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Monday, 24 June 2013

“You can’t save the Building & Construction industry by just throwing money at it”: Open letter to Maxime Verhagen, chairman of the B&C Association Bouwend Nederland

Dear Maxime,

Please let me introduce myself. I am Ernst Labruyère, 47 years old and an ICT expert, as  well as an amateur-economist. I consider myself to be one of those Dutch people with a firm and fair opinion on the Dutch and European economy. I print this opinion on my personal website on a nearly daily basis.

You are a distinguished and well-respected former statesman. You had a great political career as a longterm MP for the Dutch Christian-Democrat party CDA, with as absolute highlights:
  • your position as Minister of Economic Affairs, Agriculture and Innovation;
  • chief whip of the CDA fraction in the Second Chamber of Parliament;
  • Political leader of the CDA from 2010-2012; 

Very little people can show a resume like yours and that is something to be proud of. Therefore I want to thank you for taking your responsibility for the benefit of The Netherlands, which is one of the hardest jobs in the country.

Nowadays, you are the successor of Elco Brinkman as chairman of the Dutch building & construction association ‘Bouwend Nederland’.

With my wife and children, I am living in the youngest, large city in The Netherlands: Almere. Almere is a promising and beautiful city, but with its firm share of growing pains, due to excessive expansion within a limited number of years. In more than one way Almere has been the testing labatory for the rest of The Netherlands: for education, city planning and design, as well as for rapid expansion, bottom-up neighbourhood design and many other innovations.

Almere just offered more opportunities than other cities. Some experiments turned out very well and others didn’t…  And now Almere is a big city with some familiar big city problems: petty crime, problems with certain minorities and subsiding neighbourhoods, due to poverty and drug-related problems. The only difference with f.i. ’s Hertogenbosch is that Almere is less than 45 years old. Nevertheless, Almere is a good city to live in.

Just like many other cities in The Netherlands, Almere suffers from:
  • Very large structural vacancy among Commercial Real Estate (CRE), due to excess building activities in the recent past;
  • A locked-up housing market with dropping prices;
  • Cash-strapped retailers in newly built shopping malls, who are clutching at straws, due to excess shopping space and too little demand;
  • and, last but not least, a city council that took and still takes a bigger bite with housing and CRE development than it could chew; 

This can’t come as a surprise to you, I guess?!

And even today, now that the CRE and RRE (residential real estate) markets have almost totally dried out in The Netherlands, Almere keeps developing new industrial zones and housing areas: ‘Nobelhorst’ is the latest one called. Will it be ‘Noblesse oblige’ or just ‘Dead on Arrival’?! I am afraid that it might be the latter.

That is the reason that I write this open letter to you, as new chairman of ‘Bouwend Nederland’. The cause was your interview with Het Financieele Dagblad of last Saturday.

If you don’t mind, I will go through some statements of your interview and add my comments to it. As my site has been written in English from the beginning, so will my response to your interview be.

Verhagen wants to claim hundreds of millions in subsidies from the Dutch state, in spite of the current austerity measures by the Dutch government of PM Mark Rutte. He hopes to convince construction workers that they should compromise upon their terms of employment. And he wants the Dutch pension funds to invest more in Dutch building projects. All these measures should pull the Dutch building industry loose.

Ernst: It is ‘utopia’ that these measures will pull the Dutch building industry loose. You clearly missed the big picture. There are just too many office buildings in The Netherlands, already. And too many shopping malls and too much shopping space too.

Building yet more office buildings and more shopping space would be ignoring this simple truth. Structural vacancy of Dutch CRE is already 16%, according to the most conservative valuations and even 25% or more, according to other measurements. No pension fund in their right mind will invest in the Dutch CRE-market, as this would be money thrown away.

And when there is indeed so much need for new housing in The Netherlands, why does it take so many months to sell even the most basic house? That is, Maxime, because the prices are too high: banks don’t want to lend and Dutch people don’t want to borrow so much money anymore. Building new houses won’t help to solve this problem, unless these new houses would be sold for prices that are 20%-30% below the current sales prices. That is something that I won’t see happening in the near future.

You can’t save the Dutch building industry by just throwing money at it. Construction workers, changing their collective labour agreements, won’t change the fact that there is structural excess capacity in the building industry. It is a sad truth, but that’s just the way it is. And I know you know that too, as you are an intelligent man.

Verhagen: The cabinet should make the existing subsidy available to stimulate home insulation and durable building development. The goal is to generate 16% durable/renewable energy in 2020. Homes, offices, hospitals and schools are good for 30% of the national energy usage, so there is an opportunity if we could use this subsidy.

Ernst: This argument is again quite naive. In these trying times in which many people are seriously strapped for cash, people won’t invest tens of thousands of euro’s to further insulate their homes; not even when the government would pay 30% to 40% in subsidies. Banks won’t lend them the necessary money and people don’t have such amounts of cash available at this very moment.

And as far as the offices, hospitals and schools are concerned: what should happen with those?  Should all existing buildings be refurbished? And who is going to pay for that?

Or should those buildings just be simply abandoned, in favor of newer and more environmentally friendly ones? Like open scars in the cities?

I know f.i. that Medical Centre Alkmaar, the local hospital in this North-Holland city, is moving to a new location at the outer rim of Alkmaar. What will happen with the old hospital building in the center of this city? Will it be left there to erode away or to be demolished? And again I ask you, who is going to pay for all these new commercial and non-commercial buildings? As this is often the tax-payer, in the end!

