1

RESEARCH PAPER:

DUTCH RESIDENTIAL INVESTMENTS

IN EUROPEAN PERSPECTIVE

2

OUTLINE

Residential real estate in the investor portfolio

Steady income return

Moderate inflation hedge

Low correlation with other asset classes

High portfolio diversification potential across Europe

The conditions on the Dutch housing market

Regulation is consistent

Economic situation shows positive signs

Indicators for investing in Dutch residential markets are positive

Pricing has improved

Housing shortage is increasing

Non-regulated rental market will be bigger

3

GOOD RISK-ADJUSTED RETURN AND MODERATE INFLATION HEDGE

Residential investments have a good long-term risk-adjusted return.

Volatility of capital growth has been relatively high, and income volatility very low.

Over the past ten years the total return in Sweden, the UK and the Netherlands has only been negative once. For France, Germany and Switzerland this has not occurred even once.

Residential investments give more protection against inflation risk than other Dutch asset classes.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

The NetherlandsFranceGermanyUnited KingdomSwedenSwitzerland

ANNUAL TOTAL RETURNS

Source: IPD (2003 - 2012)

Correlation to inflation 1 year 2 year 3 year

Residential 1 0.30* 0.35** 0.40**

Stocks 2 - 0.09 - 0.09 - 0.11

Bonds 3 0.10 0.10 0.09

Liquidity 4 0.29* 0.33** 0.34**

* Significant at a 90% level ** Significant at a 95% level1 BIS (1971 - 2012) 2 MSCI Netherlands (1971 - 2012) 3 JP Morgan GBI Netherlands 7-10 years (1975 - 2011);

4 3-month Euro deposito (1971 - 2012); 5 FTSE EPRA/NAREIT EU (1990 - 2012)

4

DOUBLE DIVERSIFICATION: IN OVERALL PORTFOLIO AND IN HOUSING PORTFOLIO

Correlations between housing investments and other Dutch asset classes are very low.

So housing offers excellent diversification potential.

Cross-country correlations among European residential markets are low.

So international investment in housing provides good diversification advantages.

The low correlations between the Dutch housing market and other European markets stand out.

Cross-correlation Residential (IPD) Stocks Bonds

Stocks 0.15 1

Bonds - 0.10 1 - 0.09 1

Liquidity 0.03 1 0.20 1 0.23 *3

* Significant at a 90% level ** Significant at a 95% level1 1977 – 2012; 2 1990 – 2012; 3 1977 – 2011; 4 1990 - 2011

Cross-correlation The Netherlands France Germany Sweden Switzerland

France 0.13

Germany 0.09 0.21*

Sweden 0.38** 0.43** - 0.07

Switzerland -0.28* 0.27* 0.59** 0.17

United Kingdom 0.09 0.45** 0.40 0.46** 0.70**

* Significant at a 90% level ** Significant at a 95% levelSource: BIS (1971 – 2012)

5

OUTLINE

Residential real estate in the investor portfolio

Steady income return

Moderate inflation hedge

Low correlation with other asset classes

High portfolio diversification potential across Europe

The conditions on the Dutch housing market

Regulation is consistent

Economic situation shows positive signs

Indicators for investing in Dutch residential markets are positive

Pricing has improved

Housing shortage is increasing

Non-regulated rental market will be bigger

6

RENT REGULATION CREATES INFLATION HEDGE AND REGULATED SECTOR WILL GET SMALLER

Rents, regulation and inflation

Regulated rental dwellings (88% of the market) have a rent increase based on inflation.

This is a reason why housing returns are correlated with inflation.

Regulated sector gets smaller

Up to one million regulated houses could get non-regulated, based on current WWS points.

Due to income-based rent increases regulated dwellings will likely get non-regulated.

Social housing providers have to go back to core business.

So non-regulated rental dwellings could shift towards other landlords.

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0%

1%

2%

3%

4%

5%

RENT INCREASE LINKED TO NL INFLATION

Inflation rate NL

Rent increase

Source: CBS(2013)

7

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0%

20%

40%

60%

80%

100%

120%

RESIDENTIAL MORTGAGE DEBT TO GDP RATIO

Netherlands

United Kingdom

Sweden

Germany

France

RESIDENTIAL MORTGAGE DEBT HIGH, BUT HOUSEHOLD BALANCE SHEET LOOKS HEALTHY

The mortgage-debt-to-GDP ratio has increased rapidly.

The Dutch ratio seems very high, which is caused by

− increasing home-ownership

− increasing house prices

− willingness of home buyers to take out mortgage with high LTV

− growing popularity of mortgages that do not (directly) amortize

Many mortgages have savings account attached, which is currently not in the statistics.

The large mortgage debt is put in perspective by the underlying house values, other assets and the extensive pension scheme in the Netherlands. Hou

se v

alue

Mor

tgag

e de

bt

Ove

rval

ue

Oth

er a

sset

s

Oth

er d

ebt

Pens

ions

Capi

tal

0

400000000000

800000000000

1200000000000

1600000000000

2000000000000

2400000000000

€ 1,158

€ 505,827,454,000

€ 757,875,415,000 - € 652 - € 95

€ 817,336,000,000 2081038869000

BALANCE SHEET DUTCH HOUSEHOLDS (2011)

Source: CBS (2012, 2013)

Source: Hypostat (2011)

8

THE ECONOMIC OUTLOOK IS IMPROVING FAST

The economic outlook has recently started to brighten up.

