In the private equity world there is a mountain of cash, running into many billions of dollars, looking for a home in real estate. Many complain of unrealistic expectations among sellers with regards to prices. Others feel prices will fall further anyway.
Recent updates from listed property companies, such as Liberty Group, which owns shopping centres, seem to bear this out. Many continue to write-down the value of their assets with little sign of any improvement in the short to medium term.
So how to get a bargain? One way is probably to wait, but that might not go down too well with investors in private equity real estate funds eager to see their funds deployed. Indeed, what these funds need are desperate sellers.
They’re unlikely to be found among the listed property companies, however. Most are still enjoying recurring cashflows and haven’t over-indulged in speculative development. And property retail funds, many of which bought right at the top of the market, have put a break on disposals by telling their investors they won’t accept any further redemptions.
And then there are the speculative investors – people or companies that bought buildings on stretched loan to value ratios and are breaching their loan covenants and struggling to pay higher rates of interest. That type of investor is increasingly becoming a source of transactions, often at attractive prices.
Another potential source of deals that many private equity groups appear to have overlooked is the UK’s embattled house builders. Many have engaged in acquisitions of other companies and of land, while others borrowed money to buy back shares or raise dividends – a seemingly foolish strategy for a sector well known for its cyclical nature.
However, all this debt-fuelled activity has come back to haunt the house builders, leaving many struggling for cash. Banks will only support them reluctantly and shareholders are showing a distinct lack of enthusiasm in subscribing for new shares when they attempt emergency rights issues.
Private equity groups could bid for the house builders, gaining their valuable land banks and some of their developments at competitive prices. But takeovers always involve lots of time, due diligence, complications and have uncertain outcomes.
According to Richard Davies, head of M&A with estate agent group DTZ, there is another way – simply buy some of their developments, many of which are struggling to find retail buyers.
To be of interest to a private equity group, Davies reckons an investment would have to consist of several developments that are well spread geographically and be worth a total of about £50m. Commercial real estate agents are probably in the best position to parcel together such a package.
These developments, which would be purchased at deep discounts, could then be resold at competitive prices as individual units or rented out either to the private sector or public sector organisations. Alternatively they could be rented out to housing associations and local councils.
Nothing like this is happening right now, but should problems deepen in the housing market such a route may well go from being the last resort to the only resort for embattled house builders. That level of desperation should translate into some excellent bargains.