Empty office buildings are costing banks and institutional investors hundreds of millions of euros. The Dutch Central Bank (DNB) recently warned that following the credit crunch and the European debt crisis, this could lead to yet another financial crisis.Far too late, according to Arno van der Vlist, professor of real estate development at the University of Groningen. ‘Depreciations have been applied to the value of commercial property since 2008 and are likely to continue. Of course, it hurts to see so much money vanishing in front of your eyes, but instead of creating panic, the DNB could put more effort into finding a solution.’
Figures published by the Vereniging van Nederlandse Projektontwikkeling Maatschappijen (the Netherlands Association of Property Developers (NEPROM)) show that 15% of all office buildings in the Netherlands are vacant.Six per cent of the buildings have even been abandoned. Banks and investors are saddled with a huge volume of unsellable office space and are having to write down hundreds of millions. ‘Banks and investors were overly optimistic in the past,’ explains Van der Vlist. ‘Some of them are now pointing the finger at the government, saying that they should have been warned. An unfair accusation, in my view. It is only reasonable to expect that professional investors are capable of judging the risks involved for themselves.’
The problems start for investors when the mortgages which they took out to buy the property have to be extended. The value of the secured property then has to be reassessed. If it turns out that the value of the property has dropped then the loan can only be extended if the investor deposits the difference in value. ‘Investors don't generally have such sums of money readily to hand. If the banks were to enforce the rules strictly there would be quite a number of foreclosures, something which no one wants to see,’ says Van der Vlist.‘Banks and investors have to work together on the basis of common sense. That means looking at what is feasible and agreeing on a time frame in which to apply the write downs.’
Van der Vlist is surprised that the DNB should be warning about losses on commercial property now. ‘Banks and investors recognized this problem long ago. Depreciations have been applied to the value of commercial property since 2008 and are likely to continue. Pension funds are incurring losses on their property portfolios and cutting our pensions. Banks too are having to write down properties and have less money to lend. This can affect economic activity in other sectors. Of course, it hurts to see so much money vanishing in front of your eyes but instead of creating panic, the DNB could put more effort into finding a solution.’
It is essentially up to the banks and investors to find a solution to the problem, says Van der Vlist. ‘Investors have to do all they can to get a positive return, and cut costs, while banks need to be careful when demanding extra capital deposits.' Van der Vlist sees the role of the DNB as a modest one. ‘Creating panic without offering a solution is – to put it bluntly – not helpful. The DNB has no direct steering mechanism available, but could perhaps play a background role when banks and investors make arrangements with one another.
On top of this, the Dutch government could set up a temporary guarantee fund which, under strict terms, investors could turn to when refinancing their commercial property.‘A sort of national mortgage guarantee scheme for commercial property,’ explains Van der Vlist . ‘The United States already has such a fund. Here the DNB could also play a background role, although it is up to the politicians to decide whether or not such a fund should be set up.’
Professor Arno van der Vlist
(Hardinxveld, 1971) studied agricultural economics in Wageningen. After gaining a PhD in economics from the VU University Amsterdam in 2001, he worked for a while in the real estate sector and as a university lecturer at Wageningen University. In late 2008 he became professor of Real Estate Development at the Faculty of Spatial Sciences of the University of Groningen. His research concentrates on the spatial economics aspects of the real estate market and the tendering process in property development and construction.
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