Advisory firms set up 'distressed' teams

The major real estate services firms are setting up special teams to advise on the growing phenomenon of 'distressed' property sales as the credit crunch deepens.

Savills set up a team in October to handle distressed real estate assets led by its New York office 'to assist real estate companies and their lenders with liquidity needs'. Through its cross-border desk, the team expects to handle multi-jurisdictional and cross-border workout and bankruptcy assignments throughout Europe, the Middle East, Australia and Asia. 'We think that a lot of distressed assets could hit the market in the first quarter next year. Everyone is on the dance floor waiting for the music to start. When it does, there'll be quite a party,' said John D. Lyons, chief executive of Savills in the US.

'I think that offices and retail assets will be vulnerable. Distress has been percolating for a bit longer in the retail sector, especially in areas where retail has been overbuilt, coupled with a slowdown in consumer spending.'

Savills is not the only firm hoping to pick up new business at a time when transactional activity has come to a virtual standstill. JLL, Cushman & Wakefield, DTZ and King Sturge also have similar teams in place. It was a timely move as there are signs that distressed properties are likely to become a fixture on the European property scene going forward as lenders are becoming increasingly unsympathetic to breaches of loan-to-value covenants. 'Will banks use a breach of loan-to-value covenants to negotiate the interest rate payment schedule? Cash flow is king - any property that is not income producing is vulnerable today,' said John Stephen, head of JLL's specialist real estate debt solutions group.

Clients also want a distressed workout done more quickly, said Martyn Williams, head of Cushman & Wakefield's distressed assets team in London. 'A client may come to us with a view to selling several properties and want answers regarding how best to do this within 24 hours,' he said.

There are already some interesting distressed assets up for sale. PriceWaterhouse Coopers is currently evaluating Lehman Brothers $15bn (EUR 11.7 bn) European property portfolio, with a view to bringing the assets to market. DTZ is advising on the administration of Dawnay Day's property portfolios. It is currently in the process of selling a Dawnay Day portfolio in the UK, which comprises around 220 properties, many of which are retail assets.

The portfolio provides an annual rental income of about £46 mln (EUR 56 mln), according to Richard Stanley, director of corporate recovery and restructuring at DTZ in London. 'We had more than 20 initial bids on this portfolio and have since drawn up a shortlist of six would-be buyers, all of whom are UK-based. We think the portfolio is likely to sell for in excess of £700 mln (€ 856 mln). It includes some trophy assets in London, including Grosvenor Gardens and the Austin Reed property on Regent’s Street,' said Stanley.

However, it is not an easy market in which to sell, Stanley concedes: 'There are huge difficulties in the market at the moment, with a widespread perception that the market could have further to fall before it bottoms out. I think there will be other distressed assets coming to market, both in the UK and elsewhere in Europe.'

The main would-be buyers today of distressed assets are opportunity funds which have been set up with a specific remit to invest in such assets, such as the Carlyle Group and ING Real Estate, said Stanley. However, most opportunity funds will bank on a five-year workout and such a turnaround is very challenging in the current climate, said Neville Pritchard, head of UK capital markets at King Sturge in London. Stephen at JLL agrees: 'If investors have cash, they want to hang onto it until they see where the market is headed. No-one is prepared to call the market at the moment. Most investors feel that any bargain today might not be such a bargain three months from now.'

In Europe, a lot of properties have been acquired in recent years by the big US investment banks, which traditionally securitise their debt. However, securitised portfolios are very different and more difficult to offload as the note holders who hold the debt have to co-operate and agree on a sales strategy. 'It's very complicated. That said, given what happened to Lehman, I think we could see more distressed assets coming to market from major banks,' said Stanley at DTZ.