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Tuesday, 22 February 2011

Getting rich with Commercial Real Estate (CRE)? Get real!

If one thing has become clear during these last weeks, it is that the love between two of the three largest holders of CRE in The Netherlands and their main investment is far from flourishing:

-      SNS Property Finance, subsidiary of SNS Reaal (Dutch bank and insurance company), has written off a staggering 858 million (mln) EUR on their CRE investments and goodwill, mainly due to depreciations on the Spanish CRE Portfolio . 
-      ING Real Estate Investment Management, part of the ING Group, is sold to CB Richard Ellis and other investors for about $1 Billion

SNS Reaal
To start with SNS Reaal: they presented their annual results on February 17. with a net loss of 225 mln EUR for the total group. This result was booked in spite of a net profit on the banking and insurance activities of 368 mln EUR (including a 71 mln EUR net loss on Group activities).

In other words: although the bank and insurance activities of SNS Reaal had a satisfying year in 2010, the total results of the group (balance sheet total of 127 billion EUR) were pushed far below the zero line by an extraordinary depreciation of the CRE portfolio of SNS Property Finance. What’s the story?

The following is an excerpt from the press release concerning the annual results of SNS Reaal (translated in English)

The strong increase of the loss at Property Finance was mainly caused by the reinforcement of loan provisions. This lead especially in Q4 (413 mln EUR) to high extraordinary depreciations. In 2010 the total amount of extraordinary depreciations (excluding the extraordinary depreciation in goodwill) was 790 mln EUR. This figure consists of:
-   628 mln EUR in write-offs on loans
-   117 mln EUR in write-offs on CRE projects
-   45 mln EUR in write-offs on participations  

The 628 mln EUR write-offs on loans led to a reinforcement of the provisions, while 150 mln EUR of the provision is used for cutting back the credit portfolio during 2010. As a result the coverage ratio (provisions as a percentage of anticipated loans) improved from 14.9% in 2009 up to 41.7% in 2010: 

-   The coverage ratio of the international portfolio improved from 18.5% (2009) up to 52% (2010)
-   The coverage ratio of the Dutch portfolio improved significantly from 9.3% up to 29.2%
These higher coverage ratios will facilitate the planned reduction of the 6.5 bio EUR (end of 2010) portfolio in the next 2 to 4 years.

Some more background information on the problems at SNS Property Finance is written by Gerdo de Jager (information property of, link in Dutch), founder of the Dutch company ‘Beurswaage Fondsanalisten’, specialist in off-exchange investments (mainly CRE). This whole article is a must-read, but unfortunately (for the people that don’t manage this language) in Dutch.

Here are some pertinent snips of the article, that I’ve translated to English:

SNS Property Finance became a big player on the Dutch CRE market after taking over Bouwfonds (a large CRE and private property investor) from ABN AMRO. However, the company took little pleasure in this investment.
Especially the foreign activities in North-America and Spain delivered large losses, as a result of deteriorating market conditions. Also for this year (2010) huge write-offs are foreseen on the foreign credit portfolio.
In hindsight SNS PF took too large risks. Managing Director Reinout Overbeek confessed in an interview with ‘Provada Magazine’ in June 2010:
“Just like other parties, we have a time behind us where the sky seemed the limit: increasing values, large fundings and enormous transactions. At some time it seemed like it didn’t matter what you financed, as it would yield anyway.
We drove eachother crazy with increasingly financed CRE and margins that got lower and lover. Those times are over and they won’t come back. Conditions are tighter and risks have been diminished”
In an attempt to stop the bleeding of money, parent company SNS Reaal announced in 2009 to reduce the international CRE activities. And now the company is partially withdrawing from the Dutch CRE market.
To achieve this, a part of the Dutch loan portfolio will be put into a separate investment vehicle, together with foreign loans. The remaining Dutch loans will be merged with the current activities in the area of Small and Medium Enterprise (SME) of SNS Bank, to be carried on under the name SNS Zakelijk (SNS Business).

A good name for the separated investment vehicle would be “SNS Garbage Bank”, I guess.

The funny thing about SNS Reaal is not that they carried out the write-offs on their CRE Portfolio. Reading the quote from Managing Director Reinout Overbeek of SNS Property Finance, you can only conclude that it was a very sensible move to do and it will increase investor confidence in SNS Reaal.

The real funny thing is that the other large investors in CRE – Rabobank, ABN AMRO and ING – are continuing to play their game of Chicken, concerning their portfolio. Don’t ask, don’t tell…

ING Real Estate Investment Management (REIM)

A tell-tale signal might be the following pertinent snips of ING Group about the sale of ING Real Estate Investment Management to CB Richard Ellis:

February 15, 2011, ING REIM
ING to sell most of REIM for USD 1.0 billion
•   ING to sell three ING REIM businesses to CB Richard Ellis for USD 940 million
•   ING to sell one ING REIM business to management and Lightyear for USD 100 mln
•   ING to also sell up to approx. USD 100 mln in equity stakes in some ING REIM funds
•   Sales expected to deliver an after-tax gain on disposal of approximately EUR 500 mln 

ING announced today that it has reached agreement to sell the majority of its ING Real Estate Investment Management business (ING REIM) in two separate transactions for a combined price of approximately USD 1.0 billion (EUR 770 million). In addition, as part of the overall transactions, ING has also agreed to sell up to approximately USD 100 million of its equity interest in existing ING REIM funds.
“With these transactions we continue to deliver on our strategic objectives of reducing exposure to real estate, simplifying our company and further strengthening our capital base,” said Jan Hommen, CEO of ING Group. 
ING has entered into an agreement with CB Richard Ellis Group, Inc., to sell ING REIM Europe, ING REIM Asia and Clarion Real Estate Securities (CRES), ING REIM’s US-based manager of listed real estate securities, as well as part of ING’s equity interests in funds managed by these businesses. The proceeds for these REIM businesses and the equity interests amount to approximately USD 1.0 billion. 
The Real Estate Investment Management business in Australia (ING REIMA), with EUR 4.8 billion in assets under management as of 31 December 2010, is not included in these transactions. Within the context of the previously announced evaluation, ING finalised the review of the strategic options and implementation has commenced. As a result ING will undertake a phased withdrawal from its Australian real estate investment management activities in a timely and controlled manner.
In the transaction with CB Richard Ellis, ING Insurance has agreed to continue its asset management mandate with CB Richard Ellis as the new manager of the funds. ING Bank will continue to have an equity interest in some REIM funds in Europe, Asia, the US and Australia. 
The equity stakes held by the Bank will be monetised over time as it continues to steadily reduce its exposure to real estate

Forget the blah-blah of ING Group’s CEO Jan Hommen about:
-     continuing to deliver on strategic objectives of reducing exposure to real estate
-     simplifying the company
-     further strengthening the capital base.

It is the same babble that CEO’s always pour out when they have to defend a disinvestment that is almost indefensible, if you look at the amount of money that is lost. This sale to CB Richard Ellis is a good way to prevent non-professional investors and analysts from finding out what was the true balance sheet value of the CRE that is now sold for $1 bln.

Although I don’t know the book value of this CRE, you can be sure that it was a lot more than this $1 bln. Therefore a tip on the hat for the honesty of SNS Reaal’s Reinout Overbeek and the company in general, for not beating about the bush concerning their losses in Commercial Real Estate.

As far as I’m concerned, CRE is a no-go area for as long as the current weak market remains. And it might remain for at least five more years in The Netherlands, looking at the bad-but-stable situation the CRE market is in currently. And Spain: forget it!


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