2022 ended up being a remarkable and unpredictable year. The end of covid did not bring an economic recovery as expected, as Russia’s invasion of Ukraine resulted in an energy crisis and contributed to already rising inflationary pressures. This in turn has affected business and consumer confidence. To top it all off, Government pre-announced – totally unwarranted, in our view – the abolishment of the Dutch real estate FBI per 2025.

Whilst the long term strategy remains intact (a clear focus on location, sustainability and services, supplemented by selective developments and underpinned by a strong balance sheet), given the uncertainty we accelerated and slowed elements of the strategy as appropriate. In 2022 the emphasis was on leasing,
the HNK brand update and our Paris alignment roadmap. In Q4 we chose to dispose of a few remaining non-core locations and decided to postpone the Well House project.

CAPITAL DISCIPLINE
The rapid and material rise in interest rates in H1 forewarned a correction in property values in H2. Values were down by 6.2% in H2 (FY22: -5.6%). This has pushed the gross initial yield on the portfolio now to an attractive 6.5%.

2022 as such was a year to be disciplined, both on acquisitions and developments. No acquisitions were made during the year. In December we sold HNK Hoofddorp and a small asset in The Hague for € 8.2m (a 2% discount to 2021 book values), to end the year with a LTV of 28.7%. Two further assets, HNK Ede and HNK Den Bosch, were sold in January 2023 for a total of € 23.2m (a 12.4% premium to the 2021 book values).

Capital discipline remains key going into 2023. We will have to judge potential acquisitions vs potential developments (and vs our cost of capital), whereby we appreciate that acquisitions of the quality of our development programme may not become available, nor become available at a price that makes sense.

BUSINESS DISCIPLINE
In a period where our clients worry about the impact of WFH (work from home), the economic outlook, high indexation and service charges, more than ever we have maintained an active dialogue with our clients. Customer retention is key. In the end, as a result, the overall vacancy rate was marginally up, at 6.2%.

We have to keep offering the right product, in terms of location, sustainability and services, to stay relevant for our customers. We have a clear strategy and continue to invest in our portfolio. Especially on sustainability we have made great strides, with a clear path to be fully Paris-aligned by 2034, and with improved BREEAM and EPC labels to match, as we discuss in detail in the following section

DEVELOPMENT
By late Q4 we were fully ready to start the Well House project, but we have – for now – chosen not to, due to higher than expected building costs in combination with increased overall market uncertainty. We will actively revisit the case for Well House in 2023, taking into account construction costs, land values, yield and rent levels.

In 2022 the focus at Vitrum was on getting all stakeholders to agree on the new plans. Getting the municipality, the owner-association and local residents to agree proved a daunting task.  All our efforts should result in a fully worked-out plan by early Q2 2023, with the start of the project still foreseen for H2 2023.

In January 2023 ING and NSI jointly approved the final design for the Laanderpoort project. We are still on track to start the project in Q4 2023. In Q1 2023 the tender for the contractor will start, which should confirm the business case for what will be a new, highly sustainable, asset with a 15-year lease to a blue-chip tenant.

OUTLOOK FOR 2023
Whilst the abolishment of the FBI regime by Government has been postponed to January 2025, going into 2023 we have a strong incentive to agree a clear path forward for the business and provide clarity to all stakeholders. We are still lobbying for a reversal, jointly with our listed peers and other stakeholders, but prolonging the current uncertainty is hardly appealing. We continue our work on identifying possible alternative scenarios.

For 2023 we expect inflation to subside yet stay elevated. As a result, interest rates are unlikely to revert back down much. This will probably see institutional capital shift from real estate (now overweight) into bonds (now underweight). Yet, as prime office real estate continues to offer highly attractive inflation-hedging characteristics, for the best, most sustainable, assets, we expect valuation yields may well end up stabilising at levels below interest rates, as it has been in the past.

In late 2022 appraisers have adjusted capital values down a lot more quickly than in the 2009-2014 down cycle. We believe this is a positive, and the speed of adjustment would suggest this time any value declines might well be behind us by end 2023. Yet, if interesting opportunities were to come along earlier, we will not hesitate to act.

EPRA EPS for 2022 is € 2.15. We will propose to the AGM a final dividend of € 1.12, for a total dividend of € 2.16, as promised. Going into 2023 it is too early to provide guidance on EPS as there are too many moving variables. Whilst we expect to capture circa 6% lease indexation in 2023, a delayed effect from 2022, much will also depend on the outcome of our FBI review, and the potential impact of further asset rotation and further movements in interest rates. Rest assured we will continue to work hard to maximise value for all stakeholders.

Bernd Stahli