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Sunday, 2 February 2014

‘Groundbreaking’ initiative by the Dutch municipality Rijswijk reveals the sheer panic among municipal ground corporations. And they are right to panic!

This week, there were again two very interesting stories with respect to the Dutch Commercial and Residential Real Estate markets. 

Both stories witness about the awkward position of many cities and municipalities, with respect to the financial situation of their municipal ground corporations.

The first news story was printed last Thursday, 30 January 2013, by Het Financieele Dagblad. Here are the pertinent snips:

Almere, Nijmegen and Westland are the municipalities in The Netherlands that could lose the highest amount of money, when the building ground prices remain under pressure in the coming years. The three municipalities invested in excess of €1 billion in building ground, in order to build houses and commercial buildings.

When this money will not be earned back in a few years, these municipalities would have to make massive cutbacks on their community budgets. This was disclosed after an analysis of annual reports, from municipalities with large building ground positions.

Almere, Nijmegen and Westland invested much more than other cities and municipalities, as they expected a substantial growth of their population during the next decade. 

However, unlike Amsterdam, they only made rudimentary provisions for expected losses. Hence, these municipalities run a much larger risk, when the prices for building ground don’t recover soon.

In Almere, the invested amount, since the crisis started in 2008, has increased by 50% to €0.5 billion at the end of 2012. Please take into consideration that these municipalities didn’t put together their annual reports for 2013 yet [and that these data presumably will rather be worse than better – EL]. 

In Nijmegen, which had very ambitious expansion plans for the other side of the river ‘De Waal’, the total amount of their building ground positions is €350 million. 

Number three is Westland municipality, which invested more than €200 million, in order to build a new and luxurious ‘estate town’ near the shoreline at The Hague.

The following infographic came with the article:

All municipalities with building ground
positions in excess of €100 million
Data courtesy of:
Click to enlarge
Unfortunately, the city with the largest ground positions, Almere, is my own home town. This means that the possibly necessary cutbacks and tax-increases within the community, would be my cutbacks and those of my wife and children: think for instance about austerity measures upon education, healthcare and civic services, as these are often the highest expenses for communities.

Alas, Almere has a reputation for daring and even megalomanic investments – like for instance Project Duin and the Almere Icedôme, which passed by on this website – and also a reputation for commercial building projects run awry.

On top of that, Almere had earlier received a‘target’ from the national government, to grow with 50,000 (!) houses: a mindboggling number that would almost double the size of the city. And a number, of which a blind man could see that it was much too optimistic and daring, even when the crisis would not have hit The Netherlands in 2008.

This enormous, 'half a billion euro' ground position is the logical consequence of this failed and risky policy by Almere, as well as the central government. 

And it seems that both other mentioned communities stepped into the same traps of unrealistic expansion plans (Nijmegen) and stupid gambles on the wrong kind of houses (Westland with its ridiculous estate town).

Sadly, it are always the inhabitants of these cities and municipalities, who will ultimately foot the bill. Because nobody else can...

Today, Het Financieele Dagblad printed another article, concerning excess building ground. This one was about the town Rijswijk, which found the ‘ideal’ solution for the dropping ground prices. 

It sold the building ground to a joint venture, consisting of building company Dura Vermeer and… itself. This ‘groundbreaking’ initiative reveals the sheer panic among municipal ground corporations and local government officials.

You have to read it, to believe it…:

Probe project with Dura Vermeer should offer solution for stagnation of new housing construction.

The municipality Rijswijk – near The Hague – will sell a share of its building ground to a development corporation, in which the municipality holds a 50% participation. 

In this way, the community can realize a yield on ground sales, which is high enough to not suffer losses, after deducting the amount that Rijswijk paid for the ground itself. The municipality participates in this development corporation together with construction company Dura Vermeer.

Rijswijk has one of the largest ground positions of The Netherlands. Since 2007, the municipality purchased ground from glass horticulturists at the other side of the A4 highway, in order to develop new housing. The largest project is Rijswijk Buiten, for which 3500 homes will be developed during the next decade. These would be very durable houses, for which the occupants should not have to pay any energy bills at all.

In the remainder of this article, you can read that Rijswijk’s plans should enable a large number of very durable and green, and partially quite affordable houses in a neighbourhood near The Hague. 

By itself, I am quite symphathetic towards such plans, especially when it comes to social and otherwise affordable housing for people who can’t pay top dollar, but still need a decent house.