Consumer confidence is going up, after years of pessimism.

In 2012 and 2013 the Netherlands had negative GDP growth rate of 1,2% and 0.4%, respectively.

Real GDP is expected to increase by 1.0% in 2014, and 1.5% in 2015.

Sources: European Commission (2014), Swiss National Bank (2014)

1995 2001 2007 2013

-45

-30

-15

0

15

30

45France

1995 2001 2007 2013

-45

-30

-15

0

15

30

45Germany

CONSUMER CONFIDENCE

1995 2001 2007 2013

-45

-30

-15

0

15

30

45Sweden

1995 2001 2007 2013

-45

-30

-15

0

15

30

45The Netherlands

1995 2001 2007 2013

-45

-30

-15

0

15

30

45United Kingdom

1995 2001 2007 2013

-45

-30

-15

0

15

30

45Switzerland

9

OUTLINE

Residential real estate in the investor portfolio

Steady income return

Moderate inflation hedge

Low correlation with other asset classes

High portfolio diversification potential across Europe

The conditions on the Dutch housing market

Regulation is consistent

Economic situation shows positive signs

Indicators for investing in Dutch residential markets are positive

Pricing has improved

Housing shortage is increasing

Non-regulated rental market will be bigger

10

DECLINING HOUSE PRICES RESTORE EQUILIBRIUM BETWEEN HOUSE PRICES AND RENT LEVELS

Since the start of the financial crisis Dutch house prices have decreased more than those in comparable countries.

Dutch nominal house prices have fallen 18% and are now back at the year 2000 level.

The house price/rent ratio is an indicator for the attractiveness of rental houses for investors.

Since 2008 the ratio is declining, caused by declining house prices and increasing rent levels.

The Dutch ratio is currently very close to its long-term equilibrium.

HOUSE PRICE / RENT RATIO (1975-2013)

175

150

125

100

75

50

1975 1985 1995 2005 2013

175

150

125

100

75

50

1975 1985 1995 2005 2013

175

150

125

100

75

50

1975 1985 1995 2005 2013

175

150

125

100

75

50

1975 1985 1995 2005 2013

175

150

125

100

75

50

1975 1985 1995 2005 2013

175

150

125

100

75

50

1975 1985 1995 2005 2013

The Netherlands

GermanyFrance

Switzerland

Sweden

United Kingdom

Source: The Economist (2013)

11

INCREASING NUMBER OF HOUSEHOLDS, DECLINING NUMBER OF BUILDING PERMITS

In 2012 there was a shortage on the housing market of about 3.4%.

The number of Dutch households is expected to increase by around 60,000 per year.

Based on the most recent forecasts, Dutch population will grow until 2040.

During the financial crisis there has been a decline in the amount of newly built dwellings.

With a sharp decline in permits granted, the construction of new homes will likely continue to be low in the next two years, resulting in housing shortages.

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

*20

20*

2025

*20

30*

2035

*20

40*

2045

*20

50*

2055

*20

60*

-30000

0

30000

60000

90000

120000

150000

-2000000

0

2000000

4000000

6000000

8000000

10000000

TOTAL NUMBER OF HOUSEHOLDS

YTY differenceNumber of households

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

*0.000

20.000

40.000

60.000

80.000

100.000

120.000

NEW BUILDING PERMITS AND FINISHED DWELLINGS

Owner-occupied

Rent

Building permits new dwellings

Finished dwellings

Source: CBS (2013)

Source: CBS (2013)

12

HOUSING DEMAND STRONG IN URBAN AREAS AND DEMAND WILL SHIFT TO UNREGULATED SECTOR

Household development

Strongest in urban areas, larger cities in ‘Randstad’: Amsterdam, Utrecht, The Hague.

Smaller cities in Brabant: Breda, Den Bosch, Eindhoven.

Many rural areas in northern and southern parts of the country will face decline in housing demand.

Demand for unregulated housing

A growing part of this demand will go to unregulated sector in the next twenty years.

This is due to changing social housing policy and less favorable tax treatment for mortgages.

Households that plan to move are relatively more willing to rent.

Less than - 500

- 500 to 0

0 to 200

200 to 500

More than 500

Expected household development per municipality (2012 - 2030)

EXPECTED REGIONAL HOUSEHOLD DEVELOPMENT (2012 – 2030)

Source: ABF Research (2014)

13

LESSONS FOR DUTCH INSTITUTIONAL HOUSING INVESTORS

This seems to be a good moment to get in.

− The market is priced attractively

− Long-term reforms are implemented

− Scarcity of supply is likely to increase

But the rest of the world does not know it.

− Interviews with international experts and foreign institutional investors show lack of knowledge

− But there would be interest if the right opportunities were presented

− Co-investing with respected Dutch institutional investors is attractive

So fly to the money!