1. |Date 19-06-2013 Market failure Market failure in the Amsterdam office investment market Henk J. Brouwer 1

2. |Date 19-06-2013 The problem (1) ›Market failure is a situation when free markets fail to allocate scarce resources efficiently ›This is the case in the Amsterdam office market: ›High long-term office vacancy rates ›In many suburban areas 25% or even more ›Construction of new offices continues 2

3. |Date 19-06-2013 The problem (2) ›Money is invested in new offices, while existing offices do not yield expected returns ›Clearly waste of capital ›Hypothesis: market failure related to lack of efficiency in the office investment market ›We will try to substantiate this hypothesis 3

4. |Date 19-06-2013 The problem (3) ›KPMG (47,000 m2) 4

5. |Date 19-06-2013 Efficiency (1) ›Market failure is a fact, inefficient investment market most probable explanation ›Efficiency of markets refers to how rapidly information is reflected in prices ›Real estate is a long-term investment, so analysis of the future is important 5

6. |Date 19-06-2013 Efficiency (2) ›Rational investors will use their knowledge of the property market, the wider economy and the best available theories of how the two function and interrelate (Ball et al, 1998) ›Actual market situation should result in adjustment of common expectations ›This is not readily visible in investment market ›So, investment market is not fully efficient 6

7. |Date 19-06-2013 Recent history (1) ›Strong employment growth in Amsterdam region in 1995-2009 ›During ‘Golden Years’ (1996-2001) more new employment was created than in the preceding twenty years 7

8. |Date 19-06-2013 Recent history (2) ›Office construction boom from 1998-2002 ›In 1999/2000 construction of more than 1m m2 of new offices started ›Overall, in five years (1998-2002) a third added to the office stock 8

9. |Date 19-06-2013 Recent history (3) ›In 1999, actual availability of office space close to zero ›In 2001, it was believed that high demand for offices was structural ›Risk of insufficient capacity for office construction ›Rezoning from mixed use to office park ›Planning studies for underused land announced 9

10. |Date 19-06-2013 Recent history (4) ›Today, overall vacancy 20% ›In many suburban areas over 25% ›Structural vacancy is persistent, in spite of removals and transformation ›However, vacancy concentrated in older offices (i.e. offices that have been used before) 10

11. |Date 19-06-2013 Vacancy 1999-2013 11

12. |Date 19-06-2013 Vacancy (2) ›Following the end of the ‘Golden Years’ and completion of offices started in 1999/2000, vacancy soared › In 2004-2006 complete divergence of markets of newly built and older offices 12

13. |Date 19-06-2013 Vacancy (3) ›Supply of new offices triggered demand ›Net take-up much lower than gross demand: from 2000 to 2010, net take-up of offices was only 15% of gross demand ›Demand for new offices results in vacancy of older properties 13

14. |Date 19-06-2013 The consequences (1) ›Partition of the market into primary and secondary segments ›Primary market fully marketable ›Secondary market often difficult to let on conventional terms ›Offices can move to secondary segment after only five to ten years 14

15. |Date 19-06-2013 The consequences (2) ›Major adjustment of reasonable expectations necessary ›In 1999/2000/2001: strong demand for offices, low vacancy rate, shortages more probable than oversupply ›Recently: many offices will be in primary market for 5-10 years and then move to secondary market with lower rents and higher vacancy rates 15

16. |Date 19-06-2013 The consequences (3) 16

17. |Date 19-06-2013 The consequences (4) ›The space market is efficient, as the market segmentation is being reflected in rents ›Pronounced adjustment in rental difference between new and older offices from 2004 to 2008 ›Difference not yet sufficient to create equivalence 17

18. |Date 19-06-2013 Expectations ›Trends, as analysed before, can continue: strong preferences for new buildings, high supply elasticity ›Are reasonable expectations, based on current trends, included in investment yields? ›Difficult to know exactly ›We have no more than a summary of the trends on the investment market (figures from JLL) 18

19. |Date 19-06-2013 Office yields 1998-2012 19

20. |Date 19-06-2013 Analysis of yields (1) ›When should adjustment of expectations have taken place? ›It is more than simple information ›Understanding of market processes necessary ›Market participants have to appreciate underlying process, resulting in market segmentation 20

21. |Date 19-06-2013 Analysis of yields (2) ›Split of market as shown by diverging vacancy rates and prices takes place between 2004 and 2008 ›Yields record low in 2006 and 2007 in line with comparable cities ›Yields in Amsterdam start to remain higher as from 2008 21

22. |Date 19-06-2013 Analysis of yields (3) ›Yield difference with Munich and Stockholm lowest in 2006/2007: 45 bps ›Rising to 75 bps in 2010 and even 115 bps in 2012 ›Tentative conclusion: investment markets adjust to changed conditions, but with several years delay 22

23. |Date 19-06-2013 Explanation (1) ›German investors major buyers on Dutch office market ›They were the first to spot opportunities in Amsterdam after 1994 ›Since 1995, they account for 35% of office investments in The Netherlands ›Estimated market share in Amsterdam area 50% 23

24. |Date 19-06-2013 Explanation (2) ›German funds invest on behalf of multitude of small private investors ›Ultimate investor lacks insight in markets ›Funds feel pressure to invest ›Geltner, Miller et al (2007): duress can result in market inefficiency 24

25. |Date 19-06-2013 Explanation (3) ›Alternative analysis in recent report by CBRE: high vacancy rates in peripheral submarkets are common in other cities as well ›However, this argument fails to consider that in Amsterdam peripheral areas with high supply elasticity account for 75% of the market 25

26. |Date 19-06-2013 Explanation (4) ›Vacancy rates 26 RegionCBDHighest submarket Munich 2.1%16% Stockholm 4.6%12.8% Brussels 6.9%28.6% Amsterdam 7.2%28.6% Hamburg 8.1%16.4% Frankfurt11.9%35.8%

27. |Date 19-06-2013 Conclusion ›Market failure is a fact: waste of capital in office market ›Lack of efficiency in office investment market is plausible ›More research into market processes is important ›Other points of interest: location patterns and supply elasticity 27