Evergreen and resilient
The real estate investment market experienced significant headwinds in 2022, especially in the second half of the year. The Amvest Residential Core Fund showed resilience despite these challenging circumstances. The development of a clear Amvest strategy towards 2035 serves as our dot on the horizon. This long-term strategy, combined with the new evergreen structure of the Fund and our updated Right of First Refusal Agreement, enable us to continue delivering on our commitments to our stakeholders.
The ARC Fund withstands the test of time. Or rather, it withstands the test of the everchanging real estate investment market. High demand in the owner-occupied housing market and the investment market drove up the value of the ARC Fund portfolio in the first half of 2022. What followed was not a slowdown of the investment market – as experts had projected – but a near standstill. Q4 particularly showed significant negative revaluations of assets in our portfolio. Nevertheless, the ARC Fund ended the year with a positive total return, healthy direct returns and historically low vacancy rates.
Strong operational results
Our 2022 financial performance is the sum of our strong operational results on the one hand and modest negative revaluations on the other. The fundamentals of the Fund are sound: our investment focus aligns with the unwavering demand for high-quality, affordable and sustainable housing. Our approach to raising rents is both financially and socially responsible by taking into account the interests of our investors and of our tenants. Because of the combination of high occupancy rates and healthy development of the rental income, we achieved our net income return target. The dividend yield was slightly below target at 2.7%, primarily related to an administrative effect of a Q4 block sale. The moderate negative revaluations in Q3 (-1.8%) and significant negative revaluations in Q4 (-5.4%) resulted in a total return of 1.1% for 2022.
Strategic divestments
We look back positively on the sales realised in 2022. The block sale of a property located in Rotterdam was strategically important. The asset was sold below the January 1, 2022 book value – negatively impacting the total income and therefore the dividend yield – but in line with the market value. This is an important achievement in a stagnant investment market. While we see fewer opportunities for individual sales due to a declining turnover rate, the results of successful sales are excellent. In total, we executed 68 individual sales with a net gain of 21% compared to book value, demonstrating an ongoing high demand for residential real estate. The income from our divestments will contribute to the revitalisation of the portfolio.
Completed and ongoing projects
In Amsterdam and Utrecht, several major projects were delivered. The 360Degrees project and the Twins project in Amsterdam neighbourhood ‘Aan ‘t IJ’, located on the northern banks of the IJ waterway, added 250 homes to the portfolio. In Utrecht, the Steyn property added another 120 homes. The Steyn neighbours the SYP property delivered in 2019. Together, these properties have brought 386 affordable homes to Utrecht's central station area. We also saw some exciting developments outside of the four largest cities. In Eindhoven, the Groot Hartje property – consisting of 201 rental units – is being constructed. That project is a welcome addition to our portfolio; it is located in one of the Netherlands’ fastest-growing cities and next to the Hartje Eindhoven property. Given Amvest's role as an area developer, the Groot Hartje project includes a significant emphasis on area management.
Right of First Refusal agreement extended
The value of the RoFR agreement cannot be understated. The agreement was extended and updated in 2022 to include a rotation mechanism. This rotation mechanism allows both the ARC Fund and the separate accounts managed by Amvest (such as AEGON) to benefit from projects developed by ADF and went into effect January 1, 2023. It ensures future access to new investment opportunities that are in line with our portfolio strategy. And because the ADF is a separate entity, we are not exposed to development risks. This combination continues to set us apart from our peers. Of equal importance to the terms and conditions of the RoFR agreement is our strong relationship with ADF. It has allowed us to successfully navigate the volatile market and execute projects that strengthen our portfolio.
A challenging environment for acquisitions
Our commitment to making future-proof choices and achieving attractive and stable returns for our investors also requires us to be cautious. The addition of new projects to our pipeline slowed in 2022. The availability of attractive investment product that meets our return requirements is limited as construction costs remain high. The funding landscape has become more complex too. The negative revaluations are impacting the Fund's ability to increase equity funding, while the rising interest rates disincentivise the sourcing of new debt funding and our ability to increase returns through use of modest leverage.
Despite the challenging environment, the Fund maintains a solid funding position, which is supported by our low leverage levels. In 2022, we even increased our funding position as a result of securing an additional EUR 100 million of debt commitments and EUR 120 million of equity commitments. We will continue to monitor the markets closely and consider our (investment) decisions carefully against the profile and strategy of the Fund.
ESG performance
In 2022, we remained focused on further improving the quality and sustainability of our portfolio. Our sustainability improvements are part of our roadmap to a Paris proof portfolio. The roadmap entails our short-term and long-term investment decisions to achieve net-zero emissions by 2050. Achieving our goals requires data. We continued to expand our insight into the environmental performance of our portfolio and by using detailed data of our properties by for example obtaining additional GPR certificates. Our extended use of GPR certificates and sustainability improvements across our standing portfolio once again resulted in a five-star GRESB rating. Our score increased and we moved up in the ranking, thereby meeting our goal of remaining among the top residential funds in ESG performance. During 2022, we have implemented the SFDR level 2 directive and classified the ARC Fund as article 8 (light green).
Benchmarking our performance against our peers matters; it allows us to know where we excel and where we need to improve. In 2022, our tenant satisfaction score demonstrated that we excel in delivering high-quality housing, but that we must improve the quality of our service. We scored a 7.2 (out of 10), consistent with the IVBN tenant satisfaction benchmark, but falling short of our target. That is why we devoted significant attention to this topic, which in 2023 will result in several initiatives to further improve the customer journey. The implementation of a new partnership model for property management is now well underway, and we are confident that our investments in people, systems and processes will pay off in improved tenant satisfaction scores.
Regulation of the housing market
As anticipated, the Minister of Housing and Spatial Planning Hugo de Jonge announced the regulation of the mid-priced rental sector, as from 1 January 2024. Over the years and months, we have closely monitored and assessed the impact of the government's plans on the ARC Fund. These plans evolved over time, which contributed to the uncertainty in the market. We are pleased to finally have clarity, even though we maintain mixed feelings on the topic. At Amvest, we acknowledge the affordability crisis. It is also our firmly-held belief that investment funds like ours are key to solving the current challenges in the housing market. It has always been our policy to carefully consider the impact of our decisions, including the raising of rents, on our residents and on society as a whole. And to acquire properties that are consistent with our focus on affordability, quality, and sustainability. Our committed pipeline features predominantly affordable homes in the mid-priced segment and is evidence of our continued success. By staying true to our investment focus, we will act as a responsible partner in solving the issue of affordability, both before and after January 1, 2024.
Outlook
Investing in high-quality, affordable and sustainable real estate is not only the right thing to do, but it also pays off for the Fund. Our strong fundamentals make us resilient and inspire confidence amongst our current and potential investors. We withstand the test of time because we look towards the future. We actively invest in our standing portfolio to meet the expectations of our tenants and investors today and in the years to come. And we act responsibly in determining our next steps. Eventually, the balance in the investment market and interest rates versus returns will be restored. And when it does, we want to be well prepared to acquire attractive new projects through our RoFR agreement with ADF and continue our role in addressing the housing shortage in the Netherlands. Management has performed its going concern assessment and concluded that there are no going concern risks.