Financialization of Dutch residential real estate : a perspective from institutional investors

(1)

1

Financialization of Dutch residential real estate:

A perspective from institutional investors.

Graduate School of Sciences University of Amsterdam

Supervisor: Sara Özoğul Student: Scato de Smit 12295272

Submission date: 12 August Pages: 47

(2)

2 Abstract

The housing market in the Netherlands in the period 1945 until the beginning of the 1980’s, was strongly regulated by the national government. Nowadays, financialization and neoliberal policies are changing the housing market. The relation between financialization and housing is an under-researched topic in academic literature. As a consequence of financialization, the volume of pension’s funds and insurances increased. Institutional investors manage pension funds and insurance money of households. The purpose of this study is to identify the relationship between the market dependency of Dutch governance in housing production and Dutch institutional investors. The behaviour and investments of institutional investors will be discussed. In addition, Dutch housing policies will be analysed, since they have a significant impact on the investments and behaviour of institutional investors. Policy makers, investors and consultancies will be interviewed. An investment and behaviour analysis and policy analysis will be used in order to assess the impact of the market orientation in the Dutch governance of housing production on Dutch institutional investors.

Key words: Financialization, housing production, institutional investors, neoliberalism, portfolio theory, Dutch residential real estate market

(3)

3

Chapter 1 Introduction

Housing production in the Netherlands is an under-researched topic in science and a hot topic in real estate practice. “The speed of housing production is too low, investors lose their confidence in housing production in Amsterdam and housing transaction prices are bearing to a record in 2018” are frequent newspaper headings. Multiple interests of stakeholders, politicians, institutional investors, private investors, citizens and scientists increase the complexity of this topic. Citizens would not like an increase in rent, institutional investors need to have minimum yields and politicians would like to have a balance in societal interests.

There is a difference in perspective in science with regard to housing production. Economists would approach the problem of housing production from a financial point of view: for instance, what are suitable strategies to finance housing for the lowest price. Testing empirical data is the most frequent used scientific method. The outcomes of these studies are published in technical literature. On the contrary, planning and sociologists would approach housing production from a policy, an inclusion and exclusion point of view. An example question would be: what effective housing policies are to enhance community and inclusion in a neighbourhood. The outcomes of these studies are published in critical literature. Both types of studies are relevant to understand housing production in the Netherlands, but they are too one-sided to give a holistic view. These studies are either focused on finance or on policy, a well-integrated approach is rare in science. This dissertation addresses the abovementioned gap in literature. It would provide insights in the complexity of housing production, the perspectives of institutional investors, local and national policy makers. These insights are relevant for society, since affordable housing affects a lot of Dutch households. The following paragraphs I will give a short introduction to the Dutch residential real estate market and institutional investors.

The Dutch Real Estate market developed itself to a full and liquid market with a proper performance track-record. The development of the pension fund industry is only one of the reasons why the Dutch Real Estate Market became a complete liquid market. The capital funding system led to enormous reserves of pensions with a total value of €1000 Billion in 2013. The capital funding system is a system where pension premiums are invested to pay retirements of the elderly people. The total value of reserves of Dutch insurers was €400 million in 2013. Originally, pension funds invested only in risk remote products, such as shares. The demand in residential real estate leaded to demand in housing, financed by pension funds. The investment volume of pension funds became less, because of the increasing position of housing associations and increasing home-ownership. Retail and office became important investment categories in the seventies because of the rise of financial services and retail concentrations. In the end of the nineties, industrial real estate became an investment category as a result of standardisation in buildings and multi-tenant buildings (Vastgoedwijzer IVBN, 2015).

The transition from investing in direct real estate to indirect real estate is an important development for Dutch pension funds. Investing directly in real estate means that investors do the property management by themselves. Maintenance rent contracts and tenants are one of the tasks of investing

directly in real estate. APG and PGGM, one the biggest pension funds, started to invest indirectly in

real estate from the nineties onwards. Indirect real estate investment means that pension funds invest in real estate funds rather than in buildings. The portfolios of Dutch pension funds are nowadays completely indirect, which means that pension funds do not invest in buildings but in specific real estate funds. Risk management and performance are the main advantages to invest indirectly in real estate. The Dutch National Bank supported this transition (Vastgoedwijzer, 2015).

(5)

5

Real estate markets are characterised by high transaction costs compared to other markets, especially the stock market. The involvement of intermediaries in transactions are the main reasons for high transactions costs in real estate (Nozeman, 2014). As a result, the exact size of the Dutch residential real estate is complicated to be measured exactly. Since, not all involved intermediaries and investors publish their information: the type of deal, the purchase price and the size of the concerned building (IVBN, 2015). There are several types of investors who invest in the Dutch real estate market, namely: Family offices, private investors, commercial banks, funds and institutional investors. About the latter, there is a widespread discussion about the exact definition of an institutional investor. The IVBN, a lobby organization which serves the interests of institutional investors in the Netherlands, uses the following definition: a real estate enterprise which manages extensive real estate portfolios. It manages these extensive portfolios for pension funds, insurance companies and commercial banks for the long term. In contrast to opportunistic parties, such as private equity companies, which invest in the short term. Nowadays, institutional investors invest in residential, retail, industrial, offices, healthcare and other real estate classes. This dissertation focuses exclusively on residential real estate. The objective of this dissertation is to understand the impact of policies on the investment behaviour of institutional investors with regard to housing production. The theories behind neo-liberal housing, portfolio theory and policies will summarize the existing knowledge. They do not exclusively focus on the Netherlands, but also on other countries, such as France and Germany. The reason for this broader scope is that there is little known about the interaction between policies and housing production of institutional investors. Critical literature provides little insights in finance of property and the decision-making of institutional investors. Technical literature is only focused on testing empirical data and neglects the processes of housing production. The discussion of both aims at to contributing to understand the gap in literature. In order to research the impact of policies on the investment behaviour of institutional investors three methods are used. Firstly, an analysis of policy documents in order to provide insights in housing policies. Secondly, interviews to provide insights in the interaction between housing policies and the investment behaviour of institutional investors. Thirdly, investment data of residential real estate transactions provide insights in changes of investment volume over time. This data is provided by Savills Research & Consultancy. The mismatch between strict policies and investment interests of institutional investors, the market dependency of local governments on institutional investors and the growth of residential real estate as an asset class are the most important outcomes of this study. Moreover, strong conflicting interests between commercial and political stakeholders, lack of planning capacity and a strong demographic growth in the Randstad increase the complexity of this study.

