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Tuesday, 15 February 2011

Two building companies (almost) bankrupt in one day: does the economy try to tell us something?

It was a black day for the Dutch building world yesterday:

-   Midreth, a 200+ million EUR building company, famous for the building of football stadiums and the refurbishing of the world-famous Stedelijk Museum in Amsterdam went bankrupt, after asking for suspension of payment on January 28 of this year.
-   February 14., the Heddes Bouwgroep, also a 200 million EUR building company and part of Heddes Holding, asked for suspension of payment.

According to Financieel Dagblad (Dutch financial daily newspaper; link in Dutch):

“the problems are mainly caused by the stagnation in the number of commissions given to the building companies, as municipalities cut down their building budgets. Chairman Nico Rietdijk of the Dutch Society of Developers and Building Companies (NVB) predicts that 2011 will be ‘an extremely difficult year in which also the top 25 building companies could go bankrupt. The economy is improving. The prices for raw materials are rising, but the market is not picking up yet. Cash flow is the drawback currently. If the number of orders in hand imploded and you didn’t reorganize, things can co wrong very quickly if your customers didn’t pay’. 
Uptil now mainly smaller builders and subcontractors have been struck by the crisis, but even large, renowned building companies like Heijmans, Hillen & Roosen and Van Hoogevest came into financial problems. According to the Dutch Central Bureau of Statistics (CBS) the building and construction sector is the sector with the largest number of bankruptcies”.

The problems of Midreth had to do with financial risks and drawbacks the company was running in some building projects:
-   They took financial risk while building the Dirk Scheringa Museum, founded by the founder of DSB Bank. When the DSB Bank, its chairman Dirk Scheringa and all his participations went bankrupt, Midreth had to take the financial burden on its own shoulders.
-   The refurbishment of the Stedelijk Museum in Amsterdam had to content with endless delays for a great number of reasons. It should originally be finished in 2008, but will now be finished earliest at the end of 2011. Lack of experience with this kind of refurbishments was the main problem for Midreth in this commission.
-   The main reasons, however, are subject to investigation by the receivers who investigate the bankruptcy

The suspension of payment for Heddes Bouwgroep was – according to Financial Dagblad – “mainly caused by the refusal of Deutsche Bank Nederland BV to expand a credit facility for the building group”. Deutsche Bank refused the expansion in the credit facility as Heddes is in a legal fight with the Dutch city of Hoorn over a collapsed theater in 2001, rebuilt before by Heddes Bouwgroep, and couldn’t come to an agreement.

However, there are more reasons for the problems of the company. It  seems (at least partially) to be caused by events within the holding company of the building group, Heddes Holding:
-  Another branch of Heddes Holding, the HGM Exploitation group (link is in Dutch), went bankrupt while temporarily running a large highway hotel, Hotel Lijnden.
o  HGM purchased the 342 rooms hotel as the initial operator of this hotel -  AMS Hotels -  went bankrupt before.
o  The hotel was built earlier by Heddes Bouwgroep for yet another branch of Heddes Holding, Hotel Lijnden BV
-   This left a lot of bills from Heddes Bouwgroup unpayed and made Heddes to book off 9.4 million EUR in 2009.
-   Although this event happened two years before the suspension of payment of Heddes Bouwgroup, the results might have been devastating for the financial health of the company

With the bankruptcy of Midreth and the presumable bankruptcy of Heddes about 450 jobs are at stake. Probably many more will follow.

This whole story shows that the Dutch economy, although it had a growth of 0.6% in Q4 2011, is still extremely wobbly, especially in the building sector. What makes things worse is that vacancy of commercial real estate (CRE) in important cities like Amsterdam, Rotterdam, The Hague and Utrecht is still between 15% - 20% in average.

After implementation of the ‘dot com’-countermeasures of FED and ECB in the beginning of this century, there has been a building frenzy in The Netherlands, especially for offices and company buildings. Reason for this were:
-  low interest-rates;
-  the “booming” economy;
-  creation of new, heavy subsidized office zones by municipalities
-  the fact that it is often cheaper for a company to develop new offices, than to change existing ones
-  an attitude of: the sky is the limit.

Office buildings that became vacant, remained vacant for long times and although the vacancy percentage (see graph) decreased strongly between 2005 and 2007, the credit crisis gave it the ultimate headshot.  The fact that the vacancy rate remained quite stable for the last three years is caused by the fact that new building projects have been stopped/withdrawn by companies or municipalities and large project developers and contractors had to fight for their existence, cause by a lack of new orders.

To give you an impression of these vacancies:

-   Amsterdam Zuidoost (southeast corner of Amsterdam), a very large office area were many financials have their headoffices, suffers from a 23% vacancy rate of office buildings. 80% of the vacancy in this area is considered structural
-   Amsterdam Zuidas (The “Manhattan” of Amsterdam) suffers from a 15% vacancy rate
-   Rotterdam Weena  (Prestigious area in downtown Rotterdam) suffers from more than 25% vacancy.


Office building in Amsterdam, for rent for already 3 years

There isn’t any indication whatsoever that the vacancy situation in the large office zones will improve in the coming years. It is the job of realtors to always remain positive, but the writing is literally on the wall. The situation in some of these office areas is so desperate that the only feasible solutions are demolition or rebuilding to living accomodation of office buildings. As a result of these possible actions the destruction of capital will be enormous and this will result in substantial write-offs for the banks that financed these buildings.

Even if the economy grows so fast that vacancy would be reduced to 0% (which will not happen), the chances for building companies of commercial real estate will be very small for at least the coming five years:
-  Cities and communities are all looking for ways to cut down their budgets and will not invest in CRE.
-  Companies currently don’t want to put their reserves in new commercial real estate, as the current housing of these companies is almost impossible to sell or rent.
-  Large investors like pension funds have their own difficulties with the current low return on investment for stocks, bonds and savings. Investing into CRE is one bridge too far at the moment.

What the economy tries to tell us is that the economic crisis is far from over.


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