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Thursday, 14 July 2011

“Building cooperatives take too much risk”. Or: how solid Dutch institutions changed into kamikaze investors in the RRE-market

The Dutch financial newspaper “Het Financieele Dagblad” ( writes an article on the investments of building cooperatives in building ground and real estate projects. The article states that the building cooperatives lost large sums of money, due to poorly executed risk-assessments on their investments. Here are the pertinent snips of this article:

The risk management at projects of building cooperatives has all kinds of shortcomings. That is concluded by the financial supervisor on this industry, the Central Foundation for Public Housing (CFV), in an investigation published today. The CFV finds that an integral risk management-system is lacking at many building cooperatives. Also there is too little integration with the administrative decision-making process and information supply. Therefore there is a lacking  comprehension of the total corporate  risk.       

‘In many of the investigated cases, this risk comprehension is lacking’, according to the CFV. ‘Integral risk management is extremely important, especially at building cooperatives that have many high-risk projects in development, which have in common a long run time’.

The foundation looked at the risk management of all 418 cooperatives, in cases where building ground was purchased  or real estate projects were established. ‘The CFV noticed a contradiction between the returned answers on a questionnaire, received from the building cooperatives and the results of a further investigation, executed by the CFV’, according to Jan van der Moolen, managing director of the CFV. ‘According to risks, the cooperatives are too optimistic and decisions on ground purchases are taken too easily. There is no discussion about it. A number of cooperatives purchased large amounts of building ground and this seemed to happen at random’.

The CFV states that supervision on the ground purchases by the supervisory boards has been too limited. In discussions with the board members the CFV criticized them and handed out many advices.’The board members were glad; with this information they could better stand up against the executive directors’.

The subject ‘terrain portfolio’s within building cooperatives’ is currently very popular, because of ‘recent incidents’. Recently, it was in the news that a building cooperative from Geertruidenberg had to write off €35 mln on its Real Estate and Ground investments portfolio, due to maverick investments gone awry. Interim-manager Peter Ruigrok of WSG found ‘a lack of executive professionalism during the process of ground purchases’ at his predecessor, who had been fired in the meantime. ‘There was no strategy behind the purchases and too many risks were taken’, according to Ruigrok. Other problems occurred at cooperative ‘Servatius’ from Maastricht, ‘De Key’ from Amsterdman and SGGB in Hoofddorp.

During 2006-2010, all building cooperatives doubled their ground positions to €2.1 bln from €1. On top of that, the cooperatives maintained purchasing ground in 2008 and 2009, in spite of the crisis. ‘Remarkable’, according to CFV-director Van der Moolen.

The more than 400 building cooperatives in The Netherlands had to write off a total of €87 mln on their ground positions in 2009. Van der Moolen thinks that this amount might be higher in 2010. Only WSG had to write off €35 mln. ‘And there are more cooperatives that are still busy processing their losses. A number of cooperatives postponed writing off on their ground portfolios, during the last years.

This article describes very well the amateurism, ignorance and (sometimes even) greediness that those building cooperatives are operating with on the building ground markets. Kamikaze investing is the phrase I like to use for this. And unfortunately, you can find the same greediness, ignorance and amateurism among other large parties on the building ground markets, like banks, insurance companies, local governments and pension funds. The parties that profit from this amateurism are the shady traders in building ground that are often front-running official transactions, based on (often illegally) obtained information.

The nasty side of this article is that the building cooperatives are often institutions with a mandatory membership for people that want to rent or buy a house in cities and villages in The Netherlands: no membership, no house. The money to invest in building ground and real estate-projects is brought together by thousands of members in the past and present.

This makes that the money of these cooperatives is in reality community money that should not be wasted on useless ground purchases and dangerous Real Estate-projects.

I am satisfied that the CFV is now reporting on these abuses of the building cooperatives. However, I don’t have the impression that the supervision on the whole public housing-industry has been very outstanding.

Next to this story, there have simply been too many stories on real estate-fraud, money-laundering, embezzlement and abuse of public money by the ‘barons of Real Estate’ in the building cooperatives: people in semi-public functions that were forgetting the difference between public money and personal possessions. This has been adding to the growing distrust of the Dutch citizens towards these semi-public institutions.

The thing that the CFV could do to diminish this distrust is: not only handing out warnings and critics towards these building cooperatives, but acting in a decisive manner, when they suspect fraud or reckless acting among the cooperatives.

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