EUROPE NEWS: Dutch strain

The sorry tale of a huge fraud, a warning about oversupply and how the Netherlands could be hit the hardest by the unwinding of German open-ended funds. PERE Magazine March 2012 issue.

It seems almost surreal that, in the Netherlands, real estate has provided the backdrop to the biggest example of corporate embezzlement the county has ever witnessed. After all, as property managers around the world know, Dutch pension funds are famously impassioned regarding corporate governance and transparency with custodians of their capital.

Nevertheless, 11 people recently were convicted in Haarlem 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. Jan van Vlijmen, a former director at Bouwfonds and the main defendant, was sentenced to four years imprisonment after being convicted of forgery, money laundering and bribery. He was found not guilty of defrauding the Philips pension fund, however.

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 quickly sold again 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 detectives and 30 public prosecutors raided more than 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.

Unsurprisingly, some firms unrelated to the case have spotted an opportunity to promote their own services. Alvarez & Marsal, for example, came forward after the sentences were handed down to suggest ways to spot such criminal activity in a real estate setting. The advisory company listed several ‘red flags’, such as investment decisions being taken by a single individual with little or no supervision and internal procedures covering investment decisions that are not respected, have never existed or have not kept up with the growth of the organisation.

Beyond that, the case has come at a particularly bad time for Dutch real estate. Just last month, the Dutch central bank sounded the alarm over a new property crisis in the Netherlands due to a structural oversupply in the commercial sector. Jan Sijbrand, the bank´s regulatory chief, told Het Financieele Dagblad that property valuations should reduce quickly to help the sector back to life, which is fighting twin evils of rising vacancy rates and falling rents, as well as an ugly refinancing burden. Still, other articles point out that Dutch property fund Uni-Invest so far has failed to sell its €865 million office portfolio, despite offering a 40 percent discount.

Meanwhile, it is claimed by researchers at Morgan Stanley that the office market most affected by a potential wind-up of German open-ended funds would be the Netherlands. The bank ventured that an increase of assets for sale could negatively affect valuations.

All this could create a happy ending for private equity real estate firms, however. That is because an idea being mooted by the Dutch central bank is to transfer distressed property portfolios into a state ‘bad bank’ to be wound down over time. Even without a bad bank, there still might be distressed assets to feed upon.