Failed expansion into new markets is an issue that several listed European real estate companies have had to face up to during the present cycle. Shareholder discontent can rapidly lead to sliding share prices, which in turn can mean reversing a strategy that seemed promising just a few years ago.
Failed expansion into new markets is an issue that several listed European real estate companies have had to face up to during the present cycle. Shareholder discontent can rapidly lead to sliding share prices, which in turn can mean reversing a strategy that seemed promising just a few years ago.
A case in point is listed Dutch investor-developer Wereldhave which issued a profit warning in mid-2012 following writedowns on its portfolios in the US and the UK, a relatively new market for the company. The response, CEO Dirk Anbeek told PropertyEU, was a three-pronged strategy to reduce risks, re-group and grow. The first phase involved taking the pain. In January 2013, Wereldhave completed the sale of its US portfolio, valued at about €800 mln. US private equity firm Lone Star took the assets off Wereldhave’s hands for €720 mln. In the US, Wereldhave had been confronted by the disappointing operational performance of its office portfolio. The occupancy rate of the total portfolio came to 70%. At the root of the problem was the Elian development project - two office buildings, a hotel and 539 apartments - in San Antonio which was having a difficult birth. The leasing rate was only 25 apartments a month, causing a knock-on effect on the office component. The main problem Wereldhave faced in the US market was lack of scale - an €800 mln portfolio was not big enough for the company to be competitive. Former Wereldhave CEO Hans Pars had already announced in 2012 that the company intended to retreat from the US over a two-to-three year period and re-invest the proceeds in Europe where net yields are higher. Last year’s profit warning accelerated the process as Wereldhave took a €128 mln hit on the value of its US business. In a double whammy, the company’s business in the UK, a new market, came under severe pressure. Writedowns on the UK portfolio - consisting in large part of Ealing Broadway mall in London and the Dolphin Center mall in Poole - came to €38 mln.
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