One of the leading US real estate private equity firms has said the European distressed markets are entering a phase of active deal-making that the US market was in about four years ago – and it is putting its money behind the talk.
Except for limited pockets of weakness in single-family residential markets, the distress cycle is over in the US, according Richard Saltzman, president of Colony Capital, a US real estate private equity firm and real estate investment trust (REIT).
Saltzman is well-positioned for a strategic outlook on US real estate.
Before joining Colony in 2003, he was vice-chairman of investment banking at Merrill Lynch, where he acted as Sam Zell’s primary banker.
Saltzman is credited with introducing the modern REIT to Wall Street and developing the opportunity fund concept.
Private capital is returning to the US real estate capital market after being withdrawn in 2007 due to risk concerns, and securitisation has resumed, most notably with loans on single-family rental properties.
“We see a lot of parallels,” Saltzman said of Europe. “We’re at the beginning of the distress cycle.”
The primary indicator, he added, was a “willingness of the banks to shed assets and recapitalise projects”.
Saltzman gave his outlook at a real estate conference in Chicago in mid-February.
By late-February, Colony was on the move in Europe, announcing an offer to buy the shares of distressed Italian real estate company Risanamento owned by a group of Italian banks.
Risanamento was one of the biggest Italian real estate casualties of the credit crunch in 2009.
It had narrowly escaped bankruptcy, leaving the banks with nearly 65% of the company.
Intesa Sanpaolo was most exposed with a 36% position; the group also includes UniCredit, Banco Popolare, Banca Popolare di Milano and Monte Paschi di Siena.
Colony made the offer in conjunction with Risanamento founder Luigi Zunino, through a vehicle called OUI, in which Colony held a 70% stake.
Saltzman expects distressed workout transactions in this cycle to encompass multiple parts of the capital structure.
The offer for Risanamento is a template: Colony and Zunino are offering to buy shares, assume debt and acquire property in Paris.
Colony offered €0.25 for the outstanding shares, a 5% premium to the price on the day of the offer, but only if the creditor banks first accept €0.20 per share for their stake.
The cash portion of the offer is more than €165m. In addition, Colony is offering to assume some of Risanamento’s debt.
The Risanamento template also starkly illustrates the risks inherent in distressed investing, where the promise of ready money for prime assets can sideline more comprehensive offers, even if the fresh cash only buys time.
Last week, with Colony’s offer pending, Risanamento approved an offer from UK-based fund Chelsfield/Olayan Group to buy nine high-end properties it owned in central Paris for €1.23bn.
This has since been the subject of a legal challenge by Zunino.
The sale threatens to scupper the Colony-Zunino takeover bid. The prime Paris properties are Risanamento’s most attractive assets.
But while the Chelsfield deal would give Risanamento €230m in fresh cash, the story is still unfolding – the company must yet renegotiate its estimated €1.8bn of debt, and two bonds worth around €540m due by year end.
The latest move in Risanamento’s saga shows that restructuring distressed European real estate is a process in itself, and investors should stay tuned for the next episode.