Economics

2024 can be characterised as a year in which households, companies and the government became fully accustomed to the normalised interest rates. Now that inflation seems to be in check, we can once again look to the future, with a downwards interest rate policy appearing to be a question of time. Yet the Netherlands is still facing the ramifications of sharp rises in interest rates, so it is to be expected that economic growth will be very modest. Rising costs, including the costs of financing, will be accompanied by cut backs, which will affect the course that the economy takes. Ultimately, this will become even more evident in the various occupier markets in the real estate sector.

Core inflation returns to the preferred level

At the end of last year, the interest rate policy had the desired effect: inflation fell relatively quickly to below the preferred 2% level, spurred in part by falling energy prices. The core inflation rate followed suit, albeit with some delay. At the end of last year, the harmonised core inflation rate in the Netherlands settled at 3.2%, even though it peaked at 8.1% in May 2023. Despite sharp increases in wages during 2023 (averaging at 7.3%), a wage-price spiral is not particularly evident.

Besides curbing inflation, the European interest rate policy is also cooling the economy, which is prompting a downturn in corporate and government investment as well as a decline in household spending. Partly because of this, the expectation is that the current core inflation trend will continue to head towards a more normal level from a historical perspective.

Monetary policy nudges inflation downwards this year

Positive reports on inflation will extend to the monetary discussions due to be held at the European Central Bank (ECB). Last year, these discussions constantly revolved around rising interest rates, but this year they will be about when – and how quickly – the interest rate will have to be brought down. This shift alone is already having an effect, with a significant downward trend in real estate finance rates and interest on government bonds already evident in October/November 2023.

CBRE expects the ECB to lower its policy interest rates towards the end of the second quarter, after which these interest rates will fall from 4.5% today to 4% by the end of 2024. This is a measured reduction in the rate, rooted in ongoing uncertainty and based, for instance, on concerns about a second wave of inflation propelled by excessive consumer spending and/or another rise in energy costs. At the same time, the geopolitical conflicts in Ukraine and the Middle East continue to keep the world in a state of uncertainty. This is compounded by the elections due to be held in the United States as well as in various European countries this year, prompting even more disquiet.

Risk/return on government bonds and real estate once again in the right proportion

In line with falling policy interest rates, and in keeping with the trend in recent months, the expectation is that interest rates and interest on government bonds will decline steadily towards the long-term average. This is good news for the real estate investment market in several respects. Not only will this ensure that the spread between government bond yields and initial returns on real estate will find equilibrium sooner and, as a result, the prevailing depreciation trend in 2024 could finally be broken. Another important consequence of falling interest rates is the increase in investment allocations in real estate by institutional investors. Recently, there has been a considerable outflow of investment volume amongst pension funds and insurers, partly due to the stiff competition for risk-free government bond yields. Falling interest rates and a wider spread of real estate returns may therefore boost the inflow of investment in real estate again over time.

Consumer spending down, partly on the back of shrinking savings

Although falling interest rates should eventually loosen the purse strings for households, it seems as though they are still getting used to the new reality. The effect of interest rates is still unfolding, and this year – much more so than last year – this should be felt by many companies and households.

Higher inflation has only reduced consumer spending to a limited degree in the recent past. This can mainly be explained by households cashing in on a historically high savings ratio for money saved during the corona pandemic, when they spent significantly less money. The savings ratio has since fallen back to a historically recognisable level. Partly in view of this, CBRE has witnessed overall consumer spending fall compared to the beginning of 2023.

One obvious effect is that consumers are now having to adjust their spending patterns downwards, and this is likely to continue for the foreseeable future. That said, this will be offset by income growth in the medium term, giving households more financial scope and boosting a growth in spending once again.

More bankruptcies thanks to higher financing costs, taxation and less spending

A reduction in consumer spending (in terms of volume), exacerbated by corona debt repayment and higher financing costs, is expected to lead to more company bankruptcies. The reduction in the number of bankruptcies recently seems unsustainable given the current economic circumstances. As it stands now, CBRE is assuming that the number of bankruptcies across all economic sectors in the coming year may rise by between 25 and 35%. Incidentally, not all bankruptcies will have the same level of impact on the demand for space in the various real estate sectors.

Yet a combination of relatively moderate growth prospects and a rise in bankruptcies will help create more leeway in the various occupier markets in most categories of real estate. This is a separate matter to sectoral trends, which may affect the dynamics in the occupier market.

If we home in on the sectors, the expectation is that the reduction in the number of building permits for residential property developments, in particular, is going to affect the entire construction chain. This is already evident at the beginning of the chain (i.e. architects, consultants and developers) and is set to trickle down to the rest of the chain. This is a remarkable development, particularly given the fact that the Netherlands is facing an unprecedented and increasing housing shortage. From the perspective of the investment market, this means that more bankruptcies amongst property developers will ‘free up’ development sites.

