Goldman Sachs lays foundations for better times
With the commercial mortgage-backed securities market closed and the global equity markets unavailable to all but the best-of-class public property companies, there has been a marked absence of headline-making deals coming out of investment banks’ real estate units. Like other sectors of the market, the focus has shifted from new issuance to restructuring and advisory work. Despite this fundamental change, Goldman Sachs has solidified its position in this year’s Liquid Real Estate poll. The US investment bank moved up one notch to place second in the global investment banking category, shot up from fifth to third spot in western Europe and finished first in the US investment banking category.
Real estate advisory is housed in Goldman’s investment banking division and provides advisory, capital-raising and balance-sheet lending services. The firm has always been active in real estate and was one of the first to have a dedicated principal-finance and balance-sheet lending function as well as being among the first banks to sponsor a real estate fund.
“We’re good at large and complicated lending situations and work very closely with the principal investing team,” says Andy Richard, Goldman’s London-based head of real estate advisory for the EMEA region. “We are one of the largest owners of real estate globally and that gives us access to opportunities and also a vast real estate knowledge base.”
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“The IPO market will remain a very difficult market until something changes in fund flows, sentiment or both” Andy Richard, Goldman Sachs |
While its competitors have sat on the sidelines, Goldman has built on its reputation as a bank to turn to when clients need to get a deal done. Nowhere are deals more difficult to launch than in the global real estate equity market but Goldman has managed two equity deals this year – one a $300 million IPO for an Egyptian developer. “The real estate equity markets both globally and in Europe have been difficult, off in most cases anywhere from 40% to 60% from their peaks last year. New issuance, whether it’s been IPOs or follow-on offerings, is at a standstill,” says Richard. “Public companies have very limited access to public equity, but despite these very challenging market conditions, we’re starting to see some signs of life, mostly out of the US, but a real estate IPO right now would be pretty much unthinkable.”
The April IPO of Palm Hills Developments went a long way towards reinforcing Goldman’s reputation for real estate. The Egyptian developer is active in the high end of the residential, commercial and leisure sector. The IPO appealed, says Richard, because investors still want exposure to the growth and the economies in the Middle East. To date, the Palm Hills deal is one of the few international IPOs executed this year.
“That was a landmark deal for us,” says Richard. “It’s a reflection of our global equity franchise. That transaction was sold all over the world and we believe we are uniquely positioned because of the strength of our global equity franchise to do deals like that.”
The primary issuance side of the equity markets remains shut to all but the highest-quality companies and even for those any attempt to raise cash would be expensive. The size of any deal that might be done now would be nowhere near the peaks of last year.
“Investors are very selective,” says Richard. “There are plenty of opportunities for investors with what exists in the public market now, so the IPO market will remain a very difficult market until something changes in fund flows, sentiment or both.”
Another deal for Goldman’s London-based real estate advisory unit was advising the Goldman Sachs Whitehall funds on the acquisitions of a €3 billion-plus German residential company called LEG.
“That has been one of the largest deals done in western Europe for some time,” says Richard. “It demonstrates that there are pockets of transaction volume when you can buy assets that are going to generate cashflow at a fair price and there still is appetite from investors and banks.”
The Palm Hills deal was a success for Goldman this year but it is also an indication of things to come. The firm has already started to build up its presence in the Middle East and North African region, a trend it will likely continue. Last year it opened a full-service office in Dubai, now staffed with 50 people, around 20 of whom are strictly investment banking. Those numbers are set to grow and Goldman has installed one of its most senior coverage officers, Khaled Eldabag, to head the effort. Part of his remit is to develop the real estate business.
“We do think the Middle East is an area where we’ll be spending more time and where capital markets for real estate will develop,” says Richard. “There is a lot of real estate that’s getting built and needs to get built in the Middle East, because it’s a very fast-growing market which is becoming a region of choice to do business.”
Even for the big names like Goldman, though, business is subdued, thanks to the malaise hanging over real estate markets. With most markets poised for further trouble, business opportunities are still only to be found in pockets.
“It is very difficult and it would be naïve to say the market is on a positive trend or things are getting back to normal, because they’re not,” says Richard. In addition to its activities in the Middle East, the firm is still active in emerging markets such as Russia and those regions where capital flows remain healthy. But even the amount of emerging market activity is slower than last year, he adds.
