Dark clouds ahead for Commercial and Residential Real Estate (CRE + RRE) in The Netherlands. Whole construction industry needs in fact a restructuring.

Last Saturday, when I went to the super market with my wife and children, I was again annoyed by the fact that all formerly vacant space in my residence Almere (The Netherlands), seems to be built full with new commercial real estate (CRE) and combinations of CRE and residential real estate. Playgrounds and parking lots are filled up with an array of unattractive office/apartment buildings, that seemingly nobody asked for.

And also in other cities and villages this building frenzy for CRE and RRE doesn’t stop yet. Municipalities sell every vacant meter of building ground in order to get direct income and future tax revenues out of it. Project developers and building companies still take the gamble to build this ground full with houses, apartment buildings, business premises and offices, hoping to get a bigger slice of the CRE/RRE pie.

Companies, lured with reduced energy costs, tax breaks, favourable establishment conditions and improved facilities, leave their old office space behind, in order to rent space in new office buildings. The old office space often remains vacant for a long time or even indefinitely. All this reshuffling of companies from their old office space towards new office buildings, makes that there is a substantial average vacancy of 15+% in CRE in The Netherlands, with local peaks at 25% or more. The result: more industrial zones in every city and village, filled with ugly buildings and warehouses; more unused office space everywhere and less room to breathe and to recreate for the people in The Netherlands.

And also in the Residential Real Estate-market, there is a problematic situation: the deadlock that has the RRE-market in its grip, makes that news houses and condo’s outside the most popular cities, like Amsterdam, are also (much) longer vacant than planned in advance. Private housing is currently much too expensive and all attempts of the government to get tenants out of rented houses into private-owned houses, by making renting more expensive, are causing a deadlock in the rental housing market too.  

Tenants that have a cheap social rental house/condo, keep this, even though they could afford a more expensive one in theory (outside the ‘social sector’ rental market). Moving to a larger rental house/condo, would mean they lose their current favourable terms and they would have to pay much more rent, due to their higher income. Many tenants cannot or won't afford this.

Starters at the housing market have only access to cheap rental houses if they have a very low income, otherwise they are forced to look for houses at the so-called ‘free sector’ rental market. They also can't afford this. A private-owned house is currently for many tenants one bridge too far, due to the unsustainable prices on the housing market.  Result: a perfect lockup at the private-owned and rental housing market. And houses and apartments that are built for… nobody.

Summarized, the real problems in The Netherlands are:

·   The CRE-market has a 15-20% structural overcapacity currently. New office buildings and industrial zones cannibalize on older office buildings and industrial zones, by attracting the companies that had their residence there.

·   The private-owned and rental housing market is in a perfect deadlock, that won’t be removed until the government, municipalities, banks and realtors takes measures to lower the housing prices (renting and private-owned).

·   The whole complex of municipalities, project developers, investors and the construction industry is set up for a larger supply of CRE and RRE, than will be in demand in the coming years.

And there is another development that might send shockwaves through the CRE and RRE-market. This can be read in the following article in the Dutch financial newspaper “Het Financieele Dagblad” (http://www.fd.nl/). Here are the pertinent snips.

ASR abolishes € bln in real estate.

The large Dutch insurance company and former Fortis subsidiary ASR wants to sell €1.1 bln of its real estate, consisting of shops and shopping malls; a quarter of its total CRE portfolio. With the sales operation, ASR is front running the stricter capital demands that will be established in 2013 as a consequence of Solvency 2. These stricter rules force insurance companies to keep up 49% of capital on their real estate investments.

The association of institutional investors, the IVBN, notices that other members are also wrestling with the high capital demands that are associated with the new Solvency 2 rules. ‘These rules might force insurers to reduce their investments in real estate’, according to executive director Frank van Blokland of IVBN. Next to ASR, the insurance companies ING, Delta Lloyd, Achmea and Generali should keep more capital for their real estate investments.

‘The market has fears for the new capital demands’, according to Director Real Estate Ad Buismand of Ernst & Young. ‘There are fears that insurers will substantially reduce their real estate portfolios. The risk is that prices will be put under even more pressure’. After the pension funds (€68 bln), insurance companies are the biggest investors in real estate (€15 bln). ‘Bears see Solvency 2 as the kiss of death of the real estate market’.

That ASR doesn’t await the establishment of the new rules – this could still take a number of years, due to a transitional period – is caused, according to the company, by the fact that ASR (as one of the last insurers) still manages much real estate themselves.

