- looks like ERE has this in hand; but what a daunting market to be in - not surprised the share price is slow to recover.
European Res expects Dutch law to affect portfolio
2023-01-09 11:34 ET - News Release
Mr. Phillip Burns reports
ERES REIT PROVIDES UPDATE ON PROPOSED MID-MARKET REGULATION IN THE NETHERLANDS
On Dec. 9, 2022, the Minister of Housing published details regarding the proposed regulation of mid-priced rental homes in the Netherlands and amendments to the Housing Evaluation System, to become effective from Jan. 1, 2024.
The proposed legislation will further divide the residential rental market into three segments: (1) the pre-existing regulated segment; (2) a new regulated mid-market segment; and (3) the remaining unregulated, or liberalized, segment. The new mid-market regulation will apply to units with up to 187 "Points" as per the Housing Evaluation System (woningwaarderingsstelsel or "WWS"), effective for all new leases commencing on or after January 1, 2024 (i.e., for occupied units, the regulation will only take effect upon turnover). Pertinent specifications of the envisaged regulation of mid-priced rental homes, as announced through the Minister of Housing's letter to Parliament, are detailed as follows:
The maximum starting rent that can be charged for a mid-market rental unit will be determined by the number of Points allocated to such unit, pursuant to the parameters of the existing Housing Evaluation System (as amended, as outlined below).
With maximum rents subject to regular indexation on July 1st of every year to adjust for inflation, it is expected that 187 Points will correspond to a starting rent ceiling of approximately euros1,100 per month, in accordance with the Points system that will be in effect on January 1, 2024.
Indexation of the mid-market rental segment will be capped at the annual wage development figure (loonontwikkelingscijfer) + 0.5% (but not to exceed the rent ceiling as determined by the WWS Points).
Furthermore, the current Housing Evaluation System will be amended by the following key modifications:
More Points will be awarded for units with an energy label of A or higher, while Points will be deducted for units with an energy label of E, F or G (potentially mitigated by a subsidy that will be made available to landlords for the purpose of improving the sustainability of existing units).
Additional Points will be attributed to individual outdoor spaces by using a graduated scale with increments of 5 square metres (previously 25 square metres).
The cap on the number of Points which can be contributed from property value (based on the Wet Waardering Onroerende Zaken or "WOZ" value) at 33% of the total number of Points of the unit will be made applicable to rental units with 187 Points or more (an increase from its current application to rental units with 142 Points or more, thereby additionally exempting the new mid-market sector).
Effective for a temporary period of 10 years, a surcharge of 5% on the maximum starting rents as per the Housing Evaluation System will apply to newly-built units classified in the mid-market segment, for which construction commenced before January 1, 2025, and was completed after January 1, 2024.
The REIT has assessed the impact of the above developments and determined that approximately one-quarter of its portfolio would be affected by the mid-market measures. On implementation to new leases from January 1, 2024 onward, the expected rent differential, representing approximately 4% of annualized in-place rent for the total portfolio, will be incurred upon turnover of the mid-market units, and absorbed over an estimated period of three to five years. Notwithstanding the regulatory changes highlighted above, the REIT anticipates that it will continue to achieve rent growth within or in excess of its target range of 3% to 4%.
In step with the historically progressive nature of the Dutch regulatory regime, the proposed mid-market regulation is intended to be temporary, to apply only as long as necessary to alleviate the worsening of the housing shortage. As the proposals prescribed in the letter to Parliament have yet to be adopted by the Dutch government, they may be subject to change. Draft legislation is expected to be published in early 2023.
The REIT also announced today that on January 1, 2023, legislation entered into force pursuant to which indexation for Liberalized Suites will be capped at the lower of (i) CPI + 1% or (ii) the annual wage development figure (loonontwikkelingscijfer) + 1% (effective until April 30, 2024). In line with this development and given the high inflation rates prevalent throughout the past year, the Dutch government determined that the maximum rent indexation as of July 1, 2023, will be set at (i) 3.1% for Regulated Suites, equivalent to the annual wage development figure, and (ii) 4.1% for Liberalized Suites, based on the annual wage development figure + 1%.
In accordance with the above, the REIT expects to realize an average rental increase due to indexation of approximately 3.8% across the total residential portfolio (inclusive of all Regulated Suites and Liberalized Suites), driving rent growth in 2023 toward the high end of its target range. This excludes the effects of turnover which, historically, have contributed significantly to additional growth.
Ultimately, the REIT anticipates that it will continue to achieve a net operating income margin within its presently projected range of 76% to 79% of operating revenues (including service charges), which is even further reinforced by the abolition of the landlord levy tax that became effective on January 1, 2023.
"One of the cornerstones of ERES's competitive edge is its demonstrated proficiency in profitably navigating an extremely complex residential regulatory framework, and notably one which has been continuously evolving," commented Phillip Burns, Chief Executive Officer. "These iterations characterize the next chapters of that ongoing evolution. In parallel, ERES will continue to leverage its experience and platform capabilities to adapt and drive robust rent growth, as we have accomplished to date."