I OVERVIEW OF THE MARKET
Recent years have seen a growing appetite for real estate among investors, and investment volumes in the Dutch real estate market have been steadily increasing. In 2015 the reported investment volume was €11.6 billion, the highest since 2007.2 Dutch institutional investors have returned as important investors in prime assets. German investors, who dominated the top deals in the past few years, are still active but less dominant, and private equity firms from overseas (especially from the United States) are more active than before, aiming both at core and opportunistic segments. Asian investors have also made their long-expected entrance to the Dutch real estate market.
Overall, there has been a significant increase in the share of foreign investors in the total investment turnover in recent years. In 2015, more than half of all investments came from foreign investors, compared with approximately one-fifth in 2009. Most of those foreign investors in 2015 were from the United States, the United Kingdom and Germany. About three out of four deals are carried out by sophisticated investors, especially institutional investors and private equity.3
The increased activity of sophisticated – often foreign – investors has in turn led to more variety in deals, including the use of documentation based on that of corporate M&A transactions. That said, most deals, including significant transactions, are still structured as asset deals and the impact of the increased activity of such investors on deal structures should not be exaggerated.
A change these investors have brought is the general way real estate deals are prepared and analysed from a commercial perspective. Specialists with a financial background play a significant role and often the financial due diligence seems to be the top priority, having more impact on decisions than the gut feelings of a real estate professional for whom the look and feel of a property used to be equally important.
Another trend is the shift from single-asset deals to portfolio deals, which – in a country where the value of single properties rarely peaks above €150 million – has led to a number of transactions with significantly higher deal values than before.
The residential sector and premium office spaces have stayed at the top of most investors' wish lists in the past eight years; the retail sector is subject to quite some turmoil. The most notable example is department store group V&D, which was declared bankrupt at the end of 2015. The group, over 125 years old, had 62 department stores throughout the country. Over 10,000 employees lost their jobs. For the retail sector, it means a big hole in the city centre of many cities. A number of other retail groups are facing similar issues.
In all segments the Randstad area (the combined greater Rotterdam, Amsterdam, The Hague and Utrecht area) is most popular by far; for offices, the Amsterdam Zuidas district is the nation's top office location.
A typical feature of the Dutch real estate market is the presence of almost 400 housing associations that own large numbers of residential properties. Their portfolios comprise about 30 per cent of the whole Dutch residential sector, with a market value of about €250 billion (2013).4 These housing associations were set up in in the 19th century to provide subsidised housing for the poor. The applicable regulatory framework was very restrictive. Sales of properties outside the social sector were hardly possible. Recent changes in legislation made it easier for housing associations to sell off parts of their portfolio to commercial parties, although approval from the Dutch government authorities is still required. This increased freedom to sell off assets, especially where the monthly rent payments are above a certain defined threshold, resulted in the sale of several large residential portfolios to foreign REITs and private equity firms. It led to a spurt of deals and many investors (domestic and foreign) are still focusing on those portfolios. Since 2015, the demand from investors has greatly exceeded supply; this gap may even have widened as a result of the recent influx of refugees. This is said to have constrained the divestment possibilities for housing associations, as they play an important role in arranging for housing solutions for this group.
II RECENT MARKET ACTIVITY
i M&A transactions
In January 2015, France's Klépierre SA acquired Dutch-listed real estate company Corio NV through an all-stock €7.2 billion recommended public offer. Corio's portfolio consisted of 57 shopping centres in seven countries across Europe. Through the acquisition of Corio, Klépierre became the second-largest listed real estate company in Europe. As part of the transaction, Corio and Klépierre agreed on a 'pre-wired' cross-border legal merger – the first of its kind in the Netherlands. The merger would be implemented if the 95 per cent threshold for the Dutch statutory squeeze-out procedure was not reached. In return, Klépierre agreed to lower the acceptance threshold of the offer to 80 per cent if the Corio shareholders approved the cross-border merger of Corio into Klépierre. The pre-wiring of the merger added deal certainty for the bidder and was an interesting new feature of the transaction. It is also a clear example of a style of M&A dealing in a real estate context. Ultimately, Klépierre did not obtain 95 per cent of the Corio shares and the cross-border merger was implemented without any shareholder opposition in April 2015, showing the effectiveness of this pre-wired legal restructuring.
Only a month later, in May 2015, Klépierre divested nine shopping centres formerly pertaining to the Corio portfolio. In an asset deal, these shopping centres were purchased by Wereldhave NV, a Dutch-listed real estate company, for €730 million. Wereldhave is active in Europe and its portfolio mainly consists of shopping centres.