In better times than these, it would already be an economic challenge when the whole insurance industry with their €15 bln real estate portfolios, want to abolish substantial parts of these portfolios. In a normal situation, this would already cause enormous pressure on real estate prices.

But now, when the whole CRE+RRE market is already in deep trouble with overcapacity, structural vacancy and stagnating prices, Solvency II might hit the real estate market like a perfect storm. Because the question is in this very troubled market: who will buy it??? Let’s look at some candidates:

·   Pension funds? No, they have already their own problems with:

o    low coverage ratios;

o    the uncertainty on the new pension agreements;

o    investments yielding too little;

·   The banks? The four large banks are all more or less busy to abolish their CRE-portfolios, due to disappointing yields and new capital demands, as a consequence of Basel III.

·   Private investors and project developers? Some might be willing to invest in ‘bricks and mortar’, but only on absolute A-locations. Most CRE is (of course) not in those locations.

·   Remains local and central government?! This would be an expensive way to keep taxpayers’ money locked up for years to come.

In the end, it might be that demolition of substantial parts of the portfolio’s is the only way to revive the CRE and RRE market. That is a large destruction of capital, but might prevent more good money thrown at bad money.

And for the building and construction industry as a whole, including project development?

I’m afraid that about 30-40% of the companies and workers in this industry is doomed to disappear. Because the current CRE/RRE-market is based on unsustainable overcapacity: building houses, offices and shops that nobody wants to have or nobody can afford. And this business model will go wrong in one way or another.

Of course, this 30-40% is not based on a thorough investigation of the building and construction industry. But if you reckon that there is (in average) 20% of vacancy in the CRE-market, of which 15% is structural. And if you reckon that building companies are still finishing new CRE-projects every day. And if you further look at the stagnating housing market in The Netherlands and the unwillingness of all parties involved to do something about this stagnation and you add this all up: then seems a disappearance 30-40% of the current construction workers not a very wild guess. Because this whole industry is already playing in extra time for at least 5 years. And the market does not grow more favourable on this industry.

If the central government is smart, it would advance to this development by searching for other working opportunities for large parts of the workers in this industry. But I’m afraid that politics will assume the ostrich position until it is too late.

Dutch Finance Minister De Jager partially cuts conveyance duty, making the purchase of a house 4% cheaper: just another bogus trick to unlock Dutch housing market and again, it won’t work.

In our continuïng soap around the Dutch housing market being totally locked, there is a new episode. Dutch Finance Minister Jan Kees de Jager lowered the conveyance duty on house sales to 2% from 6% of the net purchase price. Dutch newspaper De Telegraaf (www.telegraaf.nl) wrote about it. Here are the pertinent snips:

Conveyance duty to 2 per cent (link in Dutch)

The conveyance duty will be lowered to 2% for one year. Currently, this duty on the purchase of a house is still 6%.

This Friday July 1^st, the Dutch cabinet will make a definitive decision on this measure; it will be effective immediately (actually from June 27^th).

Who purchases a house ‘today’ would pay 6% of the net purchase price; from tomorrow on this would be 2%. Total abolishment of this duty would prove too expensive. The banks will foot the bill of this measure to unlock the Dutch housing market. A person that buys a house for €200,000 saves €8000 with the new measure. The conveyance duty currently delivers the Dutch treasury €3.5 bln per year

Vice-PM Maxime Verhagen refused to comment on the adjustments last Friday. He advised then everybody with the intention to buy a house, to do so and not wait for changes. On top of that, he reassured that the Cabinet will not change the Mortgage Interest Deduction.

In my May17th article on the Dutch housing market Residential Real Estate revisited, I stated:  

There are two kinds of solutions for problems:

§  The (real) solution to a problem

§  The solution that you find, if you don’t want to know the real solution to a problem.

Also this last measure of the government belongs to the latter category. From an earlier article The Dutch housing market is not further locked up…, I quote:

THE main cause for the housing market being locked-up is that the PRICES are TOO HIGH.

I can’t explain to people that in Germany, close to the border with Holland, you buy a residence with 8 rooms and 10,000 Sqr ft of ground for €200,000, while a starters home in The Netherland with 3 rooms and 1350 Sqr ft of ground costs also €200,000

When I tell this to people, they all react like:

§  “Houses are scarce here in Holland”

§  “In the provinces Friesland of Groningen houses are much cheaper too, but there is no work”

§  “It is inevitable because so many people are looking for a house”

My standard reaction is: “if houses are that scarce in Holland, why houses with the current prices are often for sale for up to two years or more”. They reply:”you are right, but we can’t lower the price, as we can’t pay off our mortgage then”.

