FGH Real Estate Bulletin 2010
’FOCUS ON A NEW REALITY’
The title of the report, ‘Focus on a new reality’, refers to the current economic conditions and their consequences for the real estate market. According to FGH Bank, we are now in a new era. The real estate market has irrevocably changed and real estate players will have to forge a new path.

Recovery with risks
The economy plunged to unheard of depths last year. The Gross National Product contracted by 4%, and we have to go back to the 1930s to find comparable levels. Even at the beginning of the 1980s, the contraction was substantially smaller. The Netherlands is not alone in this, as almost all western economies were confronted with extreme contraction.
Large-scale government intervention and support by the central banks has however prevented a deeper downturn. Above all, the extremely low interest rate is a decisive difference when the situation is compared with the beginning of the 80s. The deepest point of the cycle occurred during the first six months of last year. Since then, the economy has recovered somewhat. This is primarily a result of the improvement in world trade, due to which exports are recovering. Since the third quarter of last year, the Dutch economy has been growing again on a quarterly basis. With this, we are – statistically speaking – out of the longest and deepest post-war recession.
The road back, according to FGH Bank, is however long. Investment and consumer spending declined drastically and no growth is foreseen for 2010, yet the rate of the decline will decrease. Furthermore, making available extra liquidity has helped the economy, but with real growth in the market sector, this will have to be removed from the economic process. As a result, there exists a risk that the nascent recovery will be strangled at birth. Lastly, governments cannot support the market indefinitely. Budget deficits and pubic debt will have to be reduced and paid back sooner or later, which means that recovery in the market sector will be coupled with government cutbacks and possibly increases in the tax and premium burden. This presents a complex problem that means recovery in the short term is by no means certain.

Consequences for the real estate market

• The lowest point for the building sector is still ahead. Postponed investments in 2008 and 2009 will lead to completions of new commercial real estate and housing remaining low in the next two to three years.
• Although the economy has recovered somewhat, unemployment is expected to further increase in 2010. This means that business demand for space will continue to contract. Last year, this led to a substantial decline in office and business real estate take up. Take up will also remain low this year.
• The supply of commercial real estate has increased, due to the absence of demand and an increase in the number of bankruptcies, especially in the office and business real estate segments. In 2010, a further increase in supply is expected.
• An increase in world trade is a positive sign, due to which greater dynamics can be expected in the logistics sector, which was heavily affected last year. Over-capacity will however lead to increased investment in accommodation only in the medium term.
• Consumer-related sectors, such as the retail and housing markets, will primarily be affected by the reticence of consumers. Consumer confidence has already been negative for more than two years. Rising unemployment, a limited pay bargaining range and loss of purchasing power have led to consumer choice being restrained. Retail spending declined substantially in 2009, as did the number of dwellings sold. 
• Supermarkets were a positive exception, which have for now come through the crisis reasonably unscathed. In this sector, however, competition will increase greatly due to the concentration of formulas in the market. This will again lead to price competition.
• Investments in real estate were again affected in 2009. After the halving of new investment in 2008, volume again almost halved last year.

Sticking it out
The real estate market will need time to recover. The first signs of economic recovery are encouraging, but the building sector and real estate investment market are not yet out of the woods. At the same time, real estate has been substantially devalued across the board in the last 18 months. This has caused prices to fall, due to which the time to buy is slowly but surely approaching. Since the second half of 2009, the dynamics of the market have cautiously increased. Initial yields in prime locations have reached their lowest point and are slowly but surely recovering slightly. Investors are thereby opting for core sectors that can achieve a stable, direct yield. Cash flows therefore remain an important basis in the current market.
The fall in value outside the prime locations has not ended, according to FGH Bank. This ensures that, within sectors, there is rising demand for quality and mutual differences are increasing. The extent to which the market will fall is related to the question of whether and to what extent compulsory sales will affect the balance. From the perspective of real estate financing, stable cash flows are therefore crucial where an increase in vacancy levels is the most significant threat. Furthermore, the development of the interest rate is of great importance. It is low and expected to remain so in the short term; however, the market is meanwhile pricing in higher interest rates for the medium term. 

Self-consciously focussing
Real estate players will have to focus sharply on the market, the product and above all on the added value they can provide for clients. The sector must have clearly in its sights where its own added value lies and how organisational form and content can be given to this added value. All this will take place in a market where, in some sub-segments, the tide is slowly turning. In any case, real estate players are very aware of the new reality within which the real estate market now functions. The sector is confronted with the challenge of coping with the new reality, which requires a different approach and focus than before.