Utrecht, 29 February 2012
FGH Real Estate Report 2012: ‘Investing in Credit’
Negativism is not helping the sector. A realistic view of the value of real estate and a regaining of confidence will.
‘On the basis of almost exactly the same knowledge that we have at our disposal today, the sector was a few years ago still firmly convinced that investing in high-quality real estate was a sensible and well-considered decision. This conviction seems to have completely disappeared. From FGH Bank’s point of view, this is as incomprehensible as it is undeserved. For too long, the current values of real estate have determined the market. It is now becoming clear that real estate is not a fast ‘money machine’. On the contrary, real estate requires time. Furthermore, the sector is struggling with its image. The challenge facing the real estate market is to earn back confidence in both real estate and the sector itself.’ These are the most important conclusions from the FGH Real Estate Bulletin 2012. This annual market report offers a comprehensive overview of the trends and developments in the commercial real estate market and the vision of FGH Bank thereof. On Wednesday 29 February, Mr Bernard Wientjes, Chairman of VNO-NCW, received the first copy of the report from Mr Peter Keur, Chairman of the FGH Bank Board of Management.
Keur: “We must realise that, while is true there are huge problems affecting the real estate market, we cannot resolve everything in one day. Real estate must be viewed in the long term, and the problems we have must not be managed hastily. Moreover, even a difficult market has opportunities; we must not forget this. In my view, therefore, it makes absolutely no sense to say things about the market that make the situation worse than it is already. This resolves nothing and does little to help the sector move forward. Quite the contrary, I would say.”
Distinction between investment property and business asset
It is evident that the original economic recession and the new recession have impacted the building and real estate sector badly. For three years now, the value of real estate has been under pressure. Decrease in value leads to reticence in buyers, which in turn leads to further decreases in value. Such a negative spiral is difficult to break and can be long-lasting. The value explosion of the past two decades is now being corrected. Real estate is not by definition inflation-proof and in all circumstances fundable.
Fact versus expectations
The prevailing opinion within the real estate sector demonstrates a definite lack of subtle distinction. Expectations for the future are accepted as facts, which then serve as the basis for short-term decisions. An example of this is the discussion about office vacancy levels. With more than 14% of the stock lying empty, the fear is that this is much too high because of the consequences for price trends. This anxiety has no relation to actual current vacancy levels, but arises from the expectation that things will only get worse in the future. This fear puts values under even more pressure. The fact is that the take up of offices – as with the take up of retail real estate and industrial complexes – increased last year. Moreover, the supply of offices has risen no further, and the vacancy level as a percentage of the total stock has even fallen slightly.
Uncertainty paralyses
For the real estate sector, it will take years rather than months to recover from this crisis. However, awareness that the crisis will not blow over by itself leads to the problem of uncertainty, which in turn holds back new investment. It is therefore of the utmost importance to first eradicate this uncertainty. This can be done by addressing the existing problems and finding creative solutions for them. The real estate sector must learn to think differently, which should result in a much more realistic estimation of the feasibility of future plans and their earning capacity. This is not to imply that the real estate sector has done nothing in recent years because the market has definitely taken some steps forward. Over-supply has quickly been placed high on the agenda, and this is leading to concrete measures. Municipalities and developers are scrapping their prospectless plans, new building production is being made to conform more with the market and is better attuned to demand and the transformation of old buildings into new functions also seems to be cautiously taking shape.
Investing in credit
The real estate sector has sufficient resilience and knowledge to tackle the current problems, but the sector must look at itself squarely in the mirror. In recent decades, transparency was the distinctive characteristic that attracted foreign investors to the Netherlands, and this will have to be restored to prevent further damage to the sector. It is the only way by which the real estate market can regain confidence and build up credit again.