(6)

6

Chapter 2 Critical and technical literature lack in understanding the

complexity of Dutch housing production

Neo-liberalisation and the financialization of housing

Neoliberalism is characterized by the fact that the market has the superiority over the state. Brenner and Theodore prefer to speak of neo-liberalization rather of neoliberal, since it is an ongoing process of institutional change and not an end state (2002). Institutions restructure dominant patterns and shift in institutions take place (Peck and Tickell, 2002). Generally, neoliberalism in governance presents a shift from welfare, direct service and distributive policies towards a more market-oriented and competitive governance. The doctrine behind the idea of neoliberalism is that society would function better under a market logic than under a state-directed society (Swyngedouw and Moulaert, 2002). An important characteristic of neoliberalism is that cities have become strategic targets and proving grounds for neoliberal policy experiments and institutional innovations. Such innovations allow organisations to reform themselves in a collective choice to be better prepared for uncertainties (Patterson and Huitema, 2018). Cities are positioned at the frontiers of neo-liberal formation and implementation, which lead to the fact that they become sites of market-oriented urban development (Heurkens, 2012). Large-scale urban development projects are seen as new urban policy, such as urban flagships, a marshalling point to attract more investments (Zenker and Beckmann, 2013). These projects have always been on the agenda of local governments, however in the last 20 years there has been a drastic change in reorganisation of planning and planning policy, which led to the rise of new tools, institutions and planning relations between the private and the public sector (Taşan-Kok, 2010). The process of neo-liberalization changed state-market relations and cities have become strategic sites of investments.

Neoliberal policies in housing entail the promotion of home-ownership and focusing on financial institutions which finance home-ownership. The status of housing in a neo-liberal context is therefore that it is a source of income and magnet for investment. Shifts in public policy in the 1980s and 1990s reflected these aspects (Forrest, 2015). Privatization of public housing provision is an example of a neo-liberal development, since state support diverts into home-ownership and the deregulated housing sector. For example, social housing suffered the largest share of public expenditure in the late 1970’s in the United Kingdom. Privatization of social housing was therefore attractive for local authorities. This neoliberal policy regime initiated by the government of Margaret Thatcher, emphasised home-ownership and reliance on the market rather than on the state (Newman and Ashtonô, 2004). Privatization and financial institutions financing home-ownership are essential parts of neo-liberal policies.

The concept that governments would steer public housing policies cost effectively turned out not to be correct, since, the costs of social housing suffered high expenditures. This gave rise to alternative modes of guiding socio-economic development. For instance, the transition from government to

governance. This transition entails new forms of intra-organizational collaborations between the

government, market and civil society (Rhodes, 1996). A change from a top-down structure to a structure where more actors play a part Traditional legal and practical boundaries between government and businesses were increasingly blurred (Goldstein and Mele, 2016). Collaboration in this “scattered landscape” took place in new forms of arrangements such as public private partnerships. And increasingly, the balance of power and influence shifted from government to the market. Hence, public policies became dependent on the market and private actors. As a consequence, power

(7)

7

dynamics between public and private sectors shifted in urban development, actors collaborated in scattered landscapes and boundaries got blurred.

Next to the shift in public policies from distributive and welfare coordinated policies towards a more market-oriented government, financial liberalisation and deregulation of the financial sector changed the economy. Financial liberalization and deregulation combined with digitalization made capital more “footloose”. The deregulation of finance means that the influence of central governmental power has been reduced (Fernandez and Aalbers, 2016). This process started in the 1980’s. At the same time, investments in several economic sectors became financialized. In “real” economic sectors returns and risks of investments in goods and services are related to production. In “financialized” economic sectors the risks and returns of investments do not correspond to production anymore, but to the financial economics itself. The surplus value from these economics is called fictitious capital (van Loon and Aalbers, 2017). In addition, the dismantling of the institutional welfare system and a financialized residential market are key drivers for capital seeking profitable investments in residential real estate. An increasing volume of pension schemes, insurances, and wealth funds managed by institutional investors is looking for profitable investment in the developed world since the 1980s. As a result of over -accumulation of capital, such capital is always looking for new return of investment, including the built environment (Harvey, 1985). Consequently, deregulation and financial liberalisation led to the financialization of residential real estate.

Neo-liberalisation and housing in the Netherlands

In line with the above trend, the role of the Dutch government in housing changed in the 1980’s as well. Growing deficits of the national government led to down-scaling of subsidies for social housing. Housing associations were gradually set apart from the national government rules and regulations and less strictly controlled, and eventually privatised (Rolnik, 2013). The shift from a strong institutionalised housing provision system to a market-based housing system, fits in the neoliberal ideology (Van Gent, 2013).

Between 1945 and the 1980’s strategies of spatial interventions in urban regions in the Netherlands were performed by a proactive national government. As mentioned above, the neo-liberalization of markets and globalisation changed housing provision in the Netherlands. Another considerable degree which followed simultaneously was the emergence of new intergovernmental relations. The centrality of the former “welfare state” shifted from national to municipal level (Salet et al., 2003). This process is called decentralization or rescaling of the national government (Brenner, 2004). Spatial planning systems consist of division of roles, powers and tasks between several layers of a government. The Dutch housing policy has undergone a strong market transition. The financial risks of the development of housing were transferred from the national government to local governments and private actors, such as institutional investors (Priemus, 1998).

The neo-liberal political-economic principles of deregulation, decentralization and privatization resulted in market-oriented urban development. Urban planners, officials and strategic advisors for the municipality increasingly needed to act within market environments. From a supranational level, the European Commission decided in the beginning of the 21th century to advocate r formal public-private cooperation in urban development, next to tendering principles of competition. So Private sector led- urban development in the Netherlands has been promoted from both a national and supra-national level. At the same time, public benefits of private-sector urban development are often limited. For instance, municipal officials argue that it is difficult to integrate public amenities and benefits into private sector led- urban developments, resulting in mainly private benefits for urban development (Heurkens et al., 2014).

