient. For all our assets, we mapped out exposures to physical risks such as flooding, heat stress, sea level rises and droughts. This is a very good starting point to reach our goal to have a portfolio that is resistant to all these changes.

What role can institutional investors play in increasing housing mobility?

Housing mobility allows people to move from one home to another as they move through the different phases of life. We invest in the mid-rental segment, which is between the regulated and the more expensive segment.

There is huge demand for mid-rental homes and a huge shortage. Many people who start out in regulated housing and then advance in their careers and want to move into a mid-rental home can’t because it is too expensive. That is why we focus on that segment.

Once people who are in the mid-rental segment start earning more money, they can go up the ladder to more expensive rental homes or the owner-occupied homes. Or they get in a relationship or have kids and they want to move to a bigger home.

Elderly people may end up in a family home with a lot of extra space because their children left, and some of them might want to go back to a smaller home in the city, to be closer to shops, museums and theaters. This is just an example of how a housing career can go, and if these people want to move, those homes should be available. Pension funds and other institutional investors can play a crucial role in filling this gap.

Besides standard financial metrics, how do you measure ESG impact with housing investments?

We have a Paris-proof roadmap and a green portfolio, with all our assets having a green label. We want at least 60 percent of our acquisitions to be affordable housing.

On the social side, we also have other indicators in place. One example is our “Home for Life,” which will be a label that shows how suitable a home is for aging people or people with a disability, much like an energy performance label for a house.

As people grow old, more and more of them want a home where they can live for as long as possible. Almost 20 percent of our tenants are older than 60, but it is difficult to gain insights into how suitable a home is for continued living.

With our partners, we developed a methodology to make it possible for our tenants to gain insight into how lifecycle-proof a home is: how accessible a home is; how close it is to shops or bus stops; those things that make it possible for elderly people to stay longer and live longer in their homes. That is one of our social goals within an ESG framework.