Real Estate development between stagnation and modernisation: The uncertain real estate market

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European Real Estate Society Conference 2012

Edinburgh, June 13-16

Jo Soeter & Peter de Jong

Real Estate Development between

stagnation and modernisation

Delft University of Technology, Department Real Estate & Housing



• Topical problems in the real estate market

• Approach of the research

• Findings of the sectoral research

• Expectations for 2012-2017

• The changing development perspective


Topical problems

Until 2008: high building activity + low elimination 

growing vacancy and under-utilisation of building stock after 2000.

Drop in demand in 2009 is followed by decline building activity  growing uncertainty about future growth and modernisation of property and derived project


Impact of crisis

• Demand on space market (by end users) declined

• Investment in new buildings is postponed. Funding became problematic:

• Loss of equity: for firms (users), investors, banks, and developers (from leveraged to deleveraged finance of investment)

• Budget deficit government became higher and government debt exploded

• Higher risks of development and operation of real estate


Drop in demand for new buildings (1)

Agriculture Sectoral economic growth 2008-2009

Gross Floor Area of building permits for new buildings 2009/2010 compared with 2007/2008

Scheme 1 Market sector

+3% Glasshouses -83% Barns & Sheds -3%


Trade, Hotels and Catering Transport and


Fin. and Business services

-7% -7% -5,5%


Industrial & commercial

buildings & warehouses -49%

Shopping stores -50% Other buildings market

sector -12% Offices -44%


Drop in demand for new buildings (2)

Education Sectoral economic growth 2008-2009

Gross Floor Area of building permits for new buildings 2009/2010 compared with 2007/2008 Scheme 1 (continuation) Public sector +1,5% Schools -33% Government Healthcare Non-profit services Total of all sectors

+2,5% -3,5% Offices +78% Other buildings -48% -45% Source: CBS


Quantitative approach

Step 1:

• Determine growth Stock in Use 1985-2005

• Split up of 2005 Stock in Use in 20- and 20+ part Step 2:

• Production of new buildings 2006-2011

• Split up in expansion and replacement component Step 3:

• Observed circulation time of 1985-buildings stock

• Expected production of new buildings 2012-2017 in accordance with 1% GDP growth scenario


Quantitative approach

With sectoral differentiation related to:

• Demand for new buildings

• Need for expansion of sectoral building stock, in relation to growth sectoral production, employment and use/users

• Sectoral differences in terms of replacement,

disinvestment and investment for modernisation and adaptation


Expansion of the building stock (1)

Glass houses New buildings 2006-2011 (m2 GFA) Estimated growth stock in use 2006-2011 Scheme 2 105 mln 5,5 mln m2 extension of area

vegetables & fruit

Barns and Sheds

Industrial and Commercial Buildings and Warehouses Retail outlets 24 mln Other Buildings Market Sector Estimated stock in use ultimo 2005 (m2 GFA) 70 mln 170 mln 31 mln 24 mln 19 mln 26 mln 3 mln 2 mln

3,5 mln m2 for extension live

stock 7 mln m2 related to growth of production 3 mln m2 GFA observed 1 mln m2 related to growth of production


Expansion of the building stock (2)

Offices 58 mln 3 mln m2 related to growth

stock in use

Educational buildings Other buildings

public sector

5,5 mln

All building types

33 mln 25 mln 540 mln 4 mln 4,5 mln 95 mln 1 mln m2 related to growth educational production 1,5 mln m2 related to employment growth 30 mln m2 in total

Available for replacement: 11 mln m2/year

New buildings 2006-2011 (m2 GFA) Estimated growth stock in use 2006-2011 Scheme 2 (to continuation) Estimated stock in use ultimo 2005 (m2 GFA)

Source: CBS / EIB / TU Delft Building Economics

Heathcare buildings 24 mln 6,5 mln 4 mln m2 related to growth


Industrial and Commercial buildings (1)

• Stock in use ultimo 2011 is relative young

• 60%-65% use of buildings built after 1985

• Circulation time tends to 47 years

• Scaling-up, industrial restructuring, innovation and modernisation 

high replacement / high investment / high vacancy of

technological outdated buildings and industrial areas.

• Fourth of new built square meters is in large scale logistical buildings (>5000m2)


Industrial and Commercial buildings (2)

Specific categories:

Retail outlets

• +/- 1,5% annual growth of the stock in use, consumer services included.

• Scaling up by gradually more square meters in industrial buildings

• Forecast: +/- constant trend Agrarian buildings

• Zero growth (+/-) of live stock and ‘grow under glass’

• Huge disinvestment and high replacement activity

• Growing resistance against scaling-up


Office buildings

• Most expanding stock in past decades // expanding office employment

• About 75% of stock in use ultimo 2011 is built before 1985

• Office stock is most youngest and modernised building stock

• Forecast: recent decline of employment in Financial, Business and ICT services 

25% lower production of new office buildings in 2012-2017


Healthcare buildings

• Future growth of healthcare services in relation with an ageing population  urge for more and better facilities.

• More upgrading of existing stock, than production of new buildings for replacement.

• Uncertainty about future funding and structuring of healthcare sector

 permanent slow down of building initiatives

• Forecast 2012-2014: 0 till 15% more production of new buildings


Public buildings (1)

Educational buildings

• Growth of employment in Education and university research tends to zero

• Production of new buildings equals refurbishment & main repairs

• Forecast 2012-2017: +/- constant trend of production of new buildings, with shift to higher replacement activity


Public buildings (2)

Other public buildings

• 2012-2017: 20% reduction of the production of new buildings

Background is shrinking public funding in relation with

budget cuts and stagnation of growth public employment in government and non-profit sector.

For a complete review of sectoral building stocks and

mutations: see Scheme 3, Building stock and production new buildings


A changing development perspective (1)

Social-economic context future real estate development:

• Diminishing population growth, but increasing 70+ population

• Low GDP-growth ( 1% scenario)

• Urge to meet higher technological, social functional and environmental standards

High production of new buildings was favoured by:

• Abundant ‘cheap finance’

• Rising real estate values and prices


A changing development perspective (2)

Project development (after the crises):

• Less production of new buildings for expansion and replacement

• More modernisation by upgrading and transformation

• More ‘green’ modernisation

• More financial complications





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