Didier De Vliegher of NautaDutilh takes an in-depth look at key trends in the Belgium real estate market.
"While the public sector dominance in Brussels gives the city a reputation as a stable office market, Belgian real estate costs are 25.5 per cent higher than the European average. In this regard, the main concern is the higher costs compared to our Dutch neighbours."
The Belgian real estate market has stood up well against the crisis
The Belgian real estate market is a relatively stable one. During the recession, Belgium was largely spared from sharp price falls like those recorded in other European countries. This stability is expected to continue through the end of 2014 and probably also in 2015.
The stability is due in part to the fact that Belgium did not participate in the 2005–2006 commercial real estate bubble: the spectacular price increases that occurred on the market elsewhere in Europe were not seen in Belgium. The rather limited nature of the Belgian economic recession also contributed. Additionally, Belgium’s strong public sector and the international organisations whose headquarters are located in Brussels, such as the European Union and NATO, are not directly affected by an economic downturn and have kept the demand for commercial real estate (mainly office space) high, even during the recession.
This article will briefly describe some recent and anticipated future trends in the Belgian commercial real estate market and residential housing market.
Diversification in commercial real estate investments
Over the past three years, investments in Belgian commercial real estate have grown steadily. This was the conclusion of Jones Lang LaSalle in its study of the results of and perspectives in that sector. In 2013, the investment volume reached €2.3 billion, which is slightly higher than the €2.2 billion volume in 2012 and significantly higher than the average for the last five years, namely €1.9 billion. Investments in office property have been especially popular, totalling €1.4 billion in 2013 (60 per cent more than in 2012). In 2013 such investments represented 61 per cent of the total volume of investments in Belgian commercial real estate, whereas in 2012 the proportion was only 39 per cent. The volume of investments in industrial property (eg factories, warehouses) in 2013 stayed at the 2012 level of €200 million.
A recent trend in commercial real estate investments is diversification. Whereas real estate portfolios listed on the stock exchange (such as REITs) used to consist mainly of office property, in the past several years investors have started turning to new and more profitable sectors such as nursing homes, in which demand far exceeds supply. For instance, while the overall level of investment in commercial real estate remained stable, the investment in nursing homes rose 65 per cent to €121 million in 2010 (7.6 per cent of all investments in Belgian commercial real estate in that year).
There are two main players who currently share more than 80 per cent of the market for seniors’ housing in Belgium: Cofinimmo and Aedifica. Cofinimmo is indeed one of the largest health care real estate owners in Europe, with investments in that sector currently representing 35.3 per cent of its portfolio. Those investments are valued at €1.162 billion and are located in Belgium, France and the Netherlands. Cofinimmo’s CEO, Serge Fautré, recently declared that he would gladly sell his office buildings portfolio if he could. New players such as AG Real Estate, a subsidiary of AG Insurance, have also recently decided to diversify their portfolios and invest in such projects.
Investors in Belgian commercial real estate have themselves also become more diversified. Following the acquisition of 90 per cent of North Galaxy, Danish investors accounted for 28.8 per cent of the investment volume in the first quarter of 2014. Notably, this was the first investment by Danish investors in Belgium since 2003. Belgian investors, however, still control the majority of deals, accounting for 50.8 per cent of the volume in the first quarter of 2014. German investors accounted for 7.8 per cent of the volume in the first quarter and French investors 6.4 per cent. At this stage, there is limited direct activity by Middle East investors; however Asian sovereign wealth funds from China, Korea or Singapore, as well as Canadian pension funds, are demonstrating interest in prime properties in Brussels.
The residential housing market: renting versus buying
The average rent for an apartment in Belgium in 2013 was approximately €740, an increase of 14.8 per cent compared to 2012 (€631). To rent a house, it cost an average of €825, an increase of 3.5 per cent. Although the first quarter of 2014 shows a slight 1.6 per cent decline, rent growth since 2004 has consistently exceeded the Belgian health index. Indeed, rents have been increasing at an average annual rate of 4 per cent, ie 2 per cent more than the indexation provided for in Belgian law.
These rent increases can be explained by, among other things, Brussels’ international status, competition for land use between private dwellings and offices, population growth and the general improvement in rental accommodations. However, the main reason for these increases is the imbalance between the demand for and supply of rental housing. The demand has grown as a result of reduced bank lending, causing more and more people to rent rather than buy.
