Dutch mess

The extraordinary tale of a huge Dutch real estate fraud, a warning by the country’s Central Bank over property valuations and how the Dutch office market could be hardest hit by the unwinding of German open-ended funds.

Not long ago, a Dutch pension fund was considering making a commitment to a European property fund. The fund manager reported that he was impressed, if not taken aback, by the pension’s level of due diligence. Indeed, its system of underwriting was incredibly comprehensive, and it looked at every piece of the operation for days at a time.

That is what one might expect from a Dutch institutional investor, you might say. After all, as a very broad generalisation, they are renowned for being strong proponents of transparency and governance.

However, there is more to the story than meets the eye. The pension fund’s impersonation of a customs officer with rubber gloves has to be viewed in the light of a new paradigm in the Netherlands. That is because, incongruous as it might seem, the country has just witnessed what is reputed to be the largest case of embezzlement, and it happened to be in real estate.

As has been widely reported, 11 people recently were convicted in Haarlem in northern Holland and seven were given custodial sentences in a case where the defendants were accused of embezzling a combined €250 million from Bouwfonds, which is owned by Rabobank and the Philips Pension Fund.

The fraudulent activity against the Dutch pension fund and real estate investment manager was conducted through so-called ‘ABC transactions’. These occur when properties are sold below market price to an intermediary party and then sold again quickly to the ‘official’ buyer at the market level. The difference in price between the two parts of the deal is then pocketed by the fraudsters.

In November 2007, when the authorities got wind of malpractice, some 600 police detectives and 30 public prosecutors raided over 50 premises to seize incriminating evidence. The investigation also involved tapping 70,000 telephone conversations, as well as secret surveillance of meetings at a Dutch hotel. By then, the fraud had been going on for at least 10 years!

Inevitably, this has put Dutch institutional investors on red alert for fraud, so it stands to reason that fund managers seeking commitments to a fund will get a strip search, to continue the customs analogy.

Beyond that, the criminal case has come at a particularly bad time for Dutch real estate. Very recently, the Dutch Central Bank voiced fears that a ‘third’ financial crisis after the credit crunch and the European sovereign debt crisis could be the real estate sector.

In a newspaper article, newly appointed financial institutions supervisor Jan Sijbrand said words to the effect that his primary concern was that there are doubts about the valuations of property in the Netherlands. He suggested there was no trust in the market.

Meanwhile, there could be another problem brewing. It is claimed by researchers at Morgan Stanley that the office market most affected by a potential wind-up of German open-ended funds (GEOFs) would be, you guessed it, the Netherlands.

In a research note, Morgan Stanley said the ‘The Great Unwind’ of GEOFs was likely to have a biggest impact on the Dutch office markets. Funds that already have announced their liquidation own an aggregate portfolio of €6.7 billion, it noted. The bank ventured that an increase of assets for sale could negatively affect the valuations of stocks that have exposure to the respective markets.

Whether this would be a good thing for real estate opportunity funds or not is a moot point, as the general atmosphere around real estate and the Netherlands has become more toxic. This means that any manager pitching a Dutch investor should not be surprised when seriously put under the microscope.