Unfortunately, however, Rijswijk wants to do so with a financial monstrosity, which looks like, feels like and smells like a Ponzi Scheme. By adding virtual profits upon building ground prices that are probably already way too high, they metaphorically brought Bernard Madoff to The Netherlands.

And the only reason to create this utterly stupid construction, is to cover up future losses on building ground sales for the community. Who are you fooling with this scheme, Rijswijk?! Certainly not me! 

The fact that Dura Vermeer is willing to participate in this almost fraudulent Ponzi Scheme, is a silent witness for the pure desperation within the building and construction industry. 

Just let me be perfectly clear about it: the Dutch residential and commercial real estate markets (RRE/CRE) are still critically ill!

Yes, recently there have been some greenshoots with respect to CRE at absolute A-locations, like the Amsterdam ‘Zuidas (i.e. ‘south axis’). 

And indeed, there have also been some teeny weeny growth figures in the Dutch housing market lately: for housing prices, as well as sales figures.

Still, the real problems on the Dutch CRE and RRE markets are yet far from being solved:
  • Numerous mortgages are still underwater, in spite of the fact that many people started to amortize their redemption-free, jumbo mortgages;
    • Too many people are yet held hostage by their current mortgage: they want to move to another (cheaper) home, but they can’t, as they would get stuck with a massive residual debt!
  • There is a massive void between the kind of housing that is required by the Dutch citizens and the housing that is currently on offer, due to years and years of flawed municipal building policies;
    • Too often communities gave priority to building large and lucrative estates and country houses, instead of the good and affordable, but less profitable social housing that was really needed by the Dutch citizens;
      • When the market for estates definitely collapsed in 2007, communities still for a few years kept building those estates, which nobody wanted anymore. This naive reaction to bad news (denial) increased the aforementioned void;
  • There is a substantial 16+% (structural) vacancy among commercial real estate and this number is hardly dropping;
    • Also in this situation, cities and municipalities kept building CRE far into the crisis years, like there was no tomorrow. Alas, they did not build it on A-locations alone, but mostly on B- and Z-locations. Many of these buildings have never been occupied yet;
    • Besides that, the chances are very dim that much of this vacant CRE will ever be sold, rented or refurbished before being sold, making that the ‘demolition man’ seems the only viable solution for these excess commercial buildings;
  • There is still considerable and structural overcapacity in the Building and Construction industry and Dutch national politics is very reluctant to do something about that;
    • The industry itself tries to avoid the inevitable diminishing of building capacity and the accompanying restructuring of building companies, through deploying massive lobby activities;
    • These lobby activities temper the already small political will-power to take the bull by the horns; then who wants to be the man or woman, who hits the powerful building industry on the nose;
    • By doing so, however, the industry consequentially diminishes the chances for survival for many individual companies in this industry. As 'you can ignore your problems, but your problems certainly won't ignore you';
  • Many cities and municipalities keep enormous positions in building ground;
    • This ground was bought in a time of soaring housing prices and considerable economic growth, under the influence of already extremely low official interest rates; 
    • Now the excess, speculatively purchased ground is hanging around communities’ necks like millstones.
  • And last, but not least, there is the fact that all large banks in The Netherlands have substantial positions in overpriced, excess commercial and residential real estate, in combination with hundreds of thousands of underwater mortgages;
    • Much CRE is still in the banks’ books at the historical purchase/building value or at least at a hardly depreciated value;
    • Many mortgages and many houses are also still in the banks’ books against overpriced, historical values, in spite of the fact that both have been underwater for years.
      • The excellent payment moral of the Dutch, with respect to their mortgage, has saved the banks’ bacon until now. However, in the end something’s got to give, when people can’t pay their mortgage anymore.

Consequently, there is in my opinion no other solution than to swallow the 'bitter pills that truly heal' and to restructure all aspects of the CRE and RRE industry, which have been mentioned in this list. There is no way that the Dutch economic crisis will fade away, when nothing has been done about these aspects.

Unfortunately, however, the Dutch central government rather assumes the ostrich position, than that it makes the really hard, but necessary choices. 

It changes a condition here and takes a measure there, but further the central government kicks the can down the road, under pressure of powerful lobbies from a.o. the cash-strapped municipalities and the Building and Construction Industry. It would simply be too shocking to confess that 'the emperor does not have any clothes on...' 

By doing so, the central government extends the crisis probably well into 2017 or even far beyond, as deflation might land soon in The Netherlands (if it has not already landed here).

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