Although there are not that many distressed assets on the Romanian market, there is a huge amount of distress in the capital markets. Many listed property companies – not on the local stock market, but elsewhere, on the London or Vienna stock exchanges – have seen their market capitalizations dropping dramatically. Because of the loan to value breach, analysts predict that the banks could call in these loans at any time, and owners might lose their buildings, making the value of the shares worthless, Michael Lloyd, chairman and principal of Quintet Asset Management, tells Business Review. “Canny investors have been buying companies on the stock market, de-listing them and taking their assets that way,” Lloyd explains. “Analysts know that the banks won't call the loan, but these analysts are never going to take that risk. However, an equity player would take the risk, if they have sufficient equity. […] So that's where we have been spending our time, looking at capital markets and at companies that are in distress.” This particular recipe has already been used on the Romanian market. Local investor Dinu Patriciu deployed such a strategy when buying British investment fund Fabian, which was listed on the London Stock Exchange's AIM, and then de-listing it. The fund has properties only in Romania, but Patriciu targeted foreign properties as well when he acquired control packages in Deutsche Land and Rutley European Property, which have assets in several European countries. Deutsche Land was to be stopped from trading on November 20, while Rutley is still trading. “We have been looking at quality real estate in distressed markets. That is always what recovers fastest,” says Lloyd. Smart people get the highest return in the shortest periods of time. “We have been working with people who are internal rate of return driven and trying to figure out from where you extract the highest amount of revenues in the shortest period of time. Generally speaking it's in high quality real estate in volatile markets,” says Lloyd.
Real estate cycles are a learning curve
Real estate has taught many some important lessons in Romania this year. “Those who look at the figures realize it's time to exit at a market peak, so they jump off. The lunatics keep driving the train and eventually it goes off the end of the cliff. Then the clever people put the pieces back together and start climbing back up again. That's the real estate game. We have never seen that here before – this is an educational process,” says Lloyd. However, no matter how many times people hear this – because this is what they teach at real estate university – they don't believe it until they actually see it, which is when they lose money. “Until they can't afford their Porsche Cayenne anymore, the one they took on leasing last year, thinking they were the masters of the universe, and they realize they have to hand the keys back. That hits hard – that's a lesson that the real estate market doesn't just go one way,” says the Quintet chairman. The dramatic changes on the market have made people realize that although the barriers to entry into real estate are pretty low and anyone can join the fray, it's “a big boys' game and you need to know what you are doing: real estate is not only about putting one brick on another brick,” he adds. There has, however, been a good outcome of the turbulence: it will produce a more professional quality of players in the market.Lloyd believes investors have learned that they shouldn't chase yields and that they should always remember the fundamentals of the business. Developers should have learned to build quality real estate because that is what tenants want in the end. “What have brokers learned? Brokers don't care if the markets go up or down; the worst thing for them is a static market. As long as people are transacting and they are making fees, they don't care – or they shouldn't care, particularly brokers here who are taking fees from both sides. But they should learn about the market cycle,” says Lloyd.