Real InSite provides our views on topics affecting global real estate markets. In the first of our monthly articles, we focus on the current attractiveness of the Amsterdam office market.
For more Real Estate articles, check out our Analysis of Real Estate issues.
For the last three years, we have rated central business district (CBD) offices in Amsterdam as a preferred investment (categorised as ‘Very Heavy’) within our Real Estate House View. The sector’s performance has justified our conviction, delivering a strong total return over the last three years (as at Q1 2017). This makes it our top-ranked core European real estate market. So, why is Amsterdam so attractive?
Crucially, it is all about the strength of the fundamentals. The Dutch economy grew by 2.1% in 2016, with further growth of 2.4% expected in 2017. Rising investment and global trade flows should fuel this. At 119,000 square metres in Q4 2016, office take-up reflects the healthy economic outlook. This was the highest figure ever recorded in Amsterdam and around twice the Eurozone quarterly average since inception.
Meanwhile, robust demand and the conversion of old surplus office stock to alternative uses, such as hotels, led to a fall in vacancies to around 13.5%. This was the lowest level for over 10 years. More importantly, the level of ‘good quality’ vacancy represents just 20% of total vacancies, creating pockets of very tight supply in some submarkets.
In the Zuidas (CBD) submarket, for example, vacancy is below 4% and even lower for floor space above 2,000 square metres. London’s banking industry may therefore do well to find suitable office supply in Amsterdam sooner rather than later, depending on Brexit negotiations!
Tightening supply has pushed prime Amsterdam office rents up to around €370 per square metre annually, from around €340 a year earlier. Furthermore, only 2% of stock has gone under construction over the last 12 months, restricted by new tighter planning controls and less appetite for financing speculative developments than in previous cycles. This creates further momentum to the rental market.
Meanwhile, investment in Dutch offices hit €5.8 billion in 2016, the highest level since the previous peak in 2007. With Amsterdam prime yields at 4.1% in Q1 2017, the sector provides an attractive income yield over Paris CBD and regional German office markets. As well as offering an income premium, Amsterdam offices are helping boost total returns from Dutch real estate overall. According to the IPD/MSCI/ROZ Netherlands quarterly index, the Netherlands returned 2.8% in Q1 2017. This makes it one of the strongest markets globally.
Investor intentions surveys point to ongoing strength in the Amsterdam office market. The Dutch office sector is the most sought after in continental Europe (see chart). Meanwhile, Amsterdam’s investment prospects rank sixth among 30 cities in the PWC European Emerging Trends Survey 2017.
We also believe the market has growth potential and compares favourably with other European markets at this point in the cycle. Stable income returns, combined with capital growth driven by both yield compression and rental growth, should support low double-digit returns for prime offices. Definitely time to sit up and take notice!
Source: PMA Investor Intentions Survey Q1 2017