FGH Real Estate Report 2012: Investing in Credit
Less than a year ago, the world was still enthralled by the Arab spring, and there was hope that global trade would grow. Just a few months later, however, all the euphoria had disappeared. The financial crisis in the Eurozone, a direct consequence of the 2008 credit crisis, is now more topical and deeper than ever. The limited economic recovery in 2010 turned out to be nothing more than a temporary upsurge because the underlying causes of the problems we face have still not been addressed, namely the too high debt burden and the overly risky positions. The difficulties cannot be remedied in the short term and will only be overcome by taking comprehensive measures.

Consequences for interest rates
The European debt crisis has caused a great deal of turbulence on the financial markets and also subsequent fluctuations in interest rates. The interest prospects for 2012 will depend, among other things, on the preparedness of the countries within the Eurozone to again sharpen the stability pact. Trust between banks will have to further increase, moreover, through which Euribor rates can fall, subsequent to the reductions by the ECB. The tension on the financial markets is expected to keep both the money market and the capital market rates low. The credit crisis has helped to create a new playing field, which has in turn impacted the financial sector. This has led to various changes, not least in the area of regulation. Under Basel III, the banks must now retain more of their own capital, whereby credit provision becomes more difficult and more expensive and banks can and may not grow as rapidly. We are also seeing some (foreign) banks leaving the market (just as the Dutch banks are withdrawing from abroad). This is not a positive development because the market benefits from sufficient providers. It could take some time before the offer of these parties returns to a healthy level.

No lost years
It is evident that the economic crisis and the new recession have hit the construction and real estate sectors hard. The value of real estate has been under pressure for three years, and revaluations are the order of the day. This ensures a deflationary environment: value decline leads to reticence in buyers, which in turn leads to further decline in value. Such a negative spiral is difficult to break and can also be long-lasting. Current price and market corrections are for all seasons, but the value explosion of the past two decades has resulted in a totally unhealthy situation. This is now being corrected and is unpleasant for everyone, certainly for individual parties in real estate; however, this also has a curative effect. For too long, the current rate of real estate was determined by the market, and short-term figures and results seemed more important than the long-term outcome. It has now become clear that real estate is not a fast ‘money machine’. On the contrary, real estate requires time. This does not mean that the real estate sector has lost three years, as the market has taken substantial steps forward in this period. Within a short space of time, the excess supply has been placed high on the agenda, and this will lead to concrete measures. Municipalities and developers are scrapping their more risky plans, new building production is coming in line with the market and is better attuned to demand and the transformation of old buildings to accommodate new functions seems to be gradually taking shape. Without doubt, these are good developments; they have just taken a long time.

Self image
After the euphoria of the years prior to the crisis, it seems as if a phase of collective self-flagellation has started, which has resulted in a storm of negativism and the widely held perception that things will never be right again. The sector is seemingly so convinced of this that people appear willing to accept it as hard reality and are even prepared to share their belief with everyone else. Foreign investors have meanwhile been advised to invest no further in Dutch real estate. However, people seem to overlook the fact that high vacancy levels, obsolete industrial locations, population ageing, flexible working and on-line shopping are hardly new phenomena. On the basis of virtually the same information that we have at our disposal today, the sector had a deep-rooted conviction a few years ago that investing in real estate was sensible and well-considered, especially in the case of high-quality properties in marketable locations. This conviction seems to have disappeared entirely today, and that is as incomprehensible as it is undeserved in the view of FGH Bank.

Facts versus expectations
Given the prevailing opinion of the real estate sector, it is reasonable to suggest that subtle distinction is most definitely lacking. Expectations for the future are currently accepted as facts and thus serve as a basis for short-term decisions. A good example of this is the discussion about office vacancy rates. With more than 14% of stock lying vacant, the fear is that this is much too high because of the consequences for price trends. This anxiety is however unrelated to the actual current vacancy level but stems from the expectation that it will only get worse in the future. Such a view will only serve to put values under more pressure. The fact is that the take up of offices – as with the take up of retail space and industrial complexes – rose last year. Moreover, the office stock has risen no further, and the vacancy rate as a percentage of the total stock has even fallen slightly.

Fear rules the sector
Fear maintains a hold on the market, with all the consequences that entails for the parties active therein. The world is in transition. Everyone must now seek to build new economic relationships and develop a financial equilibrium, but this requires time. For the real estate sector, recovering from this crisis will take years rather than months. However, the awareness that the difficulties will not blow over by themselves leads to uncertainty. This is a problem in itself, which in turn blocks new investment. It is therefore of the utmost importance to first eradicate the uncertainty, and this can be done by reviewing the existing problems and finding creative solutions for them. The real estate sector must learn to think differently. This should result in a much more realistic estimation of the feasibility of future plans and earnings capacity. In addition, the value potential of real estate is important. It is too easily thought that real estate is by definition inflation-proof and in all circumstances strong and fundable.

Investing in credit
The real estate sector has sufficient resilience and knowledge to tackle the current problems. It also has the ability to ensure that the transformation of existing real estate becomes a new component in any future strategy. We will have to act daringly and carve out a new path, however, and that applies to area development too. This does not mean that it will be a simple and financially painless process, but FGH Bank does not expect a permanent ice age for real estate. That picture has over the past ten years incorrectly had the upper hand. A condition for success is that the real estate sector looks at itself squarely in the mirror. For two decades, there has been investment in a transparent market, based on open information and mutual confidence. Moreover, this transparency was precisely the distinctive characteristic that set us apart from other countries and attracted foreign investors to the Netherlands. If we are not prepared to maintain this transparency and act accordingly, the real estate sector will ultimately incur more damage than in the current economic situation. We need to meet agreements, do honest business and work with unambiguous figures because we not only owe this to the sector, but also to society and above all ourselves. It is the only way in which we can earn confidence back and again build up credit.