There you got it! The main reason that the Dutch housing market is locked up is: Many people are up to their neck into debt, due to the fact that their mortgage is way too high, but they don’t want to sell their house for a lower sales price as they can’t afford then to pay off their mortgage.

It is my opinion that Dutch houses are still overpriced by 20-30%. In that situation, deducting 4% from the gross sales price won’t matter at all. Since the credit crisis broke out at the end of 2008, the prices of houses have already lowered by an estimated 8-10%. And the housing market is still locked tight…

People that want to sell a residential house, offer sometimes even discounts of 15-20% on their initial sales price. But almost nobody wants to have their house, anyway. Because it’s still too expensive.

And then the Dutch government thinks that a lousy 4% deduction via the conveyance duty will matter? Get a life!

On top of that, it are the Dutch banks that have to pony up this amount. And as the Dutch banks play a zero sum-game in this kind of situation, the citizens of The Netherlands have eventually to foot the bill for this measure. In The Netherlands, we call this: this plan is  ‘a cigar out of your own supply’.

Kees de Kort, the (in)famous columnist of Dutch Business News Radio BNR (www.bnr.nl) was totally right, when he stated that this plan was written by people with ‘nought financial intelligence’. I couldn’t have stated it better.

For my other takes on this subject, please read:

• Getting poor from you own residential real estate (RRE)
• The Dutch housing market is not further locked up…
• Mortgage Interest Deduction revisited: Letter from a reader

and some older posts on the same subject.

And the Dutch Housing market will remain… locked tight.

Why is Italy into trouble anyway? (II). Berlusconi chooses for €47 bln cutbacks, but I doubt if it will matter.

Yesterday, hours after I finished the first part of this series, I read in the news that President Silvio Berlusconi of Italy wants to make a cutback of €47 bln in three years.

His aim is to bring the budget deficit back from 4.6% of GDP in 2010 to 0.2% in 2014. The FT writes about it. Here are the pertinent snips:

Italy's government agrees austerity package

Italy's centre-right government said on Thursday it had reached agreement on an austerity package designed to eliminate the budget deficit by 2014.

The plan, which officials said amounted to some €47bn of cuts and projected increases in tax revenues, is to be passed by decree but must be approved by parliament within 60 days to remain in force.

Silvio Berlusconi, prime minister, insisted there had been "broad agreement" on the three-year budget during a lengthy cabinet meeting and he called on the opposition to support the measures in parliament where the ruling coalition has a slim majority.

"There is a need for unity in defence of our common currency," a grim-looking Mr Berlusconi told a news conference. He cut short questions from reporters, saying ministers were tired after the long meeting.

Susanna Camusso, leader of the main leftwing trades union federation, called the planned cuts "social butchery". Pier Luigi Bersani, leader of the opposition Democrats, said it was a "time-bomb".

Government insiders said Giulio Tremonti, finance minister, had come under intense pressure to water down the budget with some colleagues seeking his resignation in order to avert a package they saw as undermining the coalition's chances of winning a second term in elections that must be held by early 2013.

With few details of the cuts made public, it was not clear what concessions Mr Tremonti might have granted. At one point the cabinet meeting was reported to have been suspended over the issue of cuts to political subsidies, which includes parties.

Italy's public debt is projected to peak at 120 per cent of GDP this year, second only to Greece in the eurozone. Rating's agencies have threatened to downgrade Italy unless it gets to grips with spending cuts and boosts anaemic growth levels. The yield gap between 10-year Italian bonds and their German equivalent reached euro-era highs on Tuesday, but later narrowed.

Mr Tremonti said a country running a budget deficit was also exhibiting a deficit of responsibility. "This is a political, civil and moral choice," he said, adding that Italy was already on track to reduce its deficit to 2.7 per cent in 2012 from a projected 3.9 per cent this year.

I will not deny that €47 bln in three years is a substantial cutback, even for a country like Italy. But if you compare this to the staggering €1.697 trn in national debt of Italy and think that this debt amount might rise with a €28-odd bln in 2011 alone, then the €47 billion is nothing more than a slight beginning.

Then it is a shame to read that Finance Minister Giulio Tremonti has become under heavy pressure to water down the budget cuts and that the opposition was talking of 'social butchery'.

What I want to add to the Italian opposition, is that the financial markets are already dancing on the economic grave of Italy and that these bleeding-heart cutbacks are not even close to what is necessary to get Italy out of misery.

Yesterday, I stated that I was optimistic on the chances of survival of Italy, but politically and from an economic's point-of-view, a lot need to be changed there.