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TPG Picks Up Pieces in Netherlands Bondholder Wipeout: Mortgages

Investors See Deal Opportunities in Blighted Dutch Office Market
Since 2006, Amsterdam took steps to address a vacancy rate that is currently almost 18 percent and concentrated mainly on its fringes. Photographer: Paul O'Driscoll/Bloomberg

A short drive from the center of the city of Utrecht is all it takes to grasp the crisis in the Netherlands’ office market, where bondholders have been wiped out and investors such as TPG Capital and Patron Capital Ltd. are picking up the pieces.

About 5 miles (8 kilometers) south of downtown Utrecht, buildings in the town of Nieuwegein are festooned with billboards offering offices to rent. The local government estimates a third of the space is empty, compared with a 1 percent vacancy rate around the central rail station in Utrecht, the fourth-largest Dutch city.

A surplus of suburban office parks built with easy credit in the past decade has doubled the national vacancy rate to about 14 percent, according to DTZ Zadelhoff. Values have fallen by 20 percent since 2008. While that’s prompted some investors to duck the Dutch market, others see a chance to buy as falling values create some of Europe’s highest rental returns.

“There are properties coming onto the market now that five years ago I couldn’t imagine we could buy,” said Allard van Spaandonk, who oversees Bouwinvest Real Estate Investment Management’s 4 billion euros ($5.2 billion) of Dutch property investments. After shunning the market for two years, the firm may use 200 million euros it has available to make purchases, he said, declining to be more specific.

Inadequate Provisions

Some investors are waiting for prices to fall further because lenders have been reluctant to take writedowns. The central bank said last month that the 110 billion euros of loans secured by Dutch commercial real estate are a “specific cause of concern” because of inadequate provisions. It joined the Netherlands’ financial regulator in calling for “realistic” valuations.

When prices have dropped, buyout firms like Patron and TPG were able to acquire assets cheaply. The firms took over more than 200 offices and industrial properties owned by Uni-Invest Holding NV in August after a 600 million-euro default.

“The Uni-Invest deal is widely regarded as signaling the bottom of the market,” said Jaap van Dijk, who is overseeing the sale of Dutch lender SNS Reaal NV’s entire 8 billion-euro commercial real estate loan portfolio. The company has racked up 1.5 billion of writedowns since acquiring ABN Amro Holding NV’s property-finance unit in 2006 and must repay a government bailout by the end of next year.

First Default

It was also the result of Europe’s first commercial mortgage-backed securities to default on maturity. Patron Capital and TPG were able to get the properties after their offer was accepted by Uni-Invest’s senior creditors, ending a two-year holdout by junior bondholders who recovered none of the 242.9 million euros they were owed. The buyout firms sold some properties in high-vacancy areas, stepped up efforts to lease space and earmarked a fifth of the properties for conversion, such as into housing, or demolition.

“We are going to be able do things that weren’t possible in the past for financial reasons,” said Laurens Feleus, a partner at Patron. “We haven’t knocked anything down, but there are a number of buildings where it’s probably going to happen.”

Falling office values lifted the income return from a prime property to 5.65 percent, or 5 percentage points more than the yield on a benchmark five-year Dutch government bond. The spread is among Europe’s highest, said Simon Durkin, European head of research at RREEF Real Estate, Deutsche Bank AG’s property-asset management unit. While returns are attractive, Durkin is wary.

‘Vulnerable Assets’

“The underlying fundamentals don’t appear strong and could make some assets vulnerable,” he said.

Vacancy rates in Amsterdam and Rotterdam are among Europe’s highest along with Athens and Dublin, broker Jones Lang LaSalle Inc. said. If little changes, vacancies nationwide could rise to 20 percent in coming years, Utrecht-based SNS Reaal predicts.

DTZ Zadelhoff estimates that 2 million square meters, or 28 percent of vacant space, needs to be demolished or converted to alternative uses.

The liquidation of German real estate mutual funds, which own 2.9 billion euros of Dutch property, is another factor affecting the Dutch market, according to Jones Lang.

