Market developments

Economic slowdown as a result of increased interest rates

Since the end of the Covid-19 pandemic in late 2021 and the start of the war in Ukraine in early 2022, the inflation rate has increased significantly, exceeding 10.0% in the second half of 2022. In an attempt to slow the economy and therefore inflation, the ECB raised the deposit rate ten times in a row to 4.0% (ECB, 2023). The rate hiked proved effective; inflation reached its highest point in September 2022 (14.2%) and fell to 1.2% by December 2023 (CBS, 2024). Inflation was 3.8% for the entire year of 2023 (CBS, 2024), which is less than half of the 2022 rate.

Economic growth has slowed significantly due to the higher interest rates. Whereas the economy grew by 1.9% in Q1, the Netherlands entered a mild recession following moderately negative growth in Q2 and Q3 2023 (CBS, 2023). In Q4 economic growth was -0.5% on an annual basis and +0.3% on a quarterly basis. This means that economic growth in 2023 as a whole will be around +0.1% (CBS, 2024).

Despite limited economic growth, the labour market remains strong. The high demand for labour resulted in a low unemployment rate of 3.6% in December 2023. The number of job openings exceeded the number of job seekers (a ratio of about 120 to 100), indicating that the labour market is very tight. This is especially true for the health care market, where the increasing labour shortage is having a significant impacting on health care providers.

High inflation is also resulting in strong wage growth, which reached 6.9% in December 2023. The average wage growth in total for 2023 was 6.1% (CBS, 2024).

Since late September 2023, the ECB has held the interest rates steady at 4.0%. In response to this pause and due to the expectation that the ECB will lower the interest rate in the near future, 10-year government bond rates started to decline, reaching 3.3% at the start of October and 2.3% at the end of December 2023 (Investing.com, 2024).

On 1 January 2023, the transfer tax for real estate increased from 8.0% to 10.4%.

Figure 1: Marco-economic situation Dutch Economy

^{In percentage (left axis) / Index (right axis)}

^{Source: CBS, 2024; Investing.com, 2024; ING, 2024}

Economic outlook is more positive

The economic outlook is quite favourable. Although economic growth remains low due to relatively high interest rates, there is no sign of a major recession. Oxford Economics, CPB, ING, DNB, Rabobank and ABN AMRO expect, on average, moderate economic growth of 0.9% in 2024 and 1.2% in 2025. Due to the slowing of economic growth, the unemployment rate is expected to increase slightly to 4.1% in 2024 and 4.3% in 2025.

The inflation rate is expected to continue its downward and reach 2.8% in 2024 and 2.2% in 2025 (Oxford Economics, 2023).

In the long term, the 10-year government bond rates are expected to remain relatively stable at 2.8% in 2024 and 2.7% in 2025, and to decline to 2.0% in 2027 (Oxford Economics, 2023)

Demand for elderly housing remains strong

There is clear evidence of double aging in the Netherlands, meaning that the size of the 65+ population is increasing and that the average age of this population is going up. In 2023, there were 3,602,500 people aged 65 and older, which is approximately 20% of the total population. By 2040, this number is expected to increase by 34% to 4,830,500, roughly 25% of the total population (ABF, 2023). By 2040, people aged 75 and older will make up 13.5% of the population, compared to 9.2% in 2023 (ABF, 2023). Consequently, the number of senior households will show the same upward trend.

Because the population is aging, the number of people with dementia is growing as well. In 1950, only 50,000 people in the Netherlands had dementia. In 2022, this number rose to 295,000, an increase of 480%. According to Alzheimer Nederland (2023), this number is expected to more than double in the next few decades to 517,500 in 2040 and 623,000 in 2050.

Figure 2: Development of the number of households by age cohort, 2023 to 2040

Number of households

Source: ABF Research, Primos, 2023

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 most seniors are willing to move, many choose to remain 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. By 2030, the government aims to (re)build 170,000 zero-step homes, 80,000 clustered homes and 50,000 homes for seniors with more intensive care needs.

The government has the ambition to add 35,000 homes for the elderly population to the housing stock annually. However, only 1,700 homes were delivered in 2023, achieving just 5.0% of the target (Capital Value, 2024).

Investment volume down due to rising interest rates

The investment volume in Dutch healthcare real estate grew substantially in 2022 but began to decline following the interest rate hikes and changes in fiscal regime. Investment volumes declined by 57% in 2023 from over €1.4 billion in 2022 to just €625 million in 2023. The investment volume was relatively high in the second half of 2023, approximately €500 million.

The number of transactions decreased sharply as well. In 2022, there were 134 transactions for a total of €1.4 billion. In 2023, there were only 60 transactions for a total of €625 million. The Luxor 2+ portfolio acquired by the AL&C Fund is included in this amount. Similar to the last few years, intramural, extramural and care apartments remain the most dominant sectors, accounting for 87% of the total investment volume.

Figure 3: Dutch care real estate investment volume

In €

^{Source: Capital Value, 2023}

In 2023, institutional investors accounted for €380 million or 61% of the total investment volume of €625 million. Other investors, such as private investors and (listed) funds, made relatively small investments. Furthermore, domestic investors were the most active in the market, accounting for 82% of the investment volume. Housing associations invested only €72 million, which is 37% lower than last year.

The investment volume in newly built properties experienced a relatively small decline and fell by just 20% from €475 million in 2022 to €380 million in 2023. Newly built properties accounted for 61% of the investment volume, up from 33% in 2022. The market for existing properties decreased to €190 million in 2023.

According to Capital Value, investors have €4.5 billion available to invest in ‘impact funds’, which generally include healthcare real estate and senior living funds.

Sharp increase in gross initial yields

Gross initial yields for healthcare real estate have increased sharply due to higher interest rates and lower investor interest. From their lowest point in Q3 2022 to Q4 2023, gross initial yield levels increased by 55 to 70 bps. Because of the relatively high investment activity in the last two quarters of 2023, there was no additional upward yield shift in Q4 2023.

With the risk free rate (10y Dutch government bond) of approximately 2.75% and the gross initial yields 4.70% (extramural real estate), the risk premium for healthcare real estate has a minimum of 190 bps (Capital Value, 2024).

Figure 4: Gross initial yields healthcare real estate

In %

^{Source: Capital Value, 2023}

Conclusion

The ECB stopped increasing the deposit interest rates when they reached 4.0%. The 10-year government bond rates decreased from 3.3% at the start of October to 2.3% at the end of December.

Inflation has been gradually decreasing, reaching 1.2% in December 2023. Inflation was 3.8% for the entire year of 2023.

The economy entered a mild recession in Q2 and Q3 and began to grow again in Q4. Economic growth reached 0.1% for the entire year of 2023.

Due to the high interest rates, investment volumes plummeted. In 2023, the investment volume in healthcare real estate was around 60% lower than in 2022. There was a significant shift in gross initial yield levels in 2023. Yields increased by 70 bps from the market peak in Q2 2022 to Q4 2023.

The transfer tax for real estate investors increased from 8.0% to 10.4% on 1 January 2023.