Even higher real estate transfer tax
The impact of current government policy is also evident in the investment market. Investors face increasing regulation in the housing market.
A broad outline of plans to regulate the mid-rental sector has been announced, but the measures have yet to be finalised. This uncertainty and the current investment climate are making residential real estate investors more cautious. Many newbuild projects are being reconsidered.
To improve the position of first-time buyers in the owner-occupied market, the general rate of real estate transfer tax will be raised (even further) from the current level of 8% to 10.4% on 1 January 2023. 5 This is despite the fact that the Dutch rate was already fairly high compared to other European countries before the increase. The Czech government even completely abolished its transfer tax in 2020 (previously 4%).
The increase also comes just when investors are facing higher financing costs due to extreme inflation, rising interest rates and a deterioration in the economic outlook. In the very short term, the increase may be an incentive to complete planned investment transactions before the end of the last quarter of 2022.
Source 5 https://www.rijksoverheid.nl/onderwerpen/belastingplan/vermogen-en-wonen/overdrachtsbelasting
Investors more critical and more risk-aware
Changing market conditions are weighing on investor sentiment, however. Many investors are more critical and more risk aware. The gap between price expectations of parties is tending to widen, making it more difficult to come to an agreement. The total investment volume in the first three quarters of 2022 amounted to around €11.4 billion, down by around 5% compared to the same period last year. Due to a number of large transactions, the investment volume in the office market in 22Q3 was nevertheless more than double that of the previous quarter.
Despite the downturn in sentiment, the number of transactions in 22Q1-Q3 was substantially higher than in 21Q1-Q3 (+23%). The first half in particular saw a relatively high level of investment activity. In the current market conditions, interest is mainly focused on high-quality real estate at prime locations. Investment activity is also being driven by investors that are less dependent on borrowed capital.
Revaluations are unavoidable
The weaker economic outlook and the substantial rise in interest rates mean investors have higher return expectations. Prices are consequently under increasing pressure, with buyers and sellers adopting a wait-and-see stance. Revaluations are unavoidable in order to match supply and demand.
We expect that the housing market will need price adjustments of 15% to 20% to achieve a new equilibrium. The office investment market is also still seeking equilibrium. In the logistics market, this process appears to be going more smoothly, with sellers already adapting to the higher return expectations. This is primarily because yields in the logistics market have fallen sharply in a relatively short time. This increases the acceptance of lower prices, as buyers who bought several years ago can still sell at a profit. Many sellers are also developers, so margins can still be earned at higher yields.
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