The rising number of liquidations will also be felt in the retail, offices and logistics markets: there will be more vacant properties in the various market segments. Added to this, taking advantage of possible ‘alternative uses’ for the retail and office space that has become vacant will not be as easy as it was in the past. The legislative proposal for the housing market has had a detrimental effect on change-in-use propositions like this, particularly in the urban areas. These kinds of transformations are less likely to get off the ground, despite the fact that it should be faster procedurally in the wake of the implementation of the Dutch Environment and Planning Act.

Shortages in the labour market continue, despite slight rise in unemployment

The most significant positive trend is undoubtedly the persistently high level of job security in the Netherlands, despite a growing number of bankruptcies. Even though unemployment levels are expected to rise from 3.5% to 4%, this is still extremely low from a historical perspective. This is partly because employment is still rising, so the number of job vacancies is continuing to outpace the number of unemployed. So the jobs market remains tight, which can lead to growth problems, especially at the sectoral level. Shortages in, for instance, healthcare or specialist business services are high. High labour shortages are hindering growth in many sectors.

This immediately presents one of the Netherlands’ biggest challenges: a significant and prolonged labour shortage, which tends to have an adverse effect on further economic growth and will entail making difficult political choices. Many companies are struggling to find staff and – partly because of this – have had to adjust their growth targets. This not only applies to commercial organisations; it also includes healthcare operators that are keen to grow, and indeed have to, because of future healthcare needs. This puts the Netherlands increasingly at the mercy of productivity growth (innovation) and labour migration, in terms of ensuring economic growth as well as keeping up the standards of our social services.

Uncertainty about the business climate going forward after the election results

Migration in particular is being scrutinised on the back of the last election results. It was one of the key concerns during the election campaigns and it is that topic that swept the Party for Freedom to victory. But this party is not the only one bent on drastically curbing the migration flow, with a view to reducing the housing shortage (among other things). Other parties are also advocating a more manageable influx of labour and other types of migration.

While (severely) curtailing certain migration flows may alleviate housing problems, ultimately this is not the solution. In the process, it must be taken into account that the Netherlands is becoming increasingly dependent economically on foreign workers, including high-skilled employees, and therefore migrant workers. Extremely restrictive policies may actually worsen the business climate for leading firms, and with that the overall economic and welfare situation.

Zooming out from the current political situation, we must not forget that the Netherlands is first and foremost a country of political coalitions. A country of compromises and ‘seeking consensus’. Partly because of this, ideas and proposals like ‘Nexit’ or a complete migration freeze can be construed as highly unrealistic when it comes to forming a coalition agreement. From an economic perspective, it is safe to say that political uncertainty never contributes positively to the overall investment climate. As is the case in so many markets, the real estate sector also stands to benefit from clarity and stability. A prolonged process of forming a coalition in 2024 will therefore have a negative impact, especially in the more policy-sensitive sectors like the residential investment market.

Should a centre-right government coalition emerge from a societal point of view, this could provide a relatively favourable baseline scenario for the real estate investment climate in the Netherlands. There seems to be sufficient support for a coalition of this kind to explore ways to improve the investment climate. In the process, those involved recognise that this will require a lot of capital: on the one hand, to improve the housing market situation and, on the other, to make the built environment in its entirety more sustainable. In this light, the legislative proposal for the ‘Affordable Rent Act’ may be reviewed.

Dutch economic power under pressure

An expected decline in spending, increase in bankruptcies and continued labour shortages threaten the Dutch economy with modest growth in the long term if policies do not change. Whereas our economy benefited in recent decades from above average figures compared to many other countries, the picture is not as rosy right now. CBRE is assuming an average growth of 1.15% between 2023 and 2026. This is somewhat lower than our expectations for the Eurozone as a whole, which stands at 1.2%. What is remarkable is the significantly stronger growth forecast for the United States compared to major players in Europe. This makes it clear that the competitive position of many European countries is under pressure and that perhaps the reinforced protectionism in the United States, on the one hand, and the strong focus on making the European economy more sustainable, on the other hand, may (yet) have a negative impact in the short term. However, if competitiveness has to be improved compared to other continents, it must mainly be sought in gains in innovation and productivity, areas in which Europe still seems to be lagging behind, particularly when it comes to developing AI.

That said, with its many high-tech and life science companies, the Netherlands holds a trump card. However, it will be up to the various government agencies to facilitate the growth and support of these companies as much as possible. There has to be clarity as far as the housing policy is concerned so that everyone can get on with the huge new-build construction task that lies ahead of us. This is also not only essential for those currently looking for housing. It also concerns future migrant workers who are desperately needed if we are to keep our prosperity at acceptable levels.

This will safeguard more substantial economic growth potential, especially given the strong foundations on which the Netherlands has rested for many years. Consider education, infrastructure, the fiscal environment and historically strong economic and demographic growth. Finally, we must not lose sight of the sustainability issue. This does not seem to be as high on the priority list of the parties currently forming the coalition government. Yet, in the long run, commitment to this issue is not only beneficial for the economy and broader prosperity of our country; it is crucial given where the Netherlands is located. This calls for attention to this topic, even if it is only for future water management and the preservation of soil quality in the Netherlands.