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Thursday, 24 March 2011

Getting rich with Commercial Real Estate (CRE) Pt II? Yes, we can!! Can we??

A few weeks ago I wrote in part I of this story about two major Dutch banks ING and SNS losing their interest in CRE. Tired of the enormous write-offs on commercial real estate in Spain, Ireland and Portugal and aware of the growing risks of being involved in it, the banks are getting rid of their portfolios.

But there are always the traders, the pension fund investors and other people personally involved with CRE. And these people are celebrating their annual gathering in the jetset city of Cannes, France.

Every year the CRE congress MIPIM is used as an excuse to visit the mediteranian city. All the ‘names’ in CRE enjoy a few days of sunny weather, excellent hotels, exquisite dinners and networking old-fashioned style with lots of alcohol and pretty women hanging around. Taking a look at the dozens of million dollar yachts, the totally overbooked elite hotels and the extravagant “rides” (Lamborghini’s, Ferrari’s, Bentley’s and perhaps even a Bugatti Veyron), it seems like business–as-usual in CRE.

But if you look closer, you will notice that the Dutch CRE-traders, large pension fund investors and bankers don’t look so happy anymore and act a little bit nervous. It seems that the Dutch Public Prosecutors finally have caught some of the big fish in the opaque CRE business and they are busy reeling in a lot more.

The CRE people that are not yet under suspicion act the same as (racing) cyclists or baseball players, when they hear a colleague is suspected of using narcotics:
-     “I never liked and trusted him. He was always such a strange guy”
-     “He did offer it to me too when I was introduced to him, but I refused of course”
-     “He is an SOB that gives our line of business a bad name’”
-     “I didn’t expect that he was involved too”.

And for the rest: everybody is innocent until his or her name is printed in the newspaper. So that is the thing you have to prevent.

What is going on?!

CRE in The Netherlands has always been an extremely lucrative business, accessible to a happy few that new eachother like their own family:
-     Fund managers for the large pension funds (Philips company, civil servants, dockworkers, railway personnel, postal employees)
-     Fund managers for the big banks and insurers (ING, SNS Reaal, ABN AMRO, Rabobank, Aegon, Delta Lloyd)
-     Large project developers
-     Large realtors in CRE
-     Wealthy owners of CRE
-     Big notary’s and law offices
-     (Representatives of criminal organizations)

Already with the normal sales and purchase actions of CRE traders a lot of money was earned, as the CRE business has been booming for many years. But in every market where large sums of money are involved, the risk for fraud is huge. And there HAS been fraud in the Dutch CRE business. Three examples:
-     Commercial buildings, owned by pension or real estate funds, that were sold 3 times in one day via corrupt notaries.
o    The first sale to a front man was with f.i. for €4.5 mln heavily undervalued
o    The second sale to a second front man had an increased, but still undervalued price of f.i. € 8.5 mln
o    The last sale was against a fair value of €12.5 mln to the real buyer, who didn’t know anything about the previous sales.
o    The participants in the pension fund were taken for a ride, while the fund managers and their accomplices received kickbacks of mlns of Euro’s.

-     Corrupt civil servants informed large project developers in advance of community interest for agricultural terrain. This interest would be presented in due course via a zoning scheme.
o    The project developers bought the terrain for a “token” price from the farmers as agricultural terrain
o    The community changed the terrain to “building terrain” via the zoning scheme
o    The terrain was sold for multiple times the value to the community.
o    The project developers and the civil servants got their kickbacks.

-     Fraudulent investment offices that offer large investors a special investment in CRE in some high profile business park or resort in The Netherlands or outside (Dubai and Qatar were longterm favorite spots):
o    The investors are offered unreal yields of 10%+ per annum.
o    The investment is displayed in glossy brochures that look very expensive
o    The minimum investment amount has always been more than €50.000, as the Authority Financial Markets (AFM) may not check those high investments.
o    After a few months in which the deposit money of the unlucky investors is collected and interest payments are made on time, the money flow dries up.
o    All ties to the investment office are suddenly cut and the perpretrators are ‘gone with the wind’.

And there is also a special category investors in CRE: large drugsdealers and drugstraficcers that need to launder and invest their huge profits. As it is much harder now to stash it in normal banks, with all their government controls on suspicious money, commercial real estate was the target of choice for the drugsmob.And in contrary to the normal, ignorent investors in CRE, these guys always get their money.

The last ten years at least five important owners, traders and lawyers connected to CRE have been murdered in mob-related hits:
-     Willem Endstra
-     Victor ‘t Hooft
-     Peter Petersen
-     Kees Houtman
-     Evert Kroon
-     Evert Hingst

In non of these cases the real people behind the deals have been caught. And the rest of the insiders, whether they know everything of it or not, all keep their mouth shut.

But now the Public Prosecutors do mean busines concerning the fraud with CRE. With the criminal cases against Jan van Vlijmen, Nico Vijsma, Kees Hakstege, Hans van Veggel, Hans van Tartwijk, Dennis Lesmeister and Harm Trimp the public prosecutors showed their teeth. That a lot of cases have been settled, before being sent to court is a shame. But I guess that the prosecutors have their reasons for it.

In Cannes the kings of CRE return to their luxurious yachts after a well-spent evening. But some of them feel a cold wind blowing…

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