Rental market will shrink considerably as a result of this regulatory policy
It is not only new developments that will be affected by the new regulations though: we also anticipate a dramatic shift on the market for existing rental properties - especially in the larger cities. On reletting properties, owners will potentially be confronted with considerably reduced rents. This will prompt them to seek other options. There are four obvious scenarios here:
- Sell the property
- Optimise the property’s WWS points
- Sell the portfolio
4. Continue to let the property at a lower rental income
The choice of scenario depends greatly on the characteristics of the property portfolio and the type of owner. Here it is possible to differentiate between housing corporations, private investors, institutional investors and private equity investors.
Housing corporations are expected to opt for scenario 4: continue to let the property at a lower rental income, as this is aligned with their core values. It involves an estimated 150,000 homes in the current unregulated sector. The housing corporations will continue to let them, irrespective of the segment into which the properties fall following the introduction of the rent regulation. However, this will have an impact on their investment capacity. This negative effect has not yet been calculated, but it will ultimately have an impact on the ambitious agreements between housing corporations and the government to build new homes and accelerate the process of making large numbers of existing homes more sustainable.
Many private investors have spent the past few years expanding their portfolios, partly because of the low returns on other asset classes and relatively favourable fiscal conditions for letting residential properties. In total, this group is estimated to own about 302,000 properties in the unregulated sector, approximately 49% of the total number in this market segment (CBRE Research). Most private investors focus on the smaller home segment, many of which will enter the regulated part of the market. Add to this the fact that the fiscal benefits will largely cease from next year - with the introduction of the fixed saving variant and higher tax rate in box 3 - and the expectation is that many of them will initially seek to optimise the properties’ WWS points wherever possible.
They will examine their properties to establish whether it is possible to improve them based on the points system so that they are awarded a higher total number of points, taking them above the new rent regulation threshold (scenario 2). If optimisation turns out not to be an option, when the leases run out many private investors will sell their properties to private buyers on the owner-occupier market. This only applies to those properties on which rent regulation will have a negative rent effect. As the properties owned by private investors are located throughout the Netherlands, this will not always be the case. The rent effect will not occur - or only to a limited extent - in one quarter of all municipalities as the maximum WWS rent is equal to or higher than the local market rent.
Nevertheless, we expect many private investors to sell their properties in the coming years. A rough estimate puts this number at 50,000 to 100,000 properties. These will be offered on the owner-occupier market in the coming five to ten years when tenants terminate their tenancy agreements. The effect of this shift from rental to owner-occupier will be felt mostly in the big cities: the large number of students and expats as well as the high purchase prices mean that demand for a larger rental sector is particularly high there. The contraction of the urban rental market will only serve to increase this pressure further, especially now that mortgage rates are rising and as a result more demand will remain in the rental sector.
Private equity investors The strategy adopted by private equity investors is expected to be in line with that of private investors. Their portfolios - a much smaller portion at approximately 10,000 properties - are concentrated mainly in the big cities and generally comprise smaller, older properties. These are homes that, based on the legislation’s current contours, will largely enter the regulated sector. Private equity investors will also first review their portfolios and focus on optimising WWS points - making properties more sustainable would seem to be a highly promising move. Yet even so a relatively large portion of these assets will remain within the regulated sector. In this case, the obvious thing to do is to sell them. This will often be done indirectly: by selling the properties as part of a portfolio to an investor who specialises in buying up such properties and will sell them on to private buyers in due course. Private equity investors nevertheless remain essential to new development projects in the Netherlands. In the case of much more complicated locations for new developments, it is precisely these investors who are the catalyst for getting projects started, making them essential to the target of building about 900,000 new homes in the Netherlands by 2030.
Institutional investors/pension funds In contrast to private equity parties, institutional investors mostly own relatively new and medium-sized residential properties. This means they will be less affected by the rent regulation than other groups. On balance this involves about 35% to 45% of the approximately 130,000 homes they own in the current unregulated sector. Rents on these properties will generally fall by 5% to 10% in the long term as a result of rent regulation.
Institutional investors will also primarily seek to optimise their portfolios, leading to a smaller portion ending up in the regulated sector. We expect most institutional investors to pursue a two-tier policy for those properties that come under the regulated sector. Housing complexes that fall entirely within the social sector will be sold in the long term, generally to investors who specialise in buying up such properties.
These investors will sell these properties individually as soon as the leases on them run out. Those complexes in which only a small percentage of the properties come under the regulated sector will be retained in the portfolio and rented out at a lower rate - after all, this is aligned with the broader ESG strategy of institutional investors. Institutional investors seem to be extremely cautious about buying new housing complexes at the moment. And this means that demand for new housing complexes has almost completely disappeared. In the medium term, based on the current regulatory contours, institutional investors will mainly choose to invest in properties that easily exceed the new WWS point threshold. This hedges the risk of the threshold being raised further. All in all, this will result in a sharp drop in investment in new homes by this group of investors, which until now has accounted for 10,000 to 15,000 new properties each year.
Moreover, pension funds are being forced to scale back their investments in real estate because of what is known as the denominator effect. Here we are mostly seeing a reduction in mandates for residential investment in the Netherlands. This indicates that pension funds are also taking into account recent regulatory developments and the potential risk of alterations to pricing in this market when allocating capital. This is already visible in an upturn in the number of housing complexes being sold by institutional investors in the past two months.
The situations and expected reactions of the different types of home owners are causing major shifts in housing market stock. An expected 55,000 to 105,000 homes from the future regulated market will end up on the owner-occupier market. As a result, the proposed regulated social+ segment will initially comprise 225,000 to 275,000 properties, mainly owned by housing corporations. This is 2.8% to 3.1% of the total housing stock in the Netherlands, which is too small to meet the rapidly-growing demand for rental homes, especially now that rising mortgage rates are squeezing lending.
Current, theoretical and future distribution of rental sector in the Netherlands
At the same time a new rent regulation threshold will be created, above which there will be a shortage of homes. We in fact expect rents on these properties to rise more sharply, just as they did in Berlin. Partly out of necessity and because of waiting lists in the
new regulated segment, there will be a larger gap between the small amount of housing stock and persisting demand for it. In the long term this will lead to higher rents and in turn a growing problem of affordability.