(8)

8

Homeownership was actively promoted by the Dutch Government from the 1980’s onwards. The construction of social-rental dwellings decreased from 1990s onwards, while the construction of non-subsidized dwellings started to grow (Van Gent, 2013). The rate of homeownership increased rapidly between 1970 and 2012 as illustrated in figure 1. Financial innovations in the form of securitization provided cheap funding in the form of new mortgage products, i.e. interests-only mortgage and investment-backed mortgages which maximised loan capacity. The Dutch Housing market became heavily exposed to structures of refinancing of debts. As a consequence, the Dutch homeowners are among the most leveraged in the world (Engelen, 2015).

Figure 1: Ministerie van VROM ad DG Wonen en Bouwen, 2007;2012).

The privatisation of housing associations is also part of the earlier mentioned market transition. Housing associations were privatised in the Netherlands in the last decade of the twentieth century. Not only focusing on their core task, but also on the more expensive deregulated rent-housing sector. In addition, housing associations borrowed money for a wide range of activities, land speculation, commercial real estate projects and derivatives speculation (Aalbers et al., 2017). The Dutch government argued that housing associations should focus more on their core business, supplying lower-income households with affordable housing. The amendment of the Woningwet in 2015 aimed at limiting the tasks of housing associations (Rijksoverheid, 2015). In neoliberal governments, the state may use its power to intervene in order to enhance market dynamics (Brenner and Theodore, 2002). In the case of the Woningwet however, the national government limits the tasks of housing associations and increases the opportunity for new actors who would like to invest in the deregulated rent-housing sector. The Woningwet can therefore be interpreted as a “neoliberal policy”.

As mentioned earlier, financial deregulation and financialization started in the 1980’s. The Netherlands is characterised by an international oriented banking system, a well-developed pension system and sophisticated financial markets. The Dutch financialization is closer to Anglo-American economies than continental Europe. The open Dutch economy became highly financialized. The baby-boomer generation did not keep its money in saving accounts, but gave a boost to funds, private banking and asset management. The privatisation of the pension fund for governmental employees, resulted in large investments in assets which were listed on the Amsterdam Stock Exchange. (Fernandez, 2010). As mentioned above, such capital is always looking for new return of investment. In conclusion, the Dutch economy became highly financialized.

Integrating critical and technical literature on residential real estate investments

The previous sections described the rise of neoliberal policies in housing, the shift in public policy and the role of financialization in these transitions. This paragraph integrates critical and technical

(9)

9

literature on residential real estate investments in order to explain investment patterns and the behaviour of property investors. Academic interest in authorities and property management has been strong with regard to property-led urban policies, especially since the implementation of neo-liberal urban policies in the UK, USA and other Western European countries, summarized as the critical literature. These theories and papers provide insights in shifts in governance, policies and other socio-economic regulations with regard to residential real estate. So academic engagement with neo-liberalisation provides critical insights into Marxist traditions (Harvey, 1985) and processes of property-driven real estate (Theurillat, Rérat and Crevoisier, 2015). However, critical literature is often not considering the diversity of private sector actors and lacks understanding of private sector processes. As institutional investors and pension funds are concerned, their decision-making process and the functioning of pension funds are under-theorised (Theurillat, Corpataux and Crevoisier, 2010). Especially, the perception of any type of investors towards residential real estate and property. From an academic perspective, there is little known about the rise of institutional investors who started to invest in property from the 1990’s onwards (Guironnet, Attuyer and Halbert, 2014). This is due to the fact that technical literature tries to understand risks of property investment strategies and whether diversification of strategies can add value to real estate investments, for instance (Maier, 2009). Moreover, financialization of housing is a concept that has been used by a wide range of scholars in the critical literature. It describes how capital puts pressure on commodities, public services and debts to transform into investable financial products. Besides this increasing pressure, which is worth mentioning trend, it does not explain why investors started to invest in property, or why the supply of housing has been transferred to the private sector. In short, the technical literature is too empirical and the critical literature is too global in order to explain and identify the rise of financial, institutional and private investors who started to invest in property from the 1990’s onwards. Scholars started to engage with financialization as a concept, but there are gaps in terms of explanations on why investors invest in property.

During the post-war era in Western-Europe, residential and commercial real estate investments responded to the needs of national industries. Property markets were locally organised, financed by local banks and real estate properties were often held on the balance sheet of corporations. Financial liberalization and economic globalization in 1980’s and 1990’s changed local property markets into international property markets, and resulted in the fact that investors entered the property markets (Wijburg and Aalbers, 2017b). The rise of institutional investors such as pension funds occurred at the same time as financialization (Clark, 2000). Specifically, financial reforms in the 1980’s and the 1990’s resulted in the disappearing of post-war credit restrictions to mortgage lending and real estate development. As a result, commercial banks and real estate developers increasingly turned towards property construction. This trend differed per country, since financial reforms varied across the world. Next to these socio-economic and political reasons, the perception of institutional investors towards residential property may be justified by two financial reasons, according portfolio theory. Firstly, housing property helps to cuts down the risk of an investment portfolio, since it has a low correlation with the classic assets, bonds and shares. A low correlation means that one assets gain is proportionally matched by the other asset’s loss. An investment in property in a portfolio of different assets spreads the risk for an institutional investor. Secondly, residential property provides a hedge against inflation. The correlation between the returns on housing and inflation are normally higher than zero (Markowitz, 1952). Portfolio theory suggests that investments in property provide a low-risk alternative in a portfolio due to the low correlation. Despite this low correlation, investments in real estate remain spatially fixed. For instance, investments in real estate cannot be disinvested immediately, real estate transactions are slow compared to shares and bonds (van Loon and Aalbers, 2017). Property investments have become an asset class comparable to other investments classes. The

(10)

10

criteria used for property investments became identical for those of other investment classes, such as bonds and shares (Theurillat, Rérat and Crevoisier, 2015).

