Report of the Managing Board INDUSTRIAL REAL ESTATE MARKET The supply of industrial space has risen rapidly, but increasingly is establishing a two-tier market. There is still a need for flexible and multifunctional industrial space in good locations, where vacancy levels will generally depend upon economic conditions. On the other hand, the supply of obsolete industrial space in unattractive locations is increasing and it seems that this supply is becoming long term in nature. FGH Bank is therefore of the view that greater priority must be given to redevelopment. An increase in demand for space is only to be expected if there is an upturn in economic growth and such a recovery is not expected on a large scale in 2003. INVESTMENT REAL ESTATE MARKET New investment in commercial real estate fell slightly in 2002 relative to 2000 and 2001, but nevertheless a large amount of commercial real estate was acquired in 2002. One significant trend was that investment in real estate hy pension funds and insurance companies fell, but this was largely offset by real estate funds and private investors. The acquisition of commercial real estate by foreign investors declined relative to 2001. The risks on the Dutch market are increasing and the threatened limit on the depreciation of real estate has not helped the image of the Dutch market among foreign investors. The increased risk is also evident in net initial yields, which rose again in 2002. FGH Bank expects that net initial yields may rise further in 2003 as a result of an overhang of space in the market, which is affecting the office market in particular. REAL ESTATE FINANCE In 2002, the real estate market virtually came to a standstill. As a result of low volume of letting transactions, commercial real estate rents stabilized or even fell slightly. Rental voids, which were mainly concentrated in Amsterdam in early 2002, spread across the whole country during the course of the year. As a result, the market is now without doubt a tenants' market and because the market is dominated by relocations, rent discounts and contributions to relocation or fitting-out costs are regularly on offer. New commercial real estate development is only proceeding once a large proportion of the space has been prelet. In the wake of these trends, the pressure on older buildings in lower- quality locations has increased substantially. Low interest rates and the fact that many real estate companies have good cash positions have prevented companies from getting into financial difficulties, however. Operating in a contracting market requires expertise that the bank has, but a number of our competitors do not. This situation has led to a passive market strategy among these competitors and others have reorganized their operations, which meant that they were able to invest less resources in marketing. As a result, our market position has strengthened, and, in spite of the sharp fall in real estate transactions in the market, we have largely achieved our new business targets. In the top segment of transactions we have also seen an increase in size and complexity of transactions and FGH Bank's involvement in such transactions, either on a direct or indirect basis, has been increasing. The rise in the bank's margins, which started in 2001, also continued at a significant level in 2002. Unfortunately, changes had to be made to our account management in 2002 and the sudden death of Carlo Baggerman, our account manager in Groningen, represented a particular loss to us. Our policy is that vacancies will only be filled by highly qualified candidates who have the ability to represent FGH Bank effectively. FGH VASTGOED EXPERTISE 2002 was the third year of operations for FGH Vastgoed Expertise. FGH Vastgoed Expertise now has a balanced customer base, which is made up principally of investors, housing corporations and real estate companies. The positioning of FGH Vastgoed Expertise in these sectors has therefore strengthened significantly in 2002. Last year an advanced real estate valuation and analysis product, called 'RE-Value' was launched on the market jointly with third parties. The total number of staff as at the end of December 2002 was 6 persons. VALUATION RESEARCH In 2002, the new outsourcing policy was implemented. This has increased the efficiency of the valuation process, with extremely satisfactory results, and at the same time the quality of the valuation process has been maintained. With regard to the evaluation and monitoring of construction projects? rating methods have been developed that take into account all of the factors that are relevant to determining the quality of a building. In 2002, the department developed the first version of a forecasting model for the real estate market, which will be tested intensively in the near future and will then become operational. TREASURY In 2002, the financial markets were again characterized by high volatility. On 6 December 2002, following a long period of unchanged interest rates, the ECB decided to cut its official interest rates by 50 basis points and the 3-month Euribor rate fell by about 40 basis points in 2002. The capital market rate fell by about 80 basis points, thereby flattening the yield curve. Owing to the fact that the differential between the money market rate and the capital market rate narrowed during 2002 by about 40 basis points, the mismatch result was also slightly lower.

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Jaarverslagen Friesch-Groningsche Hypotheekbank / FGH Bank | 2002 | | pagina 10