By Maarten van Tartwijk AMSTERDAM--Banks in the Netherlands are suffering rising losses on their domestic real-estate loan books, and warn that the pain isn't over as the industry struggles with structural overcapacity and a weak economy. Financial services company SNS Reaal NV (SR.AE) Thursday said non-performing loans in its Dutch property loan book rose 38% to 1.33 billion ($1.64 billion) in the first half, representing 42% of its total outstanding loans. The group blamed tough market conditions in the Netherlands, citing high vacancy rates and pressured rents in the retail and office segments. It warned that "no recovery is expected in the near future." This echoed comments of bigger rival ING Groep NV (ING), which last week reported EUR120 million in provisions on bad property loans in the second quarter, more than twice as much as the levels seen in previous quarters. ING mainly blamed the weak market in the Netherlands, which represents 51% of its EUR31.7 billion portfolio. The losses highlight the deepening slump in the Dutch property market and come after several warnings from regulators on the risks stemming from the downturn. The sector grew rapidly in the 2000s, when cheap credit helped to fuel a construction boom. But the market is now struggling with structural overcapacity, which is aggravated by the weak economy. The downturn is felt hardest in the office market, where vacancy rates rose to 15.4% in the second half from 14.5% in the start of 2012, according to research of Dutch realtor association NVM. The Dutch market now has 7.62 million square metres in vacant office space, according to NVM. In February, the Dutch central bank said market developments were "downright worrying" and that it would carry out stress tests on financial institutions to determine the risks. It said banks would have to tighten their valuation methods and that some would have to hold on extra capital. Industry participants, ranging from project developers to banks, are now considering options to ease the pain. One idea is to reduce overcapacity by tearing down empty and superfluous office buildings. For SNS Reaal, the troubles have become a key obstacle for its plans to repay a government bailout by the end of 2013. The company had freed up nearly EUR700 million in capital to repay the aid, but said Thursday that it will use most of it to bolster its capital ratios. SNS Reaal has launched a strategic review to strengthen its capital buffer, which may result in the breakup of the banking and insurance company. Overall, SNS Reaal reported a sharp rise in first-half net profit, as gains on interest-rate derivatives at its insurance business helped offset the increase in bad-loan charges at its banking operations. Net profit was EUR115 million, up from EUR53 million in the year-ago half. -Write to Maarten van Tartwijk at maarten.vantartwijk@dowjones.com