The organisation of how property investors and institutional investors can investment in property is as significant as the risk and the expected yields. There are two significant manners for institutional investors to allocate their financial resources in residential assets, unsecuritised or securitised. In the unsecuritised market, residential property is traded directly and the income stream is directly received by the institutional investors. The utilization of collecting money is with lower costs and higher control. In the securitised market however, residential property is traded indirectly by the use of different investment vehicles. This means that residential property is traded by residential property companies, investment trusts and property unit trusts (Montezuma, 2008). These organisational forms differ per country. Generally, securitization of real estate ownership means that global investments of property can be transformed into listed and non-listed shares (Gotham, 2006). The most significant advantage of real estate securitization is the high degree of liquidity and geographic diversification. Above all, this transformation enables investors to compare the financial risks and yields of real estate funds and other financial assets. As a result, real estate markets experienced similar practices as the stock markets, higher trading frequencies, more volatility and the financial market became an important part of real estate (Coakley, 2019). The organisational forms of securitised market differ per country, they are intertwined with politics. While critical literature does not offer explanations in terms of finance of urban development and the diversity of private actors, technical literature and portfolio theory in particular, provides explanations why it is financially interesting to invest in property. The following paragraphs keynotes the developments in France and Germany with regard to real estate investment trusts and institutional investors.

For example, the internationalization of the French domestic property industry started in the early 1980’s. Privatization of public corporations, banks and firms, European integration and globalization of financial markets enabled international investors to acquire shares of French firms. They started to introduce new regimes of accountability and profitability. Following globalization of financial markets and financial reforms, France eased mortgage restrictions. Commercial banks and real estate developers massively shifted to property development. This shift led to an enormous property boom in Paris, caused by the availability of credit. The boom stopped when the global economy moved into a recession. This crisis grasped the attention of international institutional investors, since the property prices were much lower, and the expectation was these property prices would soon recover. The arrival of international institutional investors as a result of the property crisis was seen as a domestic threat. The French state introduced therefore a tax regime that allowed property companies to trade commercial real estate on the stock exchange, called listed real estate. Listed real estate are real estate companies quoted on an official national stock exchange that derive income from the ownership, trading, and development of income producing real estate assets. The French property market became less dependent on bank loans. Moreover, real estate companies could refinance itself through the capital market. This tax regime enabled the liquidity of real estate companies. The French real estate market became the largest of Europe (Wijburg and Aalbers, 2017b).

Germany, one of the largest economies in the world experienced another trajectory towards internationalization of the property industry. Germany experienced similar credit restrictions and had a property boom in West-Germany, in Frankfurt. However, the reunification between East and West, did not led immediately to the catch up of East Germany. Since East German cities were not mature enough to position themselves in the global economy. Therefore, domestic institutional investors perceived the market illiquid and risky. The German government did not reform its institutional framework for the provision for listed real estate companies, which meant that the status quo of

(11)

11

domestic local banks, investors and real estate developers maintained. High debt of local governments resulted in the fact that they had to push off their social housing. Thousands of social units were transferred to commercial banks, private equity firms and hedge funds from the United States (Wijburg and Aalbers, 2017a). International investors discovered in the early 2000’s that real estate prices were at the lowest points for decades, American private equity and hedge funds started to buy real estate assets, these were highly leveraged. These investments led to a high turnover and showed that Germany also profited from the global investment boom, the so-open funds stand out. Open-funds are public funds for institutional investors which are mostly managed by commercial banks. These leveraged funds led to huge investment capital in German cities. During the Great Financial Crisis, the liquidity of these funds was threatened by bankruptcy. The German government decided to regulate the investment market by a tax regime, similar to France, the so-called G-REIT, which notion is derived from real estate investment trusts (REITs). This tax regime allowed the German property sector to attract foreign capital at the German stock exchange and to increase the liquidity (Wijburg and Aalbers, 2017b).

The increasing popularity of Real Estate Investment Trusts (REITs) across the world shows the growing demand for tax efficient and transparent vehicles for investing in real estate. Globally, there are REITs implemented in a Europe, Asia and the America (KMPG, 2013).

Portfolio theory suggests that investments in property provide a low-risk alternative in a portfolio due to the low correlation. Securitization means that institutional investors could hold commercial or residential real estate indirectly. Institutional investors can realize capital gain via asset management, urban development and global diversification. Institutional investors could position their portfolio’s where the national and local regulations are most suitable to their financial expectations (Wijburg, 2019). The financialization and internationalization of property markets are structured differently in each country by legislation, economic conditions and the political landscape.

This section tries to integrate the technical literature and the critical literature in order to better understand the investment patterns and behaviour of investors. These dynamics are often overlooked in the critical literature on neoliberal policy and financialization of housing. The technical literature is more focused on testing empirical data. Therefore, this section is valuable to understand how real estate as an asset class grew and how it is related to neoliberal policy theories. Next to this, it describes which trajectories France and Germany followed with regards to the internationalization of property markets.

The trajectory of institutional investors in the Netherlands

Financial liberalization in the Netherlands enabled institutional investors to develop different investment strategies for their rapidly growing asset portfolios. An important moment was the “professionalization” of Dutch institutional investors in the 90’s, a shift in investment landscapes of Dutch institutional investors. The “professionalization” is a real estate investment strategy and it entails that institutional investors can indirectly invest in real estate, via real estate funds. The analysis of indirect real estate had an advantage. The estimated real estate’s volatility could be analysed with the same financial technique as shares (van Loon and Aalbers, 2017). The biggest institutional investor in the Netherlands, the ABP, pension fund for governmental employees, was at in the 1980’s still owned by the government. Indirect investments of ABP needed to be supported by an independent study, since indirect investments had a higher risk than direct investments in real estate. This study of Boston Consultancy Group convinced the board of directors that indirect investments were preferable. ABP was privatized in the mid-1990s.

(12)

12

As mentioned earlier, real estate investment remains spatially fixed, compared to other assets such as shares and bonds. Consequently, the locations of investments of institutional investors in the Netherlands are selected carefully. Not the intrinsic value of the property, but the perception of capital value reflected in stock prices, has become the key dominant factor in investment strategies of investors. On the urban level, cities started already to attract activities which can increase real estate prices further, this enhances uneven regional development (van Loon and Aalbers, 2017). Zeeland, Limburg and Friesland are not attractive investment locations compared to Randstad and Brabant. As mentioned earlier, the Dutch residential real estate market became heavily financialized, the “professionalization” of institutional investors resulted in global portfolios and neoliberal policies characterised the market orientation of Dutch governance. The financialization literature of real estate development proves the transformation of the increase in institutional capital to public goods into financial assets. These studies often focus on the finance itself and not on institutional investors (van Loon and Aalbers, 2017). However, Fernandez argues that Dutch institutional investors are intertwined with global finance and with a political economy which is strongly influenced by financialization and hence require further explanation (Fernandez, 2010).

