IVBN: Why capital is not invested automatically
This column was originally written in Dutch. This is an English translation.
Even when capital is available, it does not automatically lead to new projects. For that to happen, the conditions must be right and the risks must be manageable.
By Judith Norbart, Director, IVBN
When it comes to the housing challenge, attention is rightly being focused on how to mobilize national and international capital. But there is a crucial link between ambition and implementation: investability. After all, capital does not follow ambition alone; it seeks certainty. If that certainty is lacking, capital remains untapped, no matter how great the societal challenge may be.
Return on investment is the result of risk
In real estate, return on investment is not a fixed quantity, but the result of risk. That risk varies by project, by location, and by development phase. An inner-city transformation involves different uncertainties than an expansion site, and investment only occurs once there is sufficient certainty. The amendment to the Act on Strengthening the Management of Public Housing contributes to this. The opportunities to file objections to housing construction plans are being limited, thereby shortening objection and appeal procedures. This leads to a significant acceleration of housing construction. At the same time, projects become more predictable and easier to finance, which improves investment viability.
Conditional Capital and Manageable Risks
That is why capital is largely conditional. It becomes available when risks are manageable and transparent. If that foundation is lacking, capital will not be deployed. This is not just a matter of the willingness to invest, but above all of the conditions under which such investment can be justified. Where basic conditions are missing, the willingness to invest simply ceases.
Current practice makes this very clear. Grid congestion is the most relevant example. Without certainty regarding a power connection, a project cannot be realized. In such cases, there is no longer a risk that can be factored into the price. It is a matter of a basic service that simply must be available.
A similar mechanism applies to the permitting process. If procedures take a long time and outcomes are unpredictable, the risk becomes difficult to assess. Such uncertainty cannot be properly factored into pricing. As a result, it tends to lead to the postponement or cancellation of projects rather than to increased willingness to invest. The result is that capital remains unused, even though the need is great. Such obstacles cannot be offset by a higher expected return.
The Complexity of Investments
The practice of investing is characterized by interdependence and nuance. Policymakers often focus on one or two factors, whereas it is precisely the interplay of factors that is decisive. Investing is complex: virtually all factors are interrelated. Some risks are manageable and can be quantified financially, while others can completely derail a project. It is precisely the ability to overcome these obstacles that determines whether capital is actually deployed.
From Prerequisites to Returns
Anyone seeking to accelerate housing construction would therefore be wise to shift the focus to an integrated approach centered on risk mitigation. This requires a government that facilitates, predictable and efficient permitting, consistent policy frameworks, and the resolution of bottlenecks such as grid congestion. Only when these preconditions are in place can the necessary capital actually flow into projects. It is not the availability of capital that determines the pace of housing construction, but the extent to which risks are manageable and investments become feasible. Precisely for this reason, risk management is not a technical detail, but a prerequisite for acceleration. Without investment feasibility, housing construction remains an ambition on paper. Capital follows not only ambition, but above all the certainty of conditions that actually make investments possible.
Read this column in the digital edition of Financial Investigator magazine