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Wednesday, 20 March 2013

BNR Newsroom: Professor Hans de Jonge of Technical University Delft speaks on Commercial Real Estate. A must-read interview!


Last Monday, 18 March 2013, I was present again at BNR Newsroom, the weekly program of the Dutch business radio station BNR, hosted by Paul van Liempt.

Presenter of BNR Newsroom, Paul van Liempt
Picture copyright of: Ernst Labruyère
Click to enlarge
This week’s topic was the Dutch Commercial Real Estate (CRE) market. Regular readers of my blog know that the Dutch CRE market is still in very big trouble, with a vacancy rate of 16% at the end of 2012.

The first guest of the evening was Professor Hans de Jonge of the Technical University Delft.

De Jonge has been chairman of the so-called ‘Offices Summit’, a thinktank for the Dutch CRE market, whose goal it was to find out how the problem of (structural) vacancy could be solved.

In his role as chairman, professor De Jonge has been strongly involved in the creation of a general covenant for the CRE market, which purpose has been to reduce vacancy of Commercial Real Estate to 6% from the current 16% within ten years. Paul van Liempt asked him what went wrong with this covenant, after signing it.

In spite of the fact that I wasn’t able to ask questions on behalf of Ernst’s Economy for You, I consider this a must-read interview, as it supplies valuable insights in the disturbed Dutch CRE market. Therefore I print an (almost) integral transcript of this interview:

Paul van Liempt: How is the image of Dutch Commercial Real Estate abroad?

Hans de Jonge: Historically, Dutch CRE had a good reputation: stable, with a quite transparent market and with generally fine yields. A few years ago, this reputation deteriorated. Mainly due to overproduction on the offices market and at the same time a dropping need for office space. This situation led to the infamous vacancy in The Netherlands. This vacancy made investors nervous. On top of that, a rookie supervisor of the DNB - on his third day in action - stated in an interview with Het Financieele Dagblad (www.fd.nl) that the third crisis in The Netherlands would be 'commercial real estate'. This interview has been quoted in the Frankfurter Allgemeine and the New York Times. Since that moment, the foreign investors have been wondering if investing in Dutch real estate would be a sensible thing to do.

Paul: Is the core problem overcapacity?

Hans: Sure.

Hans de Jonge, TU Delft
Picture copyright of: Ernst Labruyère
Click to enlarge
Paul: You are also chairman of the "Offices Summit" (a thinktank for the Dutch CRE market). Last year a covenant has been drawn in The Netherlands on how to fight the (structural) vacancy of CRE. What has happened until now?

Hans: Not much. The covenant was based upon four pillars:
  • 1.  Making regional agreements on demand and supply, in order to prevent that more buildings will be added to place that already have overcapacity.
    For example: at this moment we have still twice as much capacity in planning for development than there is demand for CRE
  • 2. Knowing better how much supply there is. We still know very little about the existing supply of CRE
  • 3. Transparency in The CRE market. At this moment, the registered rents and contracts don't give a just image of the market.
  • 4. A compensation-for-demolition fund in order to make demolation possible for CRE without a future. 

Paul: Now you state that very little happened. Could you call the covenant a failure until now?

Hans: No, I don't agree with that. The covenant has been signed. That is not a failure. What went wrong in this particular situation, is that not all  stakeholders stuck to the agreements in this covenant. Some parties respected the agreements in the covenant and others didn't.

Paul: Which parties didn't stick to this agreement?

Hans: I'm very disappointed with the municipalities. After the covenant had been drawn, the steering group was dismissed. Mission accomplished. The covenant was ready. After this event, this covenant became a case of the local governments, municipalities and other market parties. These stakeholders had to take care of the deployment of the covenant. This is when things started to falter.

Paul: What would have been a better solution for this steering problem?

Hans: When the central government would have been in the lead!

Paul: Will this ever happen?

Hans: Minister Schultz - Van Haegen (Minister of Infrastructure and Environment - EL) said about this: this is a problem that primarily should be fixed within the regions and municipalities. I don't see a large role for me in this process.

She was actually right about that. However, the same parties that should have been in the lead, are now calling for coordination by the central government. 
The covenant is not mandatory, you now. Some parties in the region did join forces. They are actually doing what we agreed in the covenant.

Paul: The covenant contained some fierce goals. The vacancy at the end of last year was 16%: offices that were for rent or for sale at the time. The ambition of the Offices Summit was to bring this vacancy rate back to 6% within 10 years. Are we going to make that?

Hans: No! Not if we go on, like we did last year.

Paul: How can we change the targets, in order to make those more realistic?