Patterns in the internationalization of property markets

Path-dependency is an important concept in social science research. However, it often lacks a clear understanding of its meaning. According to Mahoney, path-dependency occurs when historical events generate a specific chain which follows a specific pattern (2000). This definition is more specific than other scholars use. History matters is a broad conceptualization. The sequence of this pattern is self-reinforcing, which means that the patterns corresponds with events that logically follow from an arbitrary breaking point. The trajectories of countries with regard to the internationalization of property markets are structured differently in each country by legislation, economic conditions and the political landscape. The different trajectories of France and Germany with regard to real estate investment trusts have been discussed. As well as, how real estate as an asset class developed in the Netherlands and the perception of investors towards it. Legislation, economic conditions and the political landscape interact with the property markets and the perception of investors towards residential real estate as an asset. In this sense, the evolution of any institutional-political configuration, following policy reforms and changing economic conditions, is likely to demonstrate characteristics of path-dependency, in which institutional arrangements shape the trajectories of property markets and the perception of investors towards residential real estate as an asset (Peck, Theodore and Brenner, 2009).

Neo-liberal urban theories and financialization theory provide insights in shifts in governance, policies and other socio-economic regulations with regard to residential real estate. However, these theories partly neglect the perception of investors towards residential real estate and property and how the rise of residential real estate can be clarified. This section of the theoretical framework tries to integrate the technical literature and the critical literature in order to better understand the investment patterns and behaviour of property investors. These dynamics are often overlooked in the critical literature on neoliberal policy and financialization of housing. Scientifically, the technical literature is rather focused on testing empirical data and the critical literature stays often too global with regard to changes in property and housing markets. Therefore, the integration between the technical literature and the critical literature is valuable for understanding the impact of housing policies on the behaviour and investment patterns of institutional investors. The integration is not a widespread topic in science, mainly due to the fact that the internationalization of property markets and residential real estate as an asset are relativity new topics in science and practice.

(13)

13

This dissertation will focus on the relationship between housing policies and the landscapes of institutional investors specified by their behaviour and the investments they do. A policy analysis and an investment analysis will provide insights in institutional investors from different angles. The market orientation of the Dutch government with regard to housing, the exposure of the Dutch housing market to refinancing debts and the volatility of Dutch Real Estate markets, makes it a very relevant topic from a societal point of view. Therefore, the reason is that these developments affect a lot of Dutch households.

(14)

14

Chapter 3 Operationalization

3.1 Problem statement

The Dutch residential real estate market became heavily financialized, regulatory and policy changes and new collaborations between public and private parties characterised the market orientation in the governance of housing production. Housing associations were forced to focus on their core task, social housing, since the amendment of the Woningwet 2015. New socio-economic trends, such as increasing flexibility of the Dutch labour market and less popularity of home-ownership, is increasing the demand to the deregulated rent-housing sector. Rentals in the deregulated rent-housing sector almost doubled between 2009-2012 (Ministry of the Interior and Kingdom Relations, 2014). Hence, an expected role for Dutch institutional investors (IVBN, 2018).

Academic interest in authorities and property management has been strong regarding property-led urban policies, especially since the implementation of neo-liberal urban policies in Western European countries, summarized as the critical literature. Neo-liberal urban theories and financialization theory provide insights in shifts in governance, policies and other socio-economic regulations regarding residential real estate (Fernandez & Aalbers, 2016). However, critical literature does offer marginal explanations in terms of finance of property and particular portfolio theory. With regard to institutional investors and pension funds, the decision-making process and the functioning of pension funds are under-theorised (Theurillat, Corpataux and Crevoisier, 2010). Scientifically, the technical literature is rather focused on testing empirical data and the critical literature is often too global regarding finance in property and housing markets. This integration between the technical and critical literature is an under-research topic in science, because it is a relatively new topic in science and practice. An integration would contribute to understand the impact of housing policies on the investment behaviour and patterns of institutional investors in the Netherlands. This would contribute to the understanding of how institutional investors are operating. Increasing demand to deregulated rent-housing, the amendment of the Woningwet 2015 and the volatility of the Dutch residential real estate markets, would make this a very relevant topic from a societal point of view. Since, these developments affect most Dutch households.

The purpose of this study is to examine to what extent the changed regulations and policies influence the landscapes of institutional investors in the Netherlands. Consequently, the research question which follows the research problem is:

To what extent does market orientation in the governance of housing production influence the landscape of institutional investors in the Netherlands?

A landscape consists of all the distinctive features that are important in a particular situation. The landscapes of institutional investors are specified by distinctive features: change in behaviour and the investments they do.

Next to the Randstad are regional cities such as Groningen, Tilburg, Eindhoven, Maastricht and Zwolle interesting cities to invest in. The economic and demographic predictions for these cities are favourable (Cushman & Wakefield, 2016). Therefore, this dissertation will focus on the whole Netherlands in order to obtain a more complete overview of the landscapes of institutional investors.

(15)

15

3.2 Conceptual model

Figure 2: Conceptual model. Own source.

This conceptual model shows how the causal relationship between housing policies and the investments and behaviour of institutional investors in the Netherlands can be identified. It is common by discussing causality in social science to refer to the factor that has a causal impact as the independent variable and the effect as the dependent variable (Bryman, 2012). The assumption of this research is that housing policies impact the behaviour and investments of institutional investors. In the theoretical background, it has become clear that financial changes, regulatory and policy changes and collaborations between public and private sector are the most important concepts in Dutch housing policy. The independent variable is therefore housing policies. The dependent variable is the “landscapes of Dutch institutional investors”. A landscape consists of all the distinctive features that are important in a particular situation. The landscapes of institutional investors are specified by two distinctive features: behaviour and investments. The landscape of institutional investors is not known yet and will be explored by doing interviews, a documentation analysis and an investment analysis of institutional investors. The explanations of these distinctive features are given in table 1 and 2.

(16)

16

Independent variable Dimensions Indicators Methods Housing policies Regulatory and policy

changes

Neoliberal policies Documentation analysis and interviews

Table 1: operationalization of independent variable

Dependent variable Dimensions Indicators and measurements

Methods Landscape of

institutional investors

Behaviour The actions of

institutional investors under given

circumstances

Documentation analysis and interviews

Investments Investment decisions and volumes of institutional investors

Data analysis of real estate investment transactions Table 2: operationalization of variables

These tables provide an overview of the operationalization of the independent and the dependent variables. The exact causal relationship is not clear yet and will be further identified in this research.

