Dutch real estate crisis looms
The Dutch real estate industry could be faced with a serious crisis if plans to limit investment by pension funds in real estate holdings are approved by the government later this year.
The controversial proposal to limit pension funds to a 20% cap in any one real estate company has come from the Commissie Staatsen (Staatsen Commission). This was set up by the first Balkenende cabinet to look at the controversial issue of additional pension fund services and decide what the ‘core-activities’ of pension schemes should be bearing in mind their tax privileged social status.
The Commission produced its report towards the end of 2003 with the most contentious point being that pension funds should be restricted in their ownership of assets to a 20% holding in any one investment. The rationale was that pension funds should be investors, not owners of related businesses or entrepreneurs.
However, pension funds can often be the sole or joint owners of buildings or real estate companies where it is argued that it can be difficult to make the distinction between being an ‘investor’ or an ‘entrepreneur’ with regards to project development and maintenance of buildings.
Jeroen Steenvoorden, director of the OPF association for company pension schemes, which is currently lobbying the government against the proposals, explains: “If you have a large office as an investor and then one of the tenants moves out and it becomes difficult to find a similar replacement tenant then you might have to make some changes to the interior to be able to let it out and ensure that it keeps value. You can’t keep a building in the same state for 50 years. You can always argue if this is project development or not, but if you’re not allowed to improve a building then it is probably not an attractive investment anymore, which is not good. This is an area where Dutch pension funds have been investing for long time.
“Staatsen is saying that you are not allowed to have more than 20% investment in such real estate investment companies, but usually if you buy a shopping mall or something maybe there are two investors, but normally there is just one.”
“You don’t want to have six owners because that is far too difficult to manage and you don’t want to buy it yourself, you want to buy it in a legal entity because then you can trade it much more easily.
“Liquidity is important. That’s an area where we are asking for this to be left out.”
Steenvorden says that Dutch junior minister for social affairs, Mark Rutte, is aware of the issue and open for discussion, but he warns that a lack of resolution could precipitate a huge move out of Dutch real estate: “The problem is that we are big international investors, but in real estate there is a tendency to invest in the local market.”
However, Gerard Riemen, head of the pensions department at the Dutch Ministry of Social Affairs argues that the government is still trying to formulate an answer for dealing with the ‘grey area’ by making a distinction between the pension fund as investor and the pension fund as business entity.
“Staatsen says that when you own more than 20% of a company you have crossed this line. However, we realise that when you draw this line you will have problems with real estate, private equity and pension capital activities. In those activities it is quite common that a pension fund owns 100% of the company who deals with real estate, for example.
“We wrote in our reaction report to Staatsen that we don’t know yet how to deal with those kinds of things.
“We are looking at this now, but it is a very complex matter.”