In July 2014, Dutch housing association Vestia and German fund Patrizia Immobilien AG agreed on the sale by Vestia to Patrizia of a residential portfolio consisting of about 5,500 residential properties for €578 million. A second tranche comprising over 1,000 properties followed in 2016 for an additional €97 million. Vestia had lost billions of euros on its derivatives portfolio during the financial crisis and had to sell a substantial part of its portfolio to recover its losses. This transaction was the first of its kind after the changes in legislation that made the sale by housing associations of large parts of their portfolios to commercial parties possible. Various parties, including some of the municipalities where the properties are located, contested the government's decision to approve the transaction. Administrative proceedings are still pending.
One owner-occupier deal stands out: in 2012 Dutch-listed Royal Philips sold its High Tech Campus business park in Eindhoven, which had become home to about 100 different other technology-related companies in addition to Philips and to a total of 8,000 employees. The buyer was a consortium led by a private investor. The deal value was said to be around €425 million. The deal is considered an early example of a more modern and sophisticated approach in real estate transactions.
ii Private equity transactions
In November 2014, four months after the Vestia/Patrizia deal, UK private equity firm Round Hill Capital was the second foreign investor to acquire a large portfolio of residential properties from a Dutch housing association. Round Hill purchased the portfolio, which consisted of 3,786 houses, from Wooninvesteringsfonds for €365 million. Like Vestia, Wooninvesteringsfonds was in financial turmoil and had to divest a significant part of its portfolio to strengthen its financial position. Round Hill is still expanding its Dutch residential portfolio.
Dutch municipalities often impose certain socially motivated restrictions and obligations on housing associations, such as limits on rent levels and priority for certain target groups when housing becomes available. In the deal between Round Hill and Wooninvesteringsfonds, Wooninvesteringsfonds required Round Hill to commit to certain of those restrictions and obligations with regard to the relevant municipalities. This is considered an important precedent for future transactions between housing associations and (foreign) investors.
In July 2014, US private equity firm Lone Star Funds purchased a portfolio of 32 office buildings in the Netherlands from CBRE Global Investors' Dutch Office Fund. The deal value was €372 million. Some of the portfolio's assets had high vacancy levels. During 2012–2013, US private equity firm Blackstone purchased distressed loans from various banks to Multi Corporation BV, a Dutch company that develops, manages and owns shopping centres across Europe. In September 2013, Blackstone announced that it had completed the acquisition of Multi. Transaction details were not disclosed. After the transaction, Blackstone has made Multi its platform for its retail portfolio in Europe. In 2014, Blackstone acquired 14 shopping centres in the Netherlands from CBRE Global Investors for €240 million and added them to the Multi platform.
There has also been quite some private equity activity in the field of non-performing loans (NPLs); for example, Cerberus buying approximately €400 million of NPLs from Van Lanschot Bank (2015) and Attestor Capital buying €250 of NPLs from FGH Bank (2015). It was recently announced that Lone Star and JPMorgan would be buying bad bank Propertize (with a reported portfolio of €5.5 billion of NPLs) for €895 million. At the time of writing, this is still subject to certain conditions.
III REAL ESTATE COMPANIES AND FIRMS
i Publicly traded REITs and REOCs – structure and role in the market
There are four listed REITs or REOCs based in the Netherlands: Wereldhave, Eurocommercial Properties, Vastned Retail and NSI. Unibail-Rodamco is based and listed in France but is also listed in the Netherlands.
Publicly traded structures typically take the form of a public limited liability company (NV) listed on Euronext Amsterdam Stock Exchange. NVs usually are closed-ended (i.e., have no legal obligation to redeem shares) and have an indefinite term. They are internally managed, meaning they employ the individuals that manage the portfolio. They qualify as fiscal investment institutions that are zero-rated for corporate income tax. They are obliged to make annual profit distributions; within eight months of the end of the financial year they have to distribute their taxable profit to their shareholders, provided that certain capital gains are not deemed part of the taxable profit and may be allocated to a reserve. As a result only ordinary income is typically distributed. A fiscal investment institution may only make passive portfolio investments, which typically exclude development or significant redevelopment activities. Development or redevelopment activities by ordinarily taxed subsidiaries of a fiscal investment institution are possible, subject to certain restrictions.
In the Netherlands these structures do not qualify as 'alternative investment funds' for regulatory purposes and are therefore not subject to authorisation by the Netherlands Financial Markets Authority.
ii Real estate PE firms – footprint and structure
In recent years, there has been an increase in real estate investments in the Netherlands by major US and UK private equity firms and other investment funds. Many of them invest in distressed commercial real estate assets or loans.