(17)

17

Chapter 4 Research Design

This chapter outlines how this research is designed and elaborates the research methods in detail. First, the methods for collecting data will be described. Secondly, the methods of data analysis will be explained. Thirdly, the ethics of research will be briefly mentioned.

4.1 Data collecting methods

Two research techniques can be distinguished in geography and planning. Qualitative and quantitative research methods. Qualitative research techniques are used to explore subjective meanings, for example in reports and interviews. Quantitative research methods use statistics and mathematics to conduct research (Clifford et al., 2013). This research design has a method approach. A mixed-method approach means that both quantitative and qualitative research techniques are integrated in one single research project (Bryman, 2012). Qualitative and quantitative data should reinforce each other. The reason why a mixed-methods will be used in this research, is that the behaviour of institutional investors is partly qualitative, and the investments of institutional investors are

quantitative. The units of analyses are institutional investors, policies, assets under management of

institutional investors and policy makers.

4.1.1 Qualitative Research

There four potential activities in data collection of qualitative research. Interviewing, observing, collecting and examining and feeling (Yin, 2009). The housing policy analysis will be based on

semi-structured interviews and examining documentation. Semi-structured interviews

Semi-structured interviews are used so that the researcher can keep an open mind about the content what the researcher wants to know (Bryman, 2012). Selecting people for semi-structured interviews is important. People are usually chosen based on the experience related to the research topic (Clifford et al, 2013). There are many strategies for recruiting participants in interviews. Firstly, one can carry out a questionnaire survey to gather basic information and to include a request for participating at the end of the survey. Secondly, emailing potential participants is an option for recruiting people. Thirdly, researchers can advertise in newspapers for recruiting participants. The fourth option is called ‘cold-calling’, is calling people if they would like to participate in an interview (Clifford et al, 2013).

The researcher chose for the method of emailing potential participants. The expertise of potential participants is checked by viewing LinkedIn and information on websites. The potential participants are categorized in a few categories. Dutch institutional investors, international institutional investors, Real Estate Consultancy companies, national and local policy makers.

(18)

18

Name Interviewee Company / institution Interview conducted

Consultancy expert I CBRE 7-2-2019

Institutional investor I Bouwinvest 19-2-2019

Institutional investor II Bouwinvest 26-2-2019

Institutional investor III Amvest 13-3-2019

Institutional investor IV Syntrus Achmea 22-3-2019 Policy maker I Municipality of Amsterdam 22-3-2019 Policy maker II Ministry of internal affairs and

housing

18-4-2019 Policy maker III Municipality of Amsterdam 18-4-2019

Remaining expert I IVBN 26-4-2019

Institutional investor V Altera 26-4-2019

Institutional investor VI Greystar 9-5-2019

Policy maker IV Municipality of Utrecht 27-6-2019 Policy maker V Municipality of Rotterdam 4-7-2019

Consultancy expert II Savills 10-7-2019

Remaining expert I Egeria Real Estate 15-7-2019

Table 3: overview of conducted interviewees. Own source.

Housing policy analysis

This chapter discusses the regulatory and policy changes in Dutch housing. In this case, the researcher does not only describe the regulations, but it discusses the interaction between institutional investors and the concerned policies and regulations. This method will be used by identifying the impact of policies on the behaviour and investments of institutional investors.

Behaviour analysis of institutional investors

The approach of the behaviour analysis of institutional investors is on the key actors, interactions, power relations, decision making and the source of funding. A comprehensive analysis should focus on the trajectories of the institutional investors throughout the years (McFadden, 2010).

4.1.2 Quantitative research

Quantitative research is a research strategy that uses quantification in the collection and analysis of data (Bryman, 2012).

Investments of institutional investors

The researcher collects the investment data of institutional investors. In detail, the transactions in residential real estate, the geographical dispersal and the investment volume throughout the time will be analysed. This analysis will provide insights in the investment behaviour of institutional investors and how residential real estate developed as an asset class between 2011-2019. The data is provided by Savills Research & Consultancy, a real estate broker.

4.2 Data analysis

This chapter will discuss the analyses of the interviews, documentation and the investments of institutional investors.

Data analysis interviews

When conducting a semi-structured interview, it is possible to take notes or to audio the discussion. The author decided to audio all the semi-structured interviews and transcribe them. The audio

(19)

19

recording will be asked in advance for permission. After the emails the author will take notes of the general tone of the interviews and of the key themes. Taking these notes is a form of data analysis for information of qualitative research (Bryman, 2012). The interviews will be conducted face to face. The researcher can link the process of making sense out of the data with the research questions and the literature to understand the content.

Documents analysis

Documents from institutional investors, real estate analysis companies, local government and national government will be assessed to gain background information on policies, investments of institutional investors and the power relations of institutional investors. Table 2 provides an overview which documents will be assessed.

Reports and documentations Year

Cushman & Wakefield 2016

Investing in the Dutch housing market 2014 IVBN Middenhuur en institutionele beleggers 2018

Vastgoedwijzer 2015

Huurprijs en puntentelling 2017

Table 4: overview of documentation. Own source.

Investment analysis

Residential real estate transactions will be analysed by dividing several types of investors, institutional investors, private investors and private equity investors. Moreover, residential real estate as an asset class will be analysed. The data is provided by Savills Research & Consultancy.

4.3 Limitations

Performing qualitative and quantitative research involves limitations, bounded to the scope of this research. Qualitative research has the tendency to create subjective based results. Quantitative research has the tendency to create a static view on phenomena, which is independent from external factors, such as politics (Bryman, 2012). The mixed-method of this research tries to integrate the best of qualitative and quantitative research. Although, this research has one major limitation. It is difficult to track down if institutional investors are completely influenced by local housing policies, since this topic is a highly commercial sensitive topic.

