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Monday, 16 April 2012

Getting rich with Commercial Real Estate Pt VI: Get rich or die trying!

In our continuing saga upon the Dutch real estate market, there are even more dark clouds up ahead than before.

I wrote in the latest episode Getting rich with real estate Pt V: Game Over? on the unfortunate adventures of Hanzevast Capital in the land of Dutch Commercial Real Estate (CRE). At this time, it was already hardly possible to put away the misfortunes of companies like Hanzevast and Uni-Invest as isolated cases. However, the ranks of the other Dutch real estate companies, pension funds and the large banks, like Rabobank, ABN Amro and ING Bank, still remained closed.

This might change very soon. While the Dutch stakeholders in the CRE business show ‘the eternal sunshine of the spotless mind’, their foreign competition seems ready to throw the towel, according to an article in the Dutch financial newspaper Het Financieele Dagblad (

The latest plan of foreign companies, owning large portfolios of second-rate Dutch Commercial Real Estate, is to organize large auctions in order to sell their portfolios and cut the losses.

While probably being a sensible move for the companies to whom it concerns, it is like the absolute nightmare scenario for the Dutch companies ‘keeping up appearances’. ‘Blast, now the people discover that the emperor doesn’t have any clothes on’.

Here are the pertinent snips of this FD article:

Foreign institutional investors are planning to auction for billions in Dutch second-rate office buildings.

The pressure to sell comes from a tidal wave of maturing real estate loans, while the possibilities for rolling over credit lines are extremely limited. Many loans are under water, as the value of the office buildings is much lower than the amount of money being borrowed for it. This puts further pressure on a market that is haunted by structural vacancy. There is hardly any outlook on market improvement, according to an expert, which forces more and more investors to take their losses.

Until now, especially the CRE portfolio of CRE management company Uni-Invest was notorious. An outstanding, matured loan of €600 mln was the reason for an auction of 200 office buildings at a discount of 40%. The auction failed totally as no buyer showed up. Tomorrow, the bondholders of Uni-Invest are voting on a solution.

However, data of credit rating agency Fitch disclosed that Uni-Invest is just a prelude: until 2017 almost €6 bln in credit lines on second-rate office buildings must be rolled over. A quarter of this stock has been financed with loans that have already matured, without being paid off. To this €1.5 bln amount, there is only €90 mln in loans that have been paid off in time. ‘This is a very bad omen’, according to Hans Vrensen of real estate advisor DTZ, based in London.
ABN Amro estimates that investors have a total of €50 bln in outstanding loans on Dutch CRE.

Can the problem not be rolled over? ‘That is not the style of foreign bondholders’, according to Nard Schuddebeurs of real estate specialist Jones Lang LaSalle. The €6 bln in maturing loans are so-called commercial mortgage backed securities (CMBS’s). These are loans with CRE as collateral, that have been packed, split up and resold to foreign investors. Schuddebeurs:’Foreign investors and banks are less willing to do what the Dutch banks do: rolling over the problem until one day the sun starts shining again on the Dutch CRE market. They take their losses and care less about the stability in The Netherlands.

Other specialists speak also of ‘the majority of loans on office buildings outside the A-locations, being underwater, where the pain should still be taken’.

Two snips from Pt V of this saga from March 15, just to remind you:

‘Uni-Invest owns real estate of the wrong kinds and vintages in exactly the wrong places. That’s a shame, but never mind! We [all other investment companies – EL] own prime-cut Commercial Real Estate at Triple-AAA locations. Every speculation on write-offs is strongly exaggerated. Trust us, we know we are worth it!’

I wonder if a 50% depreciation would not be more justified than even this 21% depreciation. However, such a depreciation would certainly be the end of Hanzevast Capital and its investors. And the worst has yet to come…

I think I might state that I was right when I predicted that the worst has yet to come.

Still, companies could defend themselves by stating that the office buildings coming on auction are second-rate investments, while they own CRE at A-locations. I will return: 
  • Did municipalities, project developers and the central government stop building new CRE? No, they didn’t. 
  • Is there (structural) vacancy on A-locations? Yes, there is! Even on the Zuidas in Amsterdam and on the Weena in Rotterdam; two of the best locations in The Netherlands. 
  • Is there an improvement in the Dutch economy that might soon spur demand for office space? No, there isn’t! 
  • Is there an increasing need for office buildings in The Netherlands? No, to the contrary, there is an ongoing trend called ‘new labour’ (i.e. Het nieuwe werken) that stimulates working from home for a few days per week. This might further diminish the need for office space. 
  • Even if demand improves in the coming years, will that mean that the vacant office buildings might become popular again? No, it won’t: with every day of vacancy, the office buildings become less interesting for new tenants or buyers: not energy-efficient enough, not having the right style anymore, needing too much rework to become usable etc. 
My take is: the auctions will lead to a financial disaster where discounts of 50+% must be accepted. This will finally force large Dutch owners of CRE-portfolios to cut their losses too, as assuming the ostrich position will not be sufficient anymore. This might lead to dropping bank-shares and deteriorating coverage ratios at insurers and pension funds.

To conclude with an explanation of the title of this article: It will not be so much ‘getting rich’ as it will be ‘dying while trying’. That is a pessimistic outlook, but I’m certain it will be the right one!

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