Friday Letter Let the bad times roll

Just a few weeks ago, there was more talk of distressed sellers than actual motivated sellers. Now talk in the US and UK is about to turn into action.

When John Kukral closed his debut fund, Northwood Real Estate Partners I, on $1.25 billion (€797 million) it probably came as no surprise that the former Blackstone real estate president was going to target distress in the US. It’s a strategy most private equity real estate firms have increasingly enlisted as the general economy takes a downward turn. Indeed just two days earlier, the consultancy firm of former New York mayor Rudolph Giuliani announced plans to raise a $750 million opportunity fund just to capitalize on that trend.

Up until recently, private equity real estate firms have only been able to talk about distress and the potential for investment opportunities. This abstract debate even promoted some in the industry to warn there was just too much demand for distress and not even supply.

However things are starting to change, with fresh examples of distress popping up everywhere. Homebuilders in the US are facing a particularly challenging time, with PERE hearing regular reports of firms buying unwanted land from developers as they desperately try to reduce their overheads. One firm said their strategy was to sit on the acquisitions until the market turned around in the full expectation it could sold on – most probably back to the same development companies that sold it.

It is the kind of situation we’ll be seeing much more of – troubled companies with prized real estate assets that well and truly need to sell. Finally, say well-capitalized private equity real estate GPs.

And the situation is much the same in the UK. The London investment bank Dawnay, Day, which has interests ranging from financial services to property, has had to call in the accountants Ernst & Young to restructure the business after failing to raise fresh finance over the past month. Already the firm is planning to sell two of its property companies: Starlight Investments and Insureprofit.

JER Partners has also been burned by the decline in the UK housing market after the UK residential developer it helped to take private last year went into administration.

The ultimate challenge though for both large and small firms is being able to assess each opportunity quickly and accurately. It is a manpower and skill set issue as much as anything else. Those firms which have staffed up to the appropriate level or which have individuals who can quickly zone in on the most attractive and achievable deals will have the advantage.

But what everyone knows in the current climate is that recent examples of distress in the US and UK are just the start. There will be many more to come.