Hans: We should not change the targets. We should improve our efforts to meet those targets! Those targets are fine. What we should do is deploy the agreements in this covenant. This covenant has been agreed upon with all parties involved: central and local governments, private and institutional investors, project developers, building companies, the banks, the users of these buildings; everybody was at the table.

Insiders predicted that we would never reach an agreement, but we did! Against all odds. Even Germany called us to ask how we did it. They said that in Germany it would be impossible to get all parties at the table. We managed to do so!

The next question is, however, how can we deploy the agreements that we have agreed upon. If we would just do so, we would have a fair chance to meet the desired reduction in vacancy.

Paul: Still, a reduction to 6% vacancy in ten years. You said that we are not going to make that...

Hans: No, I said that we are not going to make that, if we remain on the same path as now. Currently, some people are just going through the motions. That is not enough!

Paul: Do you think that these people will ever start to put more effort in this covenant?!

Hans: Until now, when I looked around, I saw that too little effort and energy had been put in the deployment of the covenant.

Paul: If people continue with just going through the motions, what will happen then?

Hans: At one particular moment, the market will start to do its job. Then the blood will spatter on the walls six foot high. You must remember, we are in the middle of a market. At one moment the NMA (Dutch authority for competition) visited me. They said: what you are trying to do is controlling the market. Perhaps, you should let the free market do its job. My response: we could do that. We really could, but we shouldn't do so.

In other words: this is a bad idea. Please, understand me correctly: I am not against the free market. But if we leave the current policy unchanged, the vacancy rate will continue to soar in the coming years, until vacancy rates of 20% - 25% are reality. This might only take a few years. At that moment, the vacancy is not just a problem for institutional and private investors. Then it would have become a societal problem.

Martine Wolzak (reporter of Het Financieele Dagblad): what should the central government do? A special levy on building? A building stop?!

Hans: No, no, no. The only thing that the central government should do, according to the covenant, is enabling a levy on building. Without this levy, it is impossible to fill the demolition fund (see pillar four - EL). With this levy, people cannot act as freeloaders. That is all that the central government has to do.

At this moment, I and other parties state, that when local initiatives stay away like they do nowadays,  the central government should have a coordinating and facilitating role in this process. By the way, at this moment the central government is more and more willing to take this role after all.

Paul: With that 'going through the motions' policy of some stakeholders. Where will the vacancy rates go?!

Hans: I cannot tell you that. F.i. the Amsterdam region tried very hard to fight vacancy and they managed to keep the vacancy rate about equal, by transforming office buildings into other purposes.

Martine: Talking about Amsterdam. In this region all involved parties seriously tried to deploy the agreements in the covenant. In spite of their efforts, they didn't make it. Is it not the underlying problem of this covenant, that as soon as it was signed, everybody started to renegotiate matters into his own favour?

Hans: That is not how I see it. After the covenant had been signed, a number of incidents happened in the market. The disappointing offer on the Uni-invest portfolio. The outcome of the Eurocommerce sale. This is when market parties started to think: "we are trying to make agreements in order to change the imminent nose-dive from the CRE market into a successful emergency landing. At the same time, bargain-hunters are purchasing CRE from the lower end of the CRE portfolio, in order to sell it at bargain prices! That is not acceptable for us! We quit!". That is basically, what went wrong.

Paul: The building of CRE continues; these offices remain vacant and for sale / for rent. In the meantime, there are people advocating a building stop. Is it not time to deploy such a building stop?

Hans: This sounds like a typical 'parliamentary solution'. There have been several proposals by MP's: a building stop, a general building stop. A plan to withdraw two old square meters for every new square meter of office space, by demolition or restructuring of office buildings.

The problem is: there is not 'a' market. There are enormous differences between regions. And when f.i. a multinational company visits Amsterdam and states:  "We are looking for 45,000 square meter of office space. We have looked for this in the market, but we didn't find it. We would like to build such an office ourselves". At this moment, this designated law would hinder this initiative. That would be very peculiar. You should not lock up the market, but look at things sensibly.

First: All the empty space, on which municipalities already have planned how much they could earn from it, should be striken as building terrain. There is much more terrain registered as building space, than there is demand for in the market.

Second: Even the reserved space, on which already building permits have been supplied, could be striken when building is not desirable. This is a dangerous thing to do, as this could bring claims.

The last thing that should happen, is that somebody in a supervising role should negotiate with all of the aforementioned market parties in order to come to building areas that could expand, building areas that should shrink and building areas that can stay as is. As a matter of fact, this is what has been laid down in the covenant.

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