The key challenges private equity firms face from a tax-structuring perspective are the risk of challenges of the deductibility of interest on intragroup debt, mitigating dividend withholding tax, and structuring acquisitions and exit strategies in respect of distressed loan portfolios in a way that does not trigger Dutch real estate transfer tax (RETT).
There are significant active private real estate investment funds with mainly institutional investors and, to some extent, family firms and wealthy individuals. These funds usually take more of a long-term view than typical private equity firms. Wealthy individual investors also play an important role in the residential sector and have bought significant portfolios over the years from institutional investors.
i Legal frameworks and deal structures
The Netherlands is a civil law country with a mature and well-established legal market. About five law firms are active in the upper part of the real estate market, with differing market shares but without any of them dominating the market. Within these firms, in most cases the lawyers advising on and implementing real estate deals are partners, who are also civil law notaries. In the Netherlands both asset and share transactions require Dutch notarial deeds of transfer. In a typical deal, funds flow through a notary's escrow account and the notary safeguards proper completion of the deal.
As a result of the general quality of the parties active at the high end of the market, the integrity of advisers, the mandatory involvement of civil law notaries, an effective and reliable land register system and a modern civil code, real estate transactions in the Netherlands are generally not surrounded by legal uncertainty.
Evolution of the sale process
Many institutional investors disposed of all or large parts of their direct real estate portfolios in the years between 1998 and 2008. A typical sale process was structured as a one-round tender: a bid book or data room was made available, a single meeting was organised for all bidders involved to ask questions and a week later, in a session normally lasting an hour, all bids (fully binding and without any conditions precedent – not even for financing) were handed in. In those years, the results of auctions were often beyond sellers' expectations.
An execution copy of the sale and purchase agreement was provided upfront and had to be submitted with the bid, signed for approval. Only title warranties were provided.
Since 2008, the typical sale process became much more similar to a customary M&A auction process, with multiple rounds to submit offers (often non-binding) the ability to provide a mark-up of the auction draft, confirmatory due diligence by one or two remaining bidders, and ending with negotiations leading to a balanced final contract.
The Klépierre/Corio cross-border merger deal stands out. In general, sophisticated structures in real estate transactions cannot be considered common. Most deals still take place in the form of straightforward asset transactions, although share deals do occur more often than before.
In portfolio deals, or even deals concerning a single property, it can be convenient to transfer one set of shares rather than a variety of assets, which then require separate contract takeovers; but this is only a real advantage if the target portfolio is already neatly packaged in a target company. Both types of deal require similar due diligence, provided that the purchaser in a share deal wants comfort that the target company has not been used for any other purpose than holding a specific real estate portfolio, or at least has no liabilities related to activities other than that. Also, both real property and shares are transferred by a notarial deed, although a property transfer is only effective after it has been entered in the land registry.
From a tax perspective, there are fundamental differences between an asset deal and a share deal. The key difference relates to the treatment of capital gains realised as a result of the sale. While capital gains realised on an asset deal are taxable unless the seller is (effectively) exempt and result in a step up (or step down) in tax basis for the buyer, capital gains realised on the sale of shares are exempt while the target company that holds the real estate objects in principle maintains the (lower) tax book value. In share deals, Dutch anti-loss trafficking rules need specific attention: these rules may result in a forfeiture of tax losses as a result of the change of control. Finally, asset and share deals may be treated differently for Dutch RETT purposes. While asset deals are in principle subject to RETT, share deals are only subject to RETT if the buyer, together with related parties, acquires or extends an interest of at least one-third.
Sale of REITs: deal origination
Public REITs being offered for sale is not something that has happened in recent years; rather, there have been recommended bids initiated by strategic buyers. Other than Klépierre/ Corio, an example – although somewhat less recent – is the acquisition of Rodamco Europe by Unibail in June 2007 to become Europe's biggest real estate company. After the successful tender offer, Unibail Holding SA changed its name to Unibail-Rodamco SA, and was later converted into a European public company (Societas Europaea or SE ).
Parties considering the takeover of a Dutch-listed company should take into account that fiduciary duties of board members of companies in the Netherlands are not only considered as obligations to the shareholders but, more broadly, to the company as a whole. Maximising sale proceeds at the expense of employees or putting continuation at risk may be considered a reason for a management or a supervisory board to use its weight against an unfriendly deal or at least not to cooperate.