4.4 Research ethics and enabling answering research question

Justice, beneficence and respect are the factors which contribute to ethical research in planning. These ethical principles will be considered before and during the research (Clifford et al, 2013). The ethical considerations for this study are related to the conducting of the semi-structured interviews and the investments analysis. Before the start of the interview, the researcher asked whether the interviewees were fine with recording and coding and using their names in this study. The interviewees agreed to this. After the study, the researcher asks whether they wish to exclude any of the given answers. The mixed-method approach of this research integrates the best of quantitative and qualitative research to answer the research question. This approach provides insights in the behaviour and investments of institutional investors in the Netherlands. Therefore, this research design enables answering the research question.

(20)

20

Chapter 5 The exploration of the policies, behaviour and investments

of institutional investors

This chapter outlines the results of the conducted interviews, documents and the residential real estate data. The interviews and documents concern the housing policy analysis and the behaviour mapping, while residential real estate data relates to the quantitative analysis. The housing policy analysis will highlight the most significant policies which impact institutional investors, such as Woningwaarderingsstelsel “home valuation system”, artikel 19 amendment woningwet “Article 19 of the amendment of the housing act” and the noodknop “emergency button”. The behaviour analysis will provide an overview of the organizational structures, history and the geographical diversification of investments of institutional investors. The investment analysis will provide insights in how residential real estate as an asset class changed between 2011 and 2019. In addition, the investment analysis will highlight how investment volume of institutional investors changed over the years.

5.1 The complexity of housing regulations in the Netherlands

In the post-war era The Netherlands was engaged in high levels of state intervention in housing policy. The Netherlands has emphasised equal opportunities for Dutch people in housing. However, nowadays many responsibilities of the central government have been decentralised or delegated to private “actors” and to institutional investors in the housing sector. The central government maintained a coordinating role in the beginning of the twentieth first century. The rental sector, mainly dominated by woningbouwcorporaties “housing associations”, was by far the most important element of the local housing market in the Dutch major cities. Currently, the municipalities in the Netherlands are completely sovereign with regard to housing, their policy instrument is the so-called “woonvisie”. In this policy document, the quantity and the quality of housing stock and developments are discussed. Municipalities have the authority and power to exclude social housing in their policies, the local government in Amstelveen for instance, decided that no new social housing developments will be added to the current stock. The most prominent instrument of the ministry of housing to influence housing is the so-called woondeal “city deal” between the municipality and the minister of housing. The precise residential developments and the locations have been registered in these deals. The minister of housing, an official of the municipality and a province sign these deals. Recently, there has been a deal between the municipality of Groningen and the minister of housing and internal affairs (Rijksoverheid, 2019). The city deals are nowadays the only instrument of the national government to influence housing production in municipalities in the Netherlands (Policy maker II, Interview 18-4-2019). Next to this specific instrument, the ministry of internal affairs and housing every year carries out the so-called “woononderzoek”, literary translated, housing research across the country. The ministry analyses the bottlenecks in the residential stock and opinions of residents. One outcome is for instance that the municipality of Amsterdam can ask for a different rent than the municipality of Eindhoven. The purpose of this research is to mirror information against local governments and developers (Policy maker II, Interview 18-4-2019). As it has become clear in the theoretical framework, housing provision in the Netherlands is decentralized.

Housing associations were privatised in the last decade of the twentieth century. However, they still took their corporate responsibility. Investment in public spaces, housing for the elderly and facilitating in participation of people in local neighbourhoods. Housing associations also focused on the more expensive the deregulated rent-housing sector. Public funds were spent on other activities rather than on social housing. Much of these funds were used to expand their real estate development activities ranging from luxurious housing to projects improving liveability (Consultancy expert I, 4-2-2019). This led to discussions in the public debate. The reason for this is that housing associations received funds from the national government and municipalities. The European Commission stated that public money

(21)

21

was spent on activities i.e. investing in owner occupied housing which did serve the public interest and which was in contradiction with European Law. In addition, there were abuses in the housing associations. Maladministration and fraud by the board of the housing associations. This also led to a public debate and the review of the Woningwet governing the housing sectors. The review of the Woningwet shows that housing associations have one primary task. Building, renting and maintaining social housing. The review of the Woningwet changed the actors in the deregulated rent-housing sector.

The previous paragraphs illustrate decentralization and the market orientation of the national government. Policy and regulatory changes are identified as an important concept in the theoretical framework. De woondeal and the woononderzoek are presently the only concrete policy instruments of the Dutch national government. Local governments have the sovereignty to decide over their urban development and the division between social housing, private rent and owner-occupied housing. The restrictions of housing associations, imposed by the national government, show the neo-liberal character of the national government, since private actors replaced the role the public housing associations.

The next paragraphs will explain the most important policies which changed or may the change the Dutch housing market. Firstly, the woningwaarderingsstelsel “home valuation system”, artikel 19 amendment woningwet “article 19 amendment of the housing act” and the noodknop “emergency button”. Next to these descriptions of these policies, it will highlight the impact of these policies on institutional investors which invest in residential real estate. The woningwaarderingsstelsel and artikel 19 of the housing act are market-oriented regulations, while the emergency button an anti-market regulation is. It is important to mention that the emergency button is not implemented yet.

The starting point of market-oriented regulations

The home valuation system is a national policy which calculates the maximum rent of a rental unit at a certain size. The outcome of a valuation was measured in points, a rental apartment with more square metres had more points. If a rental apartment has more than 142 points, it is not in the regulated rent-housing sector anymore, but in the deregulated rent-housing sector (Huurcommissie, 2017). The regulated sector is also known as the social housing sector. Institutional investors need to pay landlord tax if they rent out apartments in the regulated sector. It is much more profitable for institutional investors to rent out apartments in the deregulated rent-housing sector. Interim minister of housing Donner changed this system. Donner argued that this system is valid for every municipality, since Groningen, Maastricht and Amsterdam have different ground values and different markets. Therefore the “waardering onroerende zaken”, literally translated as the valuation of property has been added at the home valuation system. Regulated rental apartments fall since this policy change automatically in the deregulated rent-housing sector. A lot of rental apartments were transferred from the regulated rent-housing to the deregulated rent-housing sector. This policy change had a huge impact on regions with a higher property scarcity. Especially, in the major cities such as Amsterdam, The Hague, Rotterdam and Utrecht. This policy was meant to increase the flow of people on the rental market. The result of this policy change was that apartments became smaller, but the rent could still fall out the regulated sector. This policy change was interesting for institutional investors. Hence, institutional investors can build smaller apartments, and can still fall outside the regulated sector (Policy maker III, 18-4-2019).

