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Market developments

Economic outlook uncertain amidst record-breaking inflation

By early 2022, the economy had hardly recovered from the COVID-19 pandemic when the war in Ukraine increased uncertainty in the world. The prices of gas, oil, and wheat increased strongly, driving up inflation rates across Europe and in the Netherlands specifically. Economic growth in terms of GDP slowed down during 2022 to an estimated 4.2%. In Q4 of 2022, the year-over-year growth was only 2.0%. There is a high likelihood of a recession in the second half of 2023; economic growth is estimated at 0.4% for the year (ING, 2022).

Inflation reached 10.0% in 2022, compared to 2.7% in 2021 (CBS, 2023). At its peak in September, inflation reached 14.5%. In December, inflation was down to 9.6% as a result of decreasing energy prices. The rising interest rates are predicted to further bring down inflation to 4.3% in 2023 (CPB, August 2022). The ECB increased interest rates by a total of 250bps between July 2022 and December 2022 from -0.5% to 2.0%. Given the persistant high inflation, it is expected that the ECB will further increase interest rates in the quarters to come. This increase is likely to be substantial again.

As a result of these developments, consumer confidence reached a historic low in 2022. The lowest point was reached in September 2022 at -59. By December, consumer confidence had improved slightly to -52. The unemployment rate remained very low at 3.6%. The labour market is characterised by a large number of vacancies and a shortage of people to fill those vacancies. According to the CPB, the unemployment rate will increase slightly going forward.

On January 1, 2023, the transfer tax for real estate investors increased from 8% to 10.4%, which will have a negative effect on the value of real estate. The majority of the increase in transfer tax will be discounted into the price of real estate.

Figure 1: Macro economic indicators

In percentage (left axis) / Index (right axis)

Source: CBS, 2022; ING, 2022

Double ageing

There is clear evidence of double ageing in the Netherlands. This means that the size of the 65+ population is increasing and that the average age of this population is also rising. In 2022, there were 3,530,000 people aged 65 and older, approximately 20% of the total population. By 2040, this number is expected to increase by 37% to 4,825,000, roughly 25% of the total population (ABF, 2022). By 2040, people aged 75 and older will make up 13.6% of the population, compared to 8.9% in 2022 (CBS, 2021). Consequently, the number of senior households will show the same upward trend.

Because of the ageing population, the number of people with dementia is growing. In 1950, 50,000 people in the Netherlands had dementia. In 2021, this number rose to 290,000, an increase of 480%. According to Alzheimer Nederland (2022), this number is expected to increase to 520,000 in 2040 and 620,000 in 2050.

Figure 2: Development of the number of households per age cohort, 2022 to 2040

Number of households

Source: ABF Research

Many seniors live in homes that no longer suit them, for example because they lack a stair lift or elevator, or because they are too large for their household composition. While the willingness to move is there and increasing, many people stay in their homes due to a lack of suitable alternatives. The Dutch government aims to bring the supply of suitable homes more in line with the demand and has set a goal to (re)build 170,000 zero-step homes, 80,000 clustered homes, and 50,000 homes for seniors with more intensive care needs by 2030.

Investment volumes up slightly amidst rising yield levels

The investment volume in Dutch healthcare real estate has grown substantially, from less than EUR 500 million in 2016 to around EUR 1.2 billion in the last three years, an increase of 140% (Capital Value, 2022). In 2022, the investment volume reached a record high of around €1.3 billion, up from €1.2 billion in 2021.

The number of transactions decreased slightly between 2021 and 2022, while the average deal size increased from EUR 9.4 million to EUR 10.8 million, mainly because of two larger portfolio deals in 2022. Consistent with previous years, the care category represented the majority of the 2022 investments (85%). The share of deals that are a combination of intramural and extramural is growing.

Figure 3: Dutch care real estate investment volume

In €

Source: Capital Value, 2022

The number of international investors decreased slightly last year. International investors acquired €390 million in healthcare real estate, down from over €500 million in 2021, a decline of almost 25%. Because most international investors who are active in the care market are listed companies, the decline of the stock market prices impacted the investment volume.

Furthermore, the volume of newly built properties in the investment volume declined slightly, from €480 million to €445 million. There is still a significant shortage of and demand for senior living complexes in the Netherlands. It is therefore expected that the investor appetite for care real estate will remain high.

The yield levels in 2022 deviated from the trend. Up until Q3 2022, yield levels were declining steadily on the back of low interest rates and strong underlying demographic fundamentals. The rise in interest rates gradually put upward pressure on yield levels. In Q4 2022, yield levels in the care real estate market increased by an average of 20bps. Given the ongoing high inflation, it is expected that interest rates will remain high and that yield levels will further increase in the coming quarters to reflect the higher cost of capital.

Figure 4: Gross initial yields

In percentage

Source: Capital Value, 2022

Strengths and opportunities

  • Substantial growth in the number of elderly households through 2040.

  • The healthcare investment market continues to mature.

  • The demand for assisted living is increasing as the government is incentivizing the use of outpatient care.

  • The Dutch government aims to bring supply of senior living more in line with the demand for suitable homes.

  • Further segregation between costs of care and costs of housing, as well as the upcoming decrease of the NHC (normatieve huisvestingscomponent), are likely to contribute to the development of new assisted living and nursing home concepts.

  • The government is encouraging municipalities to establish (housing) policies for the elderly. An increasing number of municipalities is developing and implementing such policies.

  • Expanded opportunities for combining different healthcare concepts within mid-sized and larger locations.

Weaknesses and threats

  • Investing in assisted living is challenging due to high investor demand and the lack of suitable locations.

  • Uncertainties such as future interest rate levels are putting upward pressure on yields in the residential and healthcare real estate investment market.

  • The total cost of construction remains (very) high, negatively impacting the financial feasibility of new projects.

  • The number of private care providers is rising.

  • Foreign investors and operators are entering the Dutch healthcare market or expanding their allocation.