A private REIT usually sets its time horizon for a specific date. When that time comes, the remaining participations may be redeemed or the manager may sell off the assets and distribute the proceeds. There are recent examples of participants in some funds teaming up and triggering the sale of such funds, through the sale of either assets or shares. Terms of limited partnerships may allow for such sales if a certain qualified majority approves the deal. They are often prepared by shareholders' or participants' committees running the deal and agreeing upfront with all sellers the terms of engagement, defining the range of acceptable prices and committing them to vote for a deal at a certain price level. When such REITs are in the form of an NV, traditional pre-emptive rights of non-selling shareholders are creatively dealt with by amending the company's articles, and squeezing out any potential remaining minority often takes place using mechanisms well known in the public M&A practice. ii Acquisition agreement terms Customary terms for asset deals were more or less clear up until five to seven years ago. The top law firms had developed their own templates, but these were often in line with templates provided by the Royal Dutch Association of Civil Law Notaries; the use of those templates is very common. Such agreements were generally 10 to 20 pages long, with warranties and details on closing included within the body of the contract. A balanced set of warranties would normally be provided, assuming a decent level of due diligence by the purchaser and fair disclosure by the seller, taking into account that a seller's obligation to disclose relevant facts under Dutch law generally outweighs a purchaser's obligation to investigate. Limitations of liability in the form of time limitations deviating from the statutory regime and liability caps were not common.
This has changed to a certain extent. Gradually, a handful of typical M&A clauses have found their way in real estate deals. Specifically, defined limitations of liability and disclosure mechanisms are now common, but break fees, feasibility periods and material adverse change clauses are still absent in most deals.
This situation appears to be subject to ongoing development. Quite often, deal structures in which templates for asset deals are, with minimal changes, used for share deals that are perceived as real estate transactions; conversely, typical share transfer forms are sometimes used for asset deals to achieve a more sophisticated level of contracting. Frequently, it is easy to tell from a contract that the parties to, and perhaps even the lawyers involved in, a share deal have tried to recreate the older, more well-known format and customs of traditional asset deals.
In the Dutch legal context, principles of reasonableness and fairness play an important role. There is no 'four corners of the contract' doctrine. Those principles may, in specific circumstances, even lead to the conclusion that in the absence of an executed contract, the parties are bound to continue negotiations until signing has been achieved. To avoid that as much as possible, parties should clearly define the precontractual stage of their discussions and should emphasise that all negotiations are 'subject to contract'.
iii Hostile transactions
Hostile takeover attempts of Dutch-listed real estate companies are sometimes considered, but not often attempted. One of the few examples dates back to 2001, when Australian real estate company Westfield tried to acquire Dutch-listed real estate company Rodamco North America. This attempt led to a landmark decision by the Dutch Supreme Court about the acceptability of the use of anti-takeover measures by listed companies. Although the Supreme Court sanctioned the use of certain anti-takeover measures by the management board of Rodamco North America, the takeover was ultimately completed.
That said, a possible reason why hostile takeovers are not often attempted is the fact that Dutch-listed real estate companies are fairly well protected – or at least they used to be. Before the introduction of the Alternative Investment Fund Managers Directive (the AIFMD),5 the regime applicable to listed real estate funds allowed the management board to decide on share issuances, effectively offering an effective instrument against hostile takeovers. Under the AIFMD this regime has disappeared. Various other anti-takeover mechanisms are still available and, generally, are still very common in Dutch-listed companies; multiple measures in a single company can often be used and – although sometimes contested – the companies generally remain intact. However, not all Dutch-listed real estate funds have implemented such anti-takeover measures.
iv Financing considerations
In general, after some years of reluctance, many lenders are back on the market and credit supply is said to be available. Apart from domestic banks and insurance companies, foreign banks and alternative debt providers have also accessed the market.
Although no statistical data is available, the general impression is that lending in the real estate market by domestic banks is still mostly documented using the lenders' own template formats. Loan Market Association-based documentation is used only to a certain extent, usually in larger deals, syndicated financing and when foreign banks are involved. Larger tickets may involve multiple banks using customary intercreditor arrangements. Typical security rights granted to lenders are rights of mortgage on the properties, pledges on the shares of special purpose vehicles (SPVs) and rental income. Using a single security trustee is common, although in the absence of clarity on the enforceability of common law-type collateral agent structures, parallel debt structures are used, as is the case in other civil law countries. Typically, the security trustee holds only one first-ranking security right, and the ranking among creditors is achieved in the distribution of proceeds provisions.
v Tax considerations
Typically, Dutch real estate investments are made through structures that fall within one of the following three categories: (1) a fiscal investment institution acquiring real estate, (2) one or more Dutch or foreign SPVs, which are (highly) leveraged with bank debt and intragroup debt, acquiring real estate or (3) a tax-transparent Dutch or foreign limited partnership acquiring real estate. The main drivers for choosing the optimal structure are described below.
