Report ofthe Managing Board
Introduction
In our previous annual report we pointed
out that 1973 was a favourable year for
our business; the same holds true for the
financial year 1974. It is gratifying for us
that this can now also be expressed in the
dividend proposal. Naturally, external
circumstances have not failed to affect our
business: monetary unrest, a high rate of
inflation, excessive interest developments
on the money and capital markets and a
growing recession, making itself felt by an
apparent decline of demand. A quick re
sponse to the development of all these
factors is required. We believe that we
have so far succeeded in doing so, and we
look to the future of our business with
confidence.
The monetary unrest and the high rate of
inflation directly influenced interest
developments on the money and capital
markets. The monetary unrest made it
self felt strongest in the rates of the
money market. Not only did they move
throughout the year on a high level, but
they also showed wide fluctuations. On
the capital market, the interest rate gra
dually climbed until the end of September,
after which a rather sharp fall set in,
which continued in the beginning of this
year. On the private capital market, the
interest-rates were in the past year during
a great many months considerably higher
than on the open market.
It is understandable that in this situation
theories on interest developments are in
the limelight again. More than before,
however, the stress is now laid on the
element of inflation in the build-up of the
interest rate. Interest on the capital
market is viewed as a combination of
nominal and real payment of interest.
Although we do not wish to deny by any
means the influence of inflation on the
interest level, we hold the view that too
dominant a place is sometimes accorded
to this factor. This entails the danger of a
one-sided explanation of the essentially
extremely compound process ofthe de
termination of interest rates. Thus, for
instance, under the influence of the
further deterioration of the economy at
the end of 1974, the interest-rate on the
capital market dropped despite an increase
of the rate of inflation. We are, therefore,
of opinion that in view of the complexity
of the causes, forecasts for interest-rate
developments should be handled very
cautiously.
For the valuation of real estate, too, there
is a danger of one-sidedness if the
interest-rate on the capital market is
considered to be the only determining
factor for this value. It stands to reason
that there is a correlation: for, an investor
will, in the case of a comparatively low
capital market interest, be willing to pay
a higher price for the real estate than in
the case of a comparatively high interest
rate. Owing to the continuous rise in
building costs, as a result of inflation,
prices of new buildings rise and, by way of
reaction, prices of existing competing real
estate rise, without it being necessary that,
at the same time, a corresponding rise in
rental income occurs.
It now appears that the investor is willing
to pay the higher prices and to accept a
lower initial yield. This willingness is
based on the conviction of a continuing
inflation and the resultant rise in (index-
linked) rentals, which will in the end re
deem the initial loss of yield. Thus real
estate prices adjusted themselves recently
to the strongly risen building costs, in
which process the influence of develop
ments of the capital market interest ap
peared to be comparatively small.
Of course there is a limit to the
temporary sacrifice of part of the yield.
First of all, it must concern first-rate real
estate with index-linked rentals. More
over, the anticipating of future improve
ment of yield must not bear a speculative
character; it must be possible to realise
this improvement of yield in the short
run.