The continuation of market-oriented housing regulations

The housing act is one of the most important laws with regard to housing in the Netherlands. Originally, it states that the construction of low-quality housing should be diminished and the quality of

(22)

well-22

constructed buildings should be enhanced. This policy was mainly meant for lower-class people and introduced in 1901. Artikel 19 of the Housing Act is about the division between the “daeb” and “not-daeb”. This abbreviation stands for general economic provisions, it states that organizations can handle with support from the state. This division states that deregulated rent-housing can only be constructed without any state subsidies, housing associations cannot construct deregulated rent-housing (Policy maker II, 18-4-2019). Before this act, rent-housing associations could realize deregulated rent-housing with state subsidy. Institutional investors were aggrieved. The IVBN brought this up at the European Commission in 2007, because of unfair competition and market disruption. They wanted to have a fair level-playing field, where institutional investors and housing associations can invest under equal conditions (Remaining expert I, 26-4-2019). This complaint has been accepted officially in 2015, when housing associations are mainly forced to focus on its core task, the regulated housing sector, also known as the social housing sector. This neo-liberal policy may have an impact on the investment behaviour of institutional investors in the Netherlands.

Counterbalance to market-oriented housing regulations

The difference between the above policies and the emergency button is that the emergency button has not been implemented yet. The change in the home valuation system and article 19 of the Housing act resulted in higher activity of institutional investors in the deregulated rent-housing market. Simultaneously, the Netherlands recovered strongly from the economic crisis. In some cases, it leaded also to excessive increase in rental prices, especially in Amsterdam and Utrecht. There is limited supply in this price-class and therefore the prices are rapidly increasing, since it is a deregulated rent-housing sector.

At the moment, there is limited supply in the price class between €720 and €1000 euro in the major cities. Housing associations are formally forced to focus on the regulated sector, however housing associations can build housing in the regulated sector. Housing associations can finance deregulated rent-housing from the not-daeb, this abbreviation means that housing associations can construct regulated housing without any state support. This is costly for housing associations and most of the housing associations do not have the financial power to finance deregulated rent-housing, since they need to pay “verhuurdersheffing” for their social housing. Moreover, the current housing stock of housing associations face sustainability challenges. Housing associations prioritize the sustainability task over constructing regulated housing. In short, housing associations focus primarily on social housing in the regulated sector and do not have the financial power to build housing in the deregulated rent-housing sector (Consultancy expert II, 10-7-2019).

The question is, are extra regulations of local governments on institutional investors appropriate to enhance affordable housing. The emergency button is a policy instrument of local governments where they think can stop excessive increases in rental prices. An official of the municipality of Amsterdam proposed that rental apartments can have a maximum yearly rent which is calculated by 3% of the “woz waarde” of a property. If this policy will be implemented Amsterdam will add 30,000 new houses under the €1000 (Couzy, 2019). Currently, the minister of internal affairs and housing does not know yet what an appropriate policy is to combat excessive increase in rents (Policy maker II, 18-4-2019). Currently, there are two perspectives on this debate. The perspective of IVBN represented by institutional investors and the perspectives of some local governments. The perspective of Amsterdam will be discussed.

(23)

23 A proponent of market-oriented housing regulations

The IVBN (vereniging van professionele beleggers in vastgoed Nederland) is a lobby organization for institutional investors in the Netherlands as mentioned earlier in the introduction. The IVBN is an important discussion partner for the Lower House of Parliament and the ministry of internal affairs and housing. IVBN members added more than 10% of the housing production in the deregulated rent-housing sector in the last years. Provinces and local governments face enormous challenges in the next decade with regard to the development of housing. The minister of internal affairs and housing has set the goal to build 75,000 new dwellings each before 2025. This ambition is complicated to reach, because of rising ground prices and construction costs. Most importantly, some municipalities would like to implement the emergency button in the deregulated rent-housing market. According to the IVBN an emergency button can slow down the housing production. A constructive approach between investors and local governments is therefore essential to facilitate the housing production in the Netherlands.

The shortage of housing is increasing, especially for seniors, starters and people who work in public sector face difficulties to find a suitable home. The IVBN argues that an independent deregulated rent-housing sector is vital for a healthy residential real estate market. Next to this, IVBN argues that excesses in the deregulated rent-housing should be tackled. Long-term investors such as institutional investors are pivotal for a healthy residential real estate market. For instance, institutional investors have the financial decisiveness to invest in new construction of housing. Not only in new construction, but also investing in sustainability and renovation of the current housing stock. Next to this, they can bridge the social housing market and the owner-occupied housing with the deregulated rent-housing sector. The price class of this segment is between €720 and €1000 outside the G5 cities (Amsterdam, Utrecht, Den-Haag, Rotterdam and Eindhoven) and till €1200 in these cities.

The current threat for institutional investors is the emergency button. The IVBN states that the implementation of the noodknop will result in a substantial decrease of new construction in housing. Moreover, the investment in sustainability and renovation of current housing will slow down as well. Institutional investors would move to alternative locations outside the Netherlands or other investment classes. Additionality, there are no similar parties in the Dutch rental market which can take-over the role of institutional investors. Foreign institutional investors face similar issues as Dutch institutional investors and housing corporation’s focuses only on social housing, because of the amendment of the “Woningwet”. Landlords hardly invest in new construction of housing in the deregulated rent-housing sector; mostly transformation. The IVBN pleads in favour of deregulation in the deregulated rent- housing sector, because of the financial power of institutional investors and the long-run societal focus. Deregulation helps to increase the housing production, which can help to reduce the massive shortage in deregulated rent-housing sector.

Institutional investors increased the real rent in the deregulated rent-housing sector with an average over six years of 0,9% above inflation. Excessive rent increasing is not what institutional investors do. This is the main critique of some local governments. The perspective of the IVBN on the emergency button shows the impact of policies on institutional investors. This impact can be confirmed by this quote:

“You cannot construct and maintain property when the rent will be 3% of the woz value. The implementation of this policy will harm our investment and real estate development activities” (Institutional investor III, 13-3-2019).

The next paragraphs will discuss the perspective from some local governments to the emergency button.

Financialization of Dutch residential real estate : a perspective from institutional investors