Banks remain positive about financing the Dutch residential (investment) market

18 mei 2020

Banks are confident in the Dutch residential real estate market according to research by Capital Value among financiers in the Dutch residential (investment) market. The most important Dutch and foreign financiers with a relevant position in financing Dutch properties participated in the research. Together banks have approx. 60 billion euros in loans invested in the Dutch real estate market. Around 60% are interested in expanding their loan portfolio in Dutch residential rental properties, and the remaining 40% have indicated that they would like to retain their existing portfolio at its current level. The banks have also indicated they are struggling with capacity shortages due to the corona crisis. 

Shortage of affordable rental homes a significant factor in market confidence
The most important reason for confidence in the Dutch residential market is the shortage of affordable homes in the social or mid-market rental segment. Banks consider homes with a monthly rent of 1,300 euros as marketable and are assuming that these homes will also remain affordable in the future. The banks have also indicated that a client's track record plays an increasingly important role in providing financing for this segment of the market.

60% are prepared to finance new-build projects
All surveyed banks have indicated they are willing to finance existing homes. Existing properties are financed based on non-recourse financing. The financing term for an existing final investment is a maximum of 10 years for most banks. In practice, a term of on average 5 to 7 years is often selected primarily due to lower funding costs for financing with a shorter term. In addition, 60% of banks are prepared to finance new-build projects. A majority of banks prefer projects with a duration of 18 months, and other parties are prepared to accept longer terms. The risk appetite for land positions currently seems to be low. If commitments are being made, it is primarily based on building developers' solid balance sheets. 

Marijn Snijders, director Capital Value says, "It is a positive signal that in addition to pension funds, important financiers are willing to finance projects that can be built in the short term. In order to address the increasing shortage of homes, we must prevent building production from going into a decline. For planning development in the long term, the government could possibly play a role in the guarantee of loans. Considering the housing shortage and the Cabinet's policy to add 75,000 homes to the housing inventory annually, we must prevent planning development from coming under threat after 2021."

Most important conditions for financing
A final investment is financed up to a maximum of 70% Loan to Value (LTV). However, this maximum ratio in applications for financing is often not met because the market value of real estate has risen relatively faster than (net) rental incomes. An important condition for financing is that the rent incomes must be amply sufficient for the interest and repayment obligations. According to 60% of financiers, this Debt Service Coverage Ratio (DSCR) must be at least 1.25, and for 40% of financiers, it should be more or equal to 1.5. The banks have indicated that they assess this case-by-case and that financing always remains customised to the client's situation.

A Loan to Cost (LTC) ratio of a maximum of 90% is common for the financing of construction costs, however, there are banks that currently maintain lower LTC percentages. As an additional condition, banks also want to finance the final investment. During the development phase, financiers often request an additional, substantial guarantee. 

Location remains important
The banks have an obvious preference for the five largest municipal regions (G5) as well as the twenty largest municipal regions (G20). Fifty percent of banks are willing to finance homes in regional municipalities under the condition that the product meets demand: pricing and volume must meet demand and market conditions. The banks have indicated they will examine existing plans from developers, builders and investors very closely for the near future. Developments with regard to the decline in consumer confidence and the possible increase in unemployment will play a part in their decision making.

Capacity issues due to the corona crisis
Due to the corona crisis, the banks have a minimum capacity available for the assessment of new credit applications. The current focus lies especially in assessing credit applications from companies that have been hardest hit, and assessing the risk for retail, hotels and other portfolios. This has had an enormous impact on the lead time of real estate financing applications, and makes an existing group of their clients' track record even more important. This is entwined in the so-called Know Your Customer screening process (KYC) that clients must go through when they open a new bank account. The simpler a client's legal structure, the easier an application will be processed. The banks expect a normalisation of the situation after the summer and that there will again be sufficient capacity available for submitting and assessing new applications for financing.

Interest rates increase slightly
Since the onset of the corona crisis, market volatility has increased resulting in an increase in costs on the financial markets for purchasing money. Interest rates were raised recently with an extra liquidity surcharge rising to an average of 0.5% depending on the conditions of the loan. The rise in interest rates has had an immediate impact on calculations with regard to yield and cash flow. Nevertheless interest rates remain historically low due to the European Central Bank's incentive policy.

Marijn Snijders, director Capital Value adds, "The confidence among financiers is being confirmed by the transactions that have taken place since the lockdown in mid-March. Since then, more than 1 billion euros have been invested in Dutch residential rental properties. Several current investors are continuing to purchase and we have also witnessed a number of newcomers to the market. Because of high demand, there has been hardly any to almost no negative effect on prices in transactions over the past weeks."

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