Question to Verhagen (in the FD interview): How do you want to make the pension funds invest more in roads and bridges?

Verhagen: I am going to talk about that with (Dutch) Finance Minister Jeroen Dijsselbloem. It can’t be explained that pension funds mostly invest abroad. Lately, there was a beautiful pilot project with the N33 (national road) in Assen. The pension funds wanted to invest in it. Everybody happy. Nevertheless, at the end Dijsselbloem informed us that the Finance Ministry didn’t want to be in on this deal, because the pension funds demanded yields that depended on the height of the inflation. An open end-arrangement, according to the Minister.

The Finance Ministry is too reluctant, traditionally. It argues that it almost gets its money back immediately, when it invests in projects itself. Formally, that is right. Unfortunately, the state doesn’t want to lend anymore, as we have to diminish our state debt. The result is that we don’t make investments anymore. Most concrete bridges need refurbishing. Just as roads and sewerage infrastructure. It has to come one time.

Ernst: Pension funds don’t have an obligation to invest in The Netherlands, fortunately. Pension funds are independent organizations, which have one responsibility first and foremost: they have to supply their members with a good pension payment for the rest of their retired lives.

Forcing those funds to invest in The Netherlands and – to be more precisely – in commercial real estate or infrastructure projects, could jeopardize their future profits and subsequently, the future of their retirees. This would be an unwelcome kind of government interference.

The reason that pension funds traditionally don’t invest in The Netherlands is presumably that our country has very few large, billion euro projects to offer, except for government projects. Such large projects are necessary for the pension funds, in order to make investments worth their while. When such a large project, in collaboration with the government, is actually available, the pension funds try to maximize the cash flows from such investments. That is their right and perhaps even their duty, in the name of their members.

However, it is the duty of the Finance Ministry and the other ministries to invest the taxpayer’s money with the greatest discretion, especially in these times of ubiquitous austerity and increasing unemployment. The Finance Ministry should not warrant open ended payments to the pension funds, not even when it would help the building and construction industry.

So here is clearly a conflict of interests that cannot be solved easily. I agree with you that a good infrastructure is of the utmost importance, but not at any price. And I’m afraid that large infrastructural projects after all won’t be sufficient to keep the whole B&C industry afloat.

Verhagen: There is a latent demand for new houses. There are two million households, that want to move. Youngsters keep living at home longer. This cannot go on forever.

Also, the rents for “scheefwoners” [‘wealthy’ people that live in a cheap rental house and don’t want to move out to a more expensive house – EL]  are increasing. These higher rents could make the ‘scheefwoners’ to want to move to an owner-occupied house in the future.

The costprice for newly built houses has dropped by 15%, as construction companies build cheaper nowadays. However, the ground-prices, which communities demand, didn’t drop sufficiently yet. Building companies with ground-positions did write off on their possessions, so why can’t the communities do the same?!

Ernst: I do agree wholeheartedly with your last remark. Communities are still much too expensive with their ground-prices and they don’t (want to) see the writing on the wall yet.

However, this is a. a matter of time and b. the question who wants to pick up the bill for the losses, which these communities must suffer on their past ground investments.

What I don’t agree with, are the two million people that would be ready to move, if they could. Even if these two million people could get the money to buy the house of their dreams, they still will be very reluctant to move.

People are currently in a very risk-averse mode, since they left the years of conspicuous consumption and endless debt behind them. People count their blessings and amortize their mortgages, instead of hoarding new debt on a different house. Besides that, many people have their job on the line. If you run the risk of becoming unemployed,  then you don’t buy a new house. You simply DON’T!

The youngsters that remain living at home do so for a reason: presumably, they are either unemployed, they are still following education or they have a job with a contract for limited-time. Neither of these circumstances are spurring these youngsters to buy a new owner-occupied or (expensive) rental house. So, don’t count on those youngsters as future customers for your houses-to-be-built yet.

Summarizing: I understand that you do everything from your position to help the building and construction industry. I would do that too in your position. Still, you must understand that during the 20 years before 2008, the building industry grew into a hydrocephalic child, to put it bluntly.
Since 2008, the situation improved slightly,  due to the defaults of companies and lay-offs of construction workers. This is a sad, but truthful conclusion, as it is very unfortunate for those companies and people, but good for the b&c industry as a whole.

Nevertheless,  there are still just too many B&C companies and too many construction workers for the current RRE, the CRE and the infrastructural market in The Netherlands. It is really impossible that all these companies survive and all these workers keep their job, as there is just not enough work to do for them at the moment. And there won’t be enough work for them either in the next 15-20 years to come. Denying this is naive and even cruel in a sense.

What your organization ‘Bouwend Nederland’ should do is creating and executing a plan to reorganize this whole industry, in such a way that healthy companies survive and unhealthy companies get liquidized, with as little harm done as possible. And you should offer re-education and extra trainings for all those thousands of excess construction workers in this industry. So that all these workers might find a different job in an industry that does offer ample possibilities.

Creating such a strategy would make you a visionary in this troubled industry: perhaps not esteemed in the beginning, but undoubtedly seen as a saviour in later years.

I know you have the guts to make hard decisions, against all odds. May these guts help to make the right decision this time.

Yours sincerely,

Ernst Labruyère

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