Dutch corporate income tax
The Netherlands currently levies corporate income tax at a rate of 25 per cent (20 per cent for the first €200,000) on profits from Dutch real estate investments regardless of whether they are held by Dutch or foreign entities. Other important features include the following.
Capital gains on the sale of shares in Dutch real estate companies are not subject to corporate income tax as long as an anti-abuse rule applying to foreign shareholders does not apply – this facilitates exit strategies. Further, interest on external debt and related-party debt is not subject to statutory restrictions on interest deduction. Currently, the arm's-length principle is in practice the only limitation on the level of tax-deductible interest. That may change, for instance, as a result of the EU anti-tax avoidance directive drafts, which provide for a generic earnings-stripping rule. Fiscal investment institutions are effectively exempt from Dutch corporate income tax, but in order to qualify as a fiscal investment institution a list of strict requirements – including shareholder diversification and profit distribution requirements – must be satisfied. Finally, (Dutch) pension funds are important investors in the Dutch real estate market. These funds are fully exempt from Dutch corporate income tax. They usually prefer transparent investment structures because this allows them to benefit from their exemption.
Dutch dividend withholding tax
The Netherlands currently levies dividend withholding tax at a rate of 15 per cent on distributions by companies that are tax resident in the Netherlands. In many structures Dutch dividend withholding tax leakage is restricted or eliminated by exemptions or refunds based on Dutch domestic tax law or tax treaties, or through proper structuring.
Dutch real estate transfer tax
The acquisition of Dutch real estate is in principle subject to Dutch RETT at a rate of 6 per cent for commercial real estate and 2 per cent for residential real estate. If real estate is acquired by a group of at least four unrelated investors, or can be structured as such, while the real estate is held by entities or partnerships the interests of which may be transferred, RETT may be saved. RETT is only due on the acquisition of shares in Dutch real estate company or interests in a partnership holding Dutch real estate if the acquirer, together with its affiliates, acquires or extends an interest of one-third or more. An additional requirement applies for the acquisition of interests in a partnership. In order for such an acquisition to be exempt, the partnership must qualify as an investment fund for the purposes of Dutch regulatory supervision laws.
vi Cross-border complications and solutions
The Netherlands is very open to receiving foreign investors. Generally, no restrictions apply to foreign investments, other than anti-terrorist measures and sanctions.
From a Dutch tax perspective, the key points to note from the perspective of foreign investors are Dutch dividend withholding tax and the deductibility of interest due to low-taxed foreign group companies.
V CORPORATE REAL ESTATE
Dutch corporates often hold their real estate in property companies separated from the operating companies. There have not yet been any REIT spin-offs, but some corporations do monetise their real estate, often through sale and lease-back transactions with investors.
Dutch food retailer C1000 offers a good example. In 2011, three years after having been acquired by CVC Capital Partners Ltd, C1000 sold all six of its logistics facilities to WP Carey & Co for €155 million in a sale and lease-back transaction. This transaction, together with an earlier sale of 56 of its supermarkets to competitor Royal Ahold, allowed CVC to recover a substantial part of the price it paid for C1000 a relatively short time after its acquisition. Another high-profile deal concerns Philips' High Tech Campus in Eindhoven, mentioned earlier. A more recent transaction concerns Delta Lloyd selling a portfolio of 16 office buildings, including its own headquarters, the iconic Mondriaan tower in Amsterdam, to a group of Asian investors led by First Sponsor Group in 2015.
Overall, investors seem to be confident and capital seems to be available. Many Dutch and foreign banks are said to be fully open to increased lending; however, the general feeling is that the supply of high-quality properties, such as offices in Amsterdam's Zuidas district, and attractive residential portfolios will, in the near future, not meet the demand. That seems to be the biggest hurdle.
1 Lodewijk Hijmans van den Bergh and Mark Rebergen are partners, and Frederik Corpeleijn is an associate at De Brauw Blackstone Westbroek NV.
2 CBRE Research report 'The Netherlands Real Estate Market Outlook 2016' http://www.debrauw.com/wp-content/uploads/2016/12/The-RE-MA-and-PE-Law-Review-Netherlands.pdf ), p. 7.
3 Idem, p. 9.
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