Monitoring risks is embedded in the daily activities of the responsible line manager and is an integral part of the planning and control cycle. Bouwinvest monitors all the defined risks via key risk indicators, supported by the performance reporting and business incidents reporting processes. Each quarter, the Executive Board of Directors is provided with a risk report, including the risk indicators indicated above and actions necessary to limit or mitigate risk, if there is a deviation between the outcome and the pre-determined norm.
Risks in the portfolio are monitored closely and the following events and risks were noteworthy in 2020.
Market concentration risk
The Fund has some geographical concentration in its core regions with strong positions in the Amsterdam region (e.g. Amsterdam, Hoofddorp, Haarlem, Zaanstad and Purmerend) and in the Randstad conurbation as a whole. This concentration is based on its investment strategy with a focus on areas with good economic prospects and a healthy demand for rental homes underpinning long-term rental and valuation growth. The investment pipeline shows a similar picture.
Occupancy rate risk
The Fund devotes a great deal of attention to the kind of homes it acquires, the services it provides and the tenants journey, from rental process to dealing with queries and complaints. Although the Fund has some concentrations in rental levels, with almost 35% in higher brackets (rental levels €1,250-1,500, > €1,500) partly due to rental growth in Amsterdam and other large cities, occupancy rates are high even for these rental levels, averaging 95-99%. Combined with its focus on core regions and affordable (mid-rental homes), the Fund's vacancy levels have remained very low.
On Budget Day the Dutch government proposed increasing the Real Estate Transfer Tax (RETT) to 8% from 2% for residential real estate (starting 1 January 2021). In December 2020, this proposal was adopted by both chambers of parliament, as a result of which the increase passed into law as of 1 January of the current financial year. However, as various factors can have an impact on the Fund’s capital growth, it is uncertain how this measure will impact the Fund’s return in 2021.
Despite the Covid-19 pandemic, the Fund's rent in arrears remained very stable in 2020. Our policy was to be lenient toward tenants who had difficulty paying their rent. We are applying guidelines that have been established through industry associations, such as the IVBN. However, in most cases we work towards tailor-made solutions for our tenants.
The Fund has signed an agreement for the development of 350 houses in Zaandam, on the so-called Hembrugterrein, and has already acquired and paid for the land. The process for obtaining the necessary building permits has been delayed and there is some risk that no or fewer houses can be built. In that case, the Fund can return the land to the seller, plus the Fund has obtained additional guarantees and receives contractual interest payments to mitigate this risk. In the meantime, we are in talks on possible (short-term) alternatives for the development of homes at this location.
The issues around nitrogen emissions and PFAS levels have not resulted in financial difficulties for builders of other projects in the Fund's pipeline.
The overshooting of the acquisition target (part of the Fund’s growth ambition) has resulted in a potential funding gap situation, despite commitments from new or existing shareholders. The Fund has monitored its funding and liquidity situation carefully and has ample projected liquidity up to 2022. In light of the still high levels of uncalled commitments and its planned divestment strategy, the Fund has continued its strategy of selectively prioritising future new-build assets over currently available commitments, anticipating continuing investor demand and or sufficient market liquidity for divestments.
In its 2021 Tax Plan, the Dutch government announced that the Dutch Ministry of Finance is planning to evaluate the FII regime in 2021. This evaluation could eventually result in the abolition of the real estate FII. As a result, the Fund would become subject to tax at the ordinary income tax rate. In anticipation of the outcome of this evaluation, Bouwinvest is investigating the possibility of restructuring the Fund into the legal form of a closed Fund for Mutual Account. The fiscal transparency of the Fund for Mutual Account prevents double taxation for investors.
In the course of 2021 Bouwinvest will decide whether to propose a restructuring of the Fund to the Shareholders’ Meeting and, if so, by which date such restructuring must be effected. Bouwinvest will take into account all uncertainties, including the future of the FII-regime and the impact on all investors, when taking such a decision.
Another significant risk has required further attention, one that cannot be mapped one-to-one with the above-mentioned risks, namely climate risk.
last year was another year with exceptionally hot weather, reminding us of the need to deal with climate change and related risks. In line with the recommendations from the Task Force on Climate Financial Disclosures (TCFD), the Fund recognises two main risks related to climate change, namely physical risks directly affecting our real estate and or tenants (heat stress, flooding, strong winds, etc), and transition risks, or risks related to the adaptation of our real estate to future climate changes (an environment in which greenhouse gases should be minimised to limit future temperature rises to 2˚C or less).
Core elements of the recommended disclosures include the organisation’s governance related to climate risks, the strategy, the risk management and resulting metrics and targets. Within Bouwinvest, the Sustainability & Innovation department is dedicated to advising the Board to prepare the management organisation and the Fund for the necessary steps and related changes. These climate risks affect a large number of risks within our risk taxonomy, and we will adapt our risk taxonomy to incorporate climate risk where necessary. As an example of recent initiatives, Bouwinvest has commissioned an impact analysis (including financials and returns) for our real estate to meet the Paris Proof goals in 2045.