Covid-19 and the war in Ukraine
In 2020 and 2021, the Covid-19 crisis led to challenges for construction, tenant payment defaults and mandatory closed (leased) retail spaces, among other things. The Covid-19 is currently still having an impact.
New challenges have been added since the Russian invasion of Ukraine in late February 2022 and the war that followed. There are global geopolitical issues. At the beginning of the war, this particularly resulted in problems with the supply of construction materials, such as steel; consequently, projects got delayed and (construction) costs rose. In addition, price increases for inter alia energy were unpredictable and inflation took off.
In addition to discussions about lease disbursements and price increasements lead to discussions between contract parties which party should bear this risk thereof. The question therefore regularly arises between contracting parties whether and to what extent price increases of this particular nature should be regarded as an unforeseen circumstance and whether this consequently should lead to a reallocation of costs and a (re)distribution of risks between contracting parties.
For the construction and development sector in the Netherlands, the aftermath of Covid-19, the war in Ukraine, uncertainty regarding residential rental market regulations, rising (construction) costs and interest rates and the nitrogen crisis, among others, have an impact on the financeability and feasibility of (development) projects.
Within the real estate market, investors will suffer from higher interest rates, having to write down real estate portfolios to current price trends and allocation of equity and debt capital under the current interest rate environment. As a result, the number of transactions seems to be declining.
Uncertainty regarding residential rental market regulation
Besides the economic consequences, the (lack of certainty regarding) residential rental market regulation also brings challenges. On May 19, 2022, the Minister for Housing and Spatial Planning De Jonge announced that, as a way of making rental housing more affordable for middle-income households, initial rents in the middle rental segment will be regulated. On September 29, 2022, it became clear in a debate in the House of Representatives (Tweede Kamer) that through the home valuation system (WWS), the upper limit of the middle rental segment is likely to be set at around EUR 1,000 and that an indexation can be capped by the government in times of high inflation. The (announced) regulation will be a challenge for investors in the Dutch real estate market. More certainty regarding the exact details of this regulation will hopefully follow soon.
The Netherlands is experiencing a nitrogen crisis. Since July 1, 2021, construction projects would fall under the so-called construction exemption. Under this exemption initiators of a (construction) project were no longer required to assess, with respect to the construction phase of a project, whether a permit under the Nature Protection Act was required. In the "Porthos ruling" of November 2, 2022, the Administrative Law Division of the Council of State put an end to the construction exemption, because it was considered to be in conflict with European directives on environmental protection.
With the exception of projects for which an irrevocable decision is already available in which the construction phase has been tested against the Nature Protection Act (Wet natuurbescherming), initiators thus find themselves back in the situation before July 1, 2021. For ongoing projects, they will still have to take into account the consequences of nitrogen deposition occurring during the construction phase.
In practice, there often turn out to be opportunities for permitting, but this does require an extra careful approach. What doesn’t help, is that the government-mandated calculation methodology is also currently the subject of litigation. We therefore expect that nitrogen will continue to make a clear mark on the real estate market in the coming years.
Looking ahead to 2023; what could the new year bring for the real estate market?
The aftermath of Covid-19, the war in Ukraine, lack of certainty regarding residential rental market regulation, rising prices and interest rates and the nitrogen crisis present challenges for parties within the real estate market, and these challenges require proper contractual arrangements, including allocations of risk.
Hopefully, more clarity on residential rental market regulation and the resolution of the nitrogen crisis will soon emerge and the economy will (further) stabilize. The current economic reality, rising interest rates and the challenges described may also offer new opportunities.
Naturally, we are happy to think along with you about the challenges that have emerged in the real estate market last year and which have not yet gone away. Please do not hesitate to contact one of the persons below, or your regular contact person at Loyens & Loeff.