Netherlands Real Estate Market Update August 2014

Whilst real estate market fundamentals are still to return to a period of sustained recovery, investors have already returned to the market, initially focusing on the prime locations in Amsterdam they are increasingly prepared to go further afield. Dutch commercial real estate has historically been one of the main targets for institutional investors in Europe.

The open, export driven economy in combination with easy access to

NL Transactions % European Activity

modern office stock has historically attracted investors who have been comfortable increasing allocations to the Netherland‘s mature locations. 6 Efficient tax structures attractive to German insurers and pension funds meant they often invested into one of the numerous business park 4 2 locations along the major arterial roads. However, an accommodating planning regime allowed for local administrations to compete against 0 each other for tenants of the many office hubs located in peripheral and non core office locations. The development response of 2004/2005 drove the market to a position of over supply, and the subsequent financial crisis removed demand from the market resulting in almost eight million square meters of office space remaining vacant across the Dutch office markets today.

Several factors expected to dampen Dutch economic growth

. Deleveraging, by private households and by the public sector will result in domestic demand some way below historic averages and Dutch consumers have to deal with a weak labour market and house price adjustment. Banks continue to consolidate their balance sheets which will keep the lending environment relatively tight, furthermore, the Dutch government will have little flexibility to deviate from its current path of fiscal austerity. The size of the Dutch work force is expected to shrink over the coming years and an aging work force would need to be offset by a higher participation rate or by rising immigration. However, the latter has become subject of ongoing political discussion as populist parties have started to occupy the space in recent years. Latest forecasts by Oxford Economics 1 suggest, that the Netherlands will be running below their potential output growth rate until at least 2020, as a result, the Dutch economy is expected to only growth by 1.1% pa between 2013 and 2022. Source: Real Capital Analytics July 2014 7,5 5,0 2,5 0,0 -2,5 -5,0

Dutch economic overview (%)

GDP Growth Unemployment Retail Sales Source: Oxford Economics July 2014 1 Oxford Economics world Overview July 2014 Copy Disclosure (9 pt) with line spacing (11 pt)

Office market

We can expect that long established central submarkets in Amsterdam, Rotterdam and regional hubs such as Utrecht and Eindhoven will likely start to experience prime rent growth from 2015. The Hague, with its vast public sector exposure might need longer to remove its excess capacities. However, given the ongoing slump in economic activity, prime rents in Amsterdam don’t appear cheap. At € 345 sqm/year in prime locations like the Zuidas in the CBD are above the pre crisis level of 2008. 2 Typically there’s a lack of transparency in the Dutch office markets, as prime effective rents can differ significantly from headline rents. Furthermore, secondary space is often heavily discounted on the leasing market, as competition remains fierce. Driven by low construction levels over this cycle and a gradually decreasing amount of modern space in prime locations, prime rents are expected to grow by 1.6% per annum over the next five years with growth set to improve from 2015 onwards.

3

Retail market

Dutch households have suffered from a prolonged period of negative real income growth and rising unemployment. Households are expected to remain cautious for some years and consumers will likely remain cautious.

4 This has consequences for retailers, as real retail sales figures have been negative for 11 successive quarters. Tourist destinations such as Amsterdam are better placed. The prime high street segment has performed relatively well and core locations are in demand by international operators often willing to accept higher rents. Occupier markets are less favourable in the Shopping Centre segment, where prime rents have adjusted slightly over the last 24 months, the outlook appears worse for the larger and medium sized secondary centres. In contrast, smaller neighbourhood schemes, which provide a strong grocery anchor, have seen relatively stable performance and will continue to do so.

Office rents (LHS Index 2008) Vacancy %

125 115 105 95 85 75 Vacancy Prime rents Source: DeAWM Research, PMA 10 -5 -10 5 0

Real Retail Sales Growth % pa

France Netherlands Germany Spain United Kingdom Source: Oxford Economics July 2014 20 5 0 15 10 2 DeAWM Alternatives Research, PMA 3 DeAWM Alternatives Research, PMA 4 Oxford Economics World Overview July 2014 Copy Disclosure (9 pt) with line spacing (11 pt)

Logistics market

Given the Netherlands prominent location close to a number of dominant northern seaports it has retained its strong position in Europe. In terms of tenant demand, the Dutch market is trailing only (the much larger economies) of Germany and France. Much of the recovery of the logistics market is linked to a rise in global trade. A large chunk of European exports and imports are shipped trough Rotterdam, Amsterdam and Belgium’s Antwerp, which is south of the border. But there are other drivers too. The Netherlands is also experiencing a general shift from high street to online trade and the larger cities are also subject to urbanization. However, many logistics operators may be attracted by the easy access to ports whilst at the same time reaching a consumer base of 60-70m people within a radius of five hours drive. Of thel three key real estate sectors in the Netherlands, we expect the logistics sector to outperform as investors continue to benefit from a broader inward yield shift and moderate rental growth. 8 5 4 7 6 Office ShC Source: DeAWM Research, PMA Logistics Copy Disclosure (9 pt) with line spacing (11 pt)

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Ross Adams Industrial Specialist [email protected] Ana Leon Property Market Research [email protected] Andrew J. Nelson Retail & Sustainability Specialist [email protected] Jaimala Patel Quantitative Strategy [email protected]

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Minxuan Hu Property Market Research [email protected] Mark Ho Property Market Research [email protected] Copy Disclosure (9 pt) with line spacing (11 pt)