Funds and wealthy individuals seek opportunities in bear market

In the first six weeks of last year, more than 12 developers and investors announced real estate investment plans which, if they had been completed as said, would have required more than EUR 3 billion of investments. Then came the financial crisis, and the great de-leveraging. Most of the announcements made early last year didn't come to fruition, as the developers either halted or delayed the projects, lacking the funding to pursue them.
In the same period of this year, there were barely any development or potential acquisition announcements. Money to invest in real estate is scarce nowadays, bank financing is harder to secure and more expensive than last year. However, some companies have enough money to cherry pick the market opportunities by targeting sellers in distress. Who are those seeking opportunities on a bear market?

Vulture funds and high net worth individuals cherry pick market
With debt markets operating on a very restricted basis, highly leveraged investors will find it difficult to raise funds and operate in the market over the course of the year. The expected beneficiaries, such as German open ended funds, have gone quiet as a result of redemptions, and so have sellers, says DTZ in recent research.
In Romania, real estate investment fund DEGI says it has money to make some acquisitions on the market and is screening the five biggest cities in Romania for this. “We are in a good position to take advantage of the market recovery,” says Dietmar Muller, spokesman with DEGI. He also expects an improvement in inflows. The fund, which froze redemption in some of its funds late last year to prevent panicked investors withdrawing their money, has recently announced EUR 65 million in inflows from private investors.
“Sovereign wealth funds, some of whom are nursing losses on investments in the banking sector, are likely to remain on the sidelines, whilst Middle Eastern funds will suffer from weaker oil prices and are therefore likely to shore-up investments in their own economies, which have not been immune from the current crisis. As the sector faces further downgrades to valuations and a restructuring of its financing, we are more likely to see sales by the listed sector,” found a recent DTZ report on European property.
This leaves some unlisted funds, institutions and pension funds that still have equity to spend. Opportunistic and vulture funds will also be active, while the return of high net worth individuals to a market with higher risk premiums is likely to happen.
Michael Lloyd, a veteran of the local real estate market, who has recently launched Quintet Asset Management, says his firm is already talking to some of these funds interested in taking advantage of the market downturn. There's a lot of money in Asia, he says. “We have some money to start picking up properties. We have the commitment from some people looking at the market,” says Lloyd.
Local high net worth individuals have also started to cherry pick the market. Businessman Dan Adamescu, owned of Unirea Shopping Center properties in Romania, has already invested in taking over a distressed residential property. Adamescu bought Westhouse's Central Apartments in Constanta, a project of 89 apartments stopped due to lack of financing. It wasn't his only acquisition taking advantage of lower prices. The businessman has also bought into IT company Flamingo, which is listed on the Bucharest Stock Exchange, and has spent some money on shares in the Intercontinental hotel in Bucharest.
Businessman Dinu Patriciu, owner of Rompetrol Holding, was involved in the biggest real estate deal since the local market was put on hold by the crisis. His investment fund Black Sea Global Properties Limited (BSGL) invested in Fabian Romania property fund, which it valued at EUR 50 million in the deal. Patriciu's fund has reached more than 99 percent ownership in the fund. In Bucharest, Fabian Romania Limited, which is listed on the AIM market of the London Stock Exchange, owns Cascade office building, Baneasa Center, Evocenter offices, as well as Romana and Cubic offices, both of which are underway. The property fund has EUR 76 million of debt, and has invested EUR 42.2 million of its own equity into projects. Without necessarily eying distressed sales, but with plans to continue real estate developments in Romania, developer South Pacific Group is planning to launch two new projects. The developer, backed up by a funding line from its shareholder Warburg Pincus, and by pre-arranged bank financing for one of the projects, is looking at a EUR 80 million investment in the two housing projects.
“Last year we sold half of the business to private equity fund Warburg Pincus. Everybody in the world of finance is taking a conservative view, so we are not drawing from those funds because of the global economic outlook. But when things start to smoothen out and settle down, we'll have a funding line available through there,” says Andrew Prelea, CEO of South Pacific. The developer had, however, to put on hold its planned EUR 300 million grand prix circuit close to Bucharest.
Austrian real estate developer Soravia is one of the few companies with the cash and the willingness to continue development. The firm, which has agreed EUR 112 million of financing from the International Financing Corporation, will build a 66,000-sqm office project on Mihai Bravu Boulevard in Bucharest. The partnership with the IFC, sealed in May last year, includes a capital increase for Soravia Real Estate Development and mezzanine financing for projects in the CEE region, the former CIS countries and Central Asia. Soravia's underway Metropolis center, which will deliver 29,000 sqm of mixed offices, hotel and retail area, is currently 90 percent leased and will be delivered in April this year.

By Corina Saceanu