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Pierre Rolin, Stratreal: double whammy ahead |
"To me, distressed means properties where the banks have pulled the rug on someone and it’s vacant, or in development and the builder hasn’t been paid," says Michael Cutteridge, director of DTZ’s capital markets team in London. "I don’t think we’ve gotten to that point yet. It’s more the case of buying good properties at better pricing and there being fewer people in the market."
This is a point underscored by Nick Burnell, managing partner at Rutley Capital Management in London. Although prices have come down, they haven’t come down to distressed levels. "No one knows what the volumes of opportunities will be," he says. "It could be that the money coming in will underpin the market. I’m not sure this is an environment where people will make lots of money."
Nevertheless, in the UK, where commercial property prices have dropped by some 20% to 25%, many players are positioning themselves to scoop up bargains. London-based Rocksburgh Capital, the direct investment arm of Rock Capital, is raising €500 million to invest in property-related subordinated debt and loans – some of which might have been packaged in commercial real estate collateralized debt obligations that are being dismantled.
"We’re looking at stressed situations rather than distressed," says Andrew Radkiewicz, managing director at Rocksburgh. "Where we’ve identified opportunities is in the difference between pricing and the risk in debt and loans."
Indeed, funds are approaching the UK market in a variety of ways. London-based Managing Partners Limited’s (MPL) British Property Opportunities fund is targeting opportunities arising from redemptions in open-ended property funds. It will seek out investments in distressed portfolios, high-yield rental units, development opportunities, leasebacks and reversionary gains schemes.
Another fund, Terra Catalyst from London’s Laxey Partners, is seeking to take advantage of the steep fall in the share prices of commercial property companies. In keeping with Laxey’s active investment strategy, the fund will take stakes in and launch full takeover bids for groups it deems undervalued. Laxey aims to raise £250 million to £300 million ($600 million) from institutional investors in addition to its £1 billion debt facility from Credit Suisse.
The now sensibly priced UK market has been attracting other kinds of investors. Sovereign wealth funds have come to the UK seeking opportunities in London. Singapore’s GIC has been particularly active, as has Istithmar, Dubai’s property investment arm, which bought London’s landmark Metropole from the Crown Estate in February.
High-net-worth individuals make up another investor segment eagerly hunting around for buys in London and the UK. Nick Leslau, Tom Hunter and Kevin McCabe – all backed by HBoS – and the Livingstone brothers, who haven’t been in the UK for some time, are all moving back in. Leslau’s Prestbury fund, for example, is buying a portfolio of nine London properties for £220 million from Invista Real Estate Investment Management. However, others are waiting on the sidelines to determine whether the market will get cheaper.
"On the commercial side of the market, the problems may come with refinancing," says DTZ’s Cutteridge. "As we saw with NB Estates, they weren’t able to refinance and that property is on the market. And that’s an example of what you’d traditionally call distressed. People looking for 15% to 25% IRR will be fishing in that pool."
In addition to refinancing issues, a weakening economy could pile pressure onto the wobbly commercial property sector.
"To get worse, markets need to get some tenant failure and we haven’t seen that yet," says Rocksburgh’s Radkiewicz. "Major tenant failures and problems around speculative developments could bring more distressed properties on to the market."
The bad news hasn’t been limited to the commercial side of the business. "There’s been quite a bit on the residential side," says Cutteridge. "In the last year our receivership people have seen deals with blocks of flats where the purchasers had defaulted on the deposits and values have gone down in the regional cities and in London. There have been distressed sales where people have had their financing withdrawn or haven’t been able to refinance."
In the US, Stratreal’s Pierre Rolin is eyeing up prime residential properties in the Miami-Dade area. "There is going to be a double-whammy of lack of demand and credit problems, that will allow large sterling- and euro-denominated investors to buy into this market," says Rolin. "We’re going to bulk buy luxury apartment units from banks and developers to hold for five to seven years."
Rolin will launch a fund targeting this segment in the second half this year. He expects repossession numbers to rise in addition to the growing numbers of unsold new builds – creating more investment opportunities.