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Tuesday, 20 November 2012

Eurocommerce Commercial Real Estate sold at prices far above liquidation value! That’s good news, right?! Well, not really!


In the almost two years that I publish this blog, I’ve written quite a number of times on the ongoing disaster in the Dutch Residential (RRE) and Commercial Real Estate (CRE) industry. Among others, with my ‘fabulous’ saga ”Getting Rich with Commercial Real Estate”. Still, it was almost impossible to cover everything going on in this industry, as there was just too much happening there and I had too little time to bring it all to you. This is the reason that I didn’t inform you yet of the bankruptcy of Eurocommerce.

Eurocommerce was a commercial real estate management company with a CRE-portfolio that, to put it mildly, was not exactly top of the bill; just like Uni-Invest, which has been mentioned earlier in this blog. The crisis in the Dutch CRE-industry hit these 2nd grade Real Estate managers extra hard, due to the lack of quality and saleability in their portfolio. While this lack of quality was ‘manageable’ in the good times that lasted until 2006, afterwards it was killing for the future of these companies. This was probably the reason that Eurocommerce eventually defaulted in July, 2012.  

After the bankruptcy of Eurocommerce, a curator had been appointed whose task it was to sell Eurocommerce’s portfolio of Commercial Real Estate at the best possible price. This was business-as-usual, until today.  

Today, the Dutch financial newspaper Het Financieele Dagblad (www.fd.nl) printed in a jubilant article, that forty of the office buildings of Eurocommerce had been sold for prices far above the liquidation value. I thought: ‘well, that’s nice for the creditors’, until I saw who the buyers were… Here are the pertinent snips:


Commercial buildings, previously owned by the defaulted real estate management company Eurocommerce, received bids from the involved banks that are far above liquidation value.

More than forty buildings of defaulted real estate management company Eurocommerce, with among others football (i.e. soccer) stadium Gelredome in Arnhem, The Netherlands, will probably be sold for prices far above the liquidation value.

SNS REAAL NV (SR:NA), ING Groep NV (ING:AR), Rabobank, Friesland Bank, FGH Bank and NIBC Bank NV made a combined offer of  €426 mln for buildings that had a liquidation value of €270 mln.  These buildings are bearing a combined debt of €552 mln. The offer needs to be confirmed by the court of justice, but it is already endorsed by the curator of Eurocommerce. No other potential buyers have registered at the court of justice.

Officially, the banks, that financed Eurocommerce, don’t bid on the buildings themselves. This bid happens through a series of newly established private limiteds. The advantage is that the banks don’t receive the ownership of the buildings and that they don’t have to pay conveyance duty. The limiteds are going to utilize and eventually sell the buildings, thus keeping the banks at a distance.

It is not unusual in the real estate business, that banks in this way enable a second beginning for the Eurocommerce real estate. When the real estate climate improves, the banks hope to receive more revenues for the buildings, than if these were sold today.

The Dutch CRE market, especially the market for office buildings, is almost totally stalled as a consequence of the credit crisis. The sale of more than forty buildings at once is impossible in this market, according to insiders, or would at best, lead to strongly dropping prices.

The chosen construction by the banks is criticized by some. It would keep the value of the buildings artificially high, thus making it unnecessary for the involved banks to keep high provisions on these buildings.

The following banks are on the hook at Eurocommerce: Rabobank (+/-€300 mln), ABN Amro (€142 mln), ING (€100 mln), SNS (€100 mln) en NIBC (€39 mln). ABN Amro didn’t want to participate in this private sale.

Today, after I read this story, I put the following statement on Twitter (translated to English):

“No, we [the banks- EL] don’t have this commercial real estate in our books for an excess amount of money. Look, today we paid €426 mln for it ourselves”!

Please don’t buy this story, these buildings were and will be not worth their money. Otherwise, other parties would have made a bid on these buildings (red and bold text).

At least this Eurocommerce story proves that the Dutch banks are not yet willing to cut their losses.

The last two statements are exactly the point. These buildings are probably not even worth the liquidation value of €270 mln. The fact that not one of the other real estate management companies even bothered to make an offer, proves that nobody sees business in these buildings. This is not caused by the credit crisis alone: not in a million years.

The real reason is that project developers, cities and communities, the banks, pension funds and insurance companies combinedly financed a zillion crappy buildings in The Netherlands. Ugly and/or badly designed and built commercial buildings at Z-locations that nobody wanted to buy or rent.

The whole Dutch CRE-market currently suffers from a structural vacancy of about 15% and a forecasted non-structural vacancy of 25% within a few years. In contrary to what the FD states, this has very little to do with the credit crisis, but a lot with excess supply in a buyer’s market that already started in 2006. While the best, most beautiful and modern buildings at the best locations still can be sold or rented, this is virtually impossible for buildings in the Eurocommerce / Uni-invest categories.

At the moment that the banks would admit this and would cut their losses on Eurocommerce and Uni-Invest, they would also have to revaluate their total CRE-portfolio. This would cause a technical loss of billions of Euro’s for all the banks and perhaps it could even wipe out most of the equity of the banks involved: even when a bank is as well financed as the Rabobank. This is a nightmare scenario at which the current situation of SNS Reaal pales.

And so the combined banks pulled their wallet and paid €426 mln for these buildings: because they were worth it! Really!

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