With respect to sales of residential real estate, prices in Belgium increased in 2013 by approximately 2 per cent (to €2,100 per square metre) compared to 2012, while prices for new dwellings decreased significantly in 2013 in countries such as Spain (-15 per cent) and Italy (-5 per cent) over the same period. Standard & Poor’s recently announced that the prices in Belgium will continue to rise slightly in 2014–2016. According to Standard & Poor’s, growth in Belgian housing prices will be 1 per cent in 2014, 0.5 per cent in 2015 and 1.5 per cent in 2016. This was enough to cause international institutions such as the IMF, the ECB, the OECD and the National Bank of Belgium to announce that Belgian residential real estate appears to be overvalued. According to one calculation, the overvaluation even exceeds 60 per cent! But Etienne Callataÿ, chief economist at Bank Degroof, warned that such calculations have to be put into perspective. The heterogeneity of the real estate on which they are based, the low proportion of rental housing in Belgium (with the exception of Brussels) and the questionable choice of GDP as an indicator of income are all factors that make these calculations imperfect.
Competition in the office property market
With 12.8 million square meters of office space, Brussels has by far the largest market for such property in Belgium. It is nearly six times larger than that of Antwerp, which occupies the second position. The office property market in Belgium is also considerable in size when compared to the rest of Europe. Only cities like Berlin, Paris and London have more square metres of office space.
While the public sector dominance in Brussels gives the city a reputation as a stable office market, Belgian real estate costs are 25.5 per cent higher than the European average. In this regard, the main concern is the higher costs compared to our Dutch neighbours. “It is especially our unfavourable position in comparison to the Netherlands which could ultimately have serious consequences,” said Pierre-Gilles Solvit, general manager of OSA Studey, an international consultancy firm. Indeed, the cost of office space in Belgium is 18 per cent higher than in the Netherlands. This situation is particularly worrying when one considers that internationally active companies are increasingly opting for centralization in the Benelux.
Faced with these high prices, the current trend is for companies and public authorities to set up their offices in parts of the country other than Brussels. Besides the financial attractiveness of such a move, there are also employment-related reasons for doing so. The pool of qualified personnel is larger outside the capital. An example of a recent project reflecting the current trend is the construction of the “Virginia Loveling” tower near the train station in Ghent, open to the public in February 2014, which will be used as an administrative centre of the Flemish Region.
Another concern is the vacancy rate on the Brussels office property market, which in 2013 amounted to 11 per cent. Although this is a small improvement compared to 2009, when the rate was 11.4 per cent, Brussels remains a little behind its European counterparts. Faced with this situation, Gaetan Clermont, CEO of CBRE, urged the Brussels regional authorities to draw up an ambitious plan for the development of competitiveness clusters. According to Mr Clermont, Brussels should follow the examples of New York and Luxembourg and attract investors and their projects to its territory by granting interesting financial incentives: “Brussels cannot solely rely on being the seat of the European institutions.”
Commercial real estate market in good condition
Belgian commercial real estate continues to do well: 248,000 square metres of commercial space were leased and/or purchased in 2013, an increase of 37 per cent compared to 2012. The number of transactions was also up nearly a quarter (23 per cent): 545 transactions in 2013, compared to 442 the year before.
Volumes in 2013 were high in three segments: in the “high street” segment the total occupancy was 74,000 square meters, nearly 40 per cent of which was in Brussels and Antwerp. Among the newcomers were major international brands such as Christian Louboutin, Karl Lagerfeld, Valentino Red, Tiger and Playlife.
With an occupancy of more 142,000 square metres in 2013, the suburban stores sector had one of its best results of the preceding five years. Shopping centres also did well, with an occupancy of 32,000 square metres (compared to 26,000 square metres as at late September 2012), thanks to the expansion of Wijnegem Shopping Center and the renovation of the Ring Shopping Center in Kortrijk.
In 2013 the volume of new commercial buildings amounted to 125,000 square metres, mainly in the suburban stores sector. With the completion of the “Crescend’Eau” project (21,000 square metres) the volume developed in 2013 was close to the average of 175,000 square metres in the last five years.
Moreover, the premium rents remained stable at €1,850 per square meter per year for exclusive sites in Antwerp and Brussels. In shopping centers rents averaged €1,600 per square meter per year, while for the city stores prices approximated €2,100 per square meter per year.
According to Jean-Philip Vroninks of Jones Lang LaSalle, Belgian commercial real estate continues to attract investors. “After the record year 2012, in 2013 investors continue to be interested in commercial real estate, primarily private and specialised investors. This trend should not falter as long as we can offer quality products,” he adds.
Indeed, the prime yield for stores remained stable at 4.25 per cent, although some transactions returned 4 per cent or even less. For shopping malls the prime yield remained unchanged at 5 per cent while for suburban stores the return increased to 6 per cent.