Fourteen loans sold as CMBS and backed by Dutch offices are scheduled to mature before 2015 valued at 1.5 billion euros, Bloomberg data show. The largest is the 693 million-euro Fordgate loan, which was placed in special servicing -- or with a firm that oversees troubled loans -- in December 2011 after breaches of borrowing terms. The next largest is the 423 million-euro MPC loan, which is also in default.

Space Glut

The government and municipalities have started to tackle the space glut. Amsterdam adopted a bylaw last year to force owners to address empty offices, and the city’s aldermen are considering a demolition fund partly paid for by new development. By encouraging office conversions to hotels and housing, the city has cut vacancies by 25,000 square meters a year since 2007. The vacancy rate is still 16 percent, DTZ Zadelhoff estimates.

Concerns about blight have triggered sales and deals involving distressed assets are picking up. An unidentified investor acquired the 23 properties backing the Orange loan in the Fleet Street Finance 3 CMBS for 50 million euros in May, leaving bondholders with a 28.5 million-euro loss.

Commercial real estate sales throughout the country rose 24 percent in the first nine months to 3.42 billion euros, according to data compiled by Real Capital Analytics Inc.

“The negative sentiment is overdone,” said Johan Buijs, chief executive officer of NSI NV, the country’s largest publicly traded office landlord. “There are lots of opportunities in the Dutch market; it’s just a matter of how to take advantage of them.”

Poor Performer

NSI acquired VastNed Offices/Industrial NV a year ago, increasing vacancies at its Dutch offices to 30 percent in the third quarter. The company’s stock has fallen 35 percent this year, the worst performer of the 83-member FTSE EPRA/NAREIT Developed Europe Index. The six analysts who cover the stock recommend buying it.

NSI accounted for 6 percent of all new Dutch office leases in the first nine months. Buijs plans to convert 15 percent of its properties into higher-yielding serviced offices and 5 percent may become hotels or housing, he said.

Next year “will be a turning point with vacancies lower,” Buijs said. “We should get back to the national average, but it will take time.”

Tenants still have the upper hand in rent negotiations with the Dutch economy mired in a recession, unemployment at its highest since at least 2000 and Dutch employers adopting flexible-work policies.

Transport Hub

The Dutch unit of Cap Gemini SA plans to move into a new 21,000 square-meter (226,000 square-foot) building beside the Leidsche Rijn railway station near Utrecht. Faced with employee turnover caused by long commutes, the consulting firm gave its 5,000 workers more flexibility to work outside of the office and it’s vacating 32,000 square meters in a nearby office park. The new headquarters and a network of six Netherlands locations have cut space needs by 30 percent.

Combined with a more than 25 percent reduction in rents, the Paris-based company expects to save more than 5 million euros a year as a result of the April 2013 move, according to Hans Scholten, Cap Gemini’s real estate director for northwest Europe.

“The new development is cheaper and better equipped for our requirements,” Scholten said.

In central Utrecht, 2.7 million square feet of office space is being added in the low-vacancy area around the train station in the country’s largest urban development project, in contrast with the high vacancy rates on its periphery.

“Utrecht illustrates what’s going on across the Netherlands,” said Frank van der Sluys, DTZ Zadelhoff’s head of research. “Public transport is more important than ever.”

‘Owners’ Problem’

Neighboring Nieuwegein had the Netherlands’ highest office vacancy rate until last year. The municipality estimates that a third of the 165,000 square meters of empty space may need to be demolished. The town of 60,000 has sped up the planning process for building conversions and it set a target of eliminating 20,000 square meters of vacant space this year that will probably be met.

“Vacancy is the owners’ problem,” Wouter Kolff, the alderman in charge of economic affairs, said in an interview last month at Nieuwegein’s 50 million-euro civic center that opened last year.

The new center increased the town’s office vacancies by 10,000 square meters, Kolff said. The building designed by Danish architect Kim Nielsen was part of a plan dating from the 1990s to rejuvenate the town center and accommodate employees, he said.

“We want to move beyond the image of Nieuwegein as a place full of empty buildings,” Kolff said. “It’s a slow process.”

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