The big question among private equity real estate firms of late is whether nationalised British banks, the Royal Bank of Scotland and Lloyds Banking Group, will allow themselves to sell property assets to private equity real estate firms.
There is currently a “perception” the banks won’t owing to the PR-problem of selling to so-called “vulture funds”. Last month, although the question wasn’t exactly answered, there was encouragement for private equity real estate after RBS agreed to sell 13 logistics and manufacturing units to London-based Rockspring Property Investment Managers for a reported £27 million (€29 million; $44 million).
Though Rockspring could be dubbed a “vulture fund” by virtue of its private equity fund structures, there was little danger of mainstream newspapers splashing vulture-type headlines around, not least owing to the size of the deal.
One theory in the UK is that RBS was “testing” the market with such a modestly structured, private equity deal before rolling out any mega deals in the future.
RBS is retaining a share in any future profits that might be made from the portfolio, which would also placate critics asserting private equity real estate is opportunistically capitalising on RBS’ problems – and worse, that taxpayers are being shortchanged.
According to sale documents circulated in April, RBS was seeking a 50-50 share of the promote above a 17.5 percent IRR – certainly more palatable than an outright sale.
The sale of the assets is also significant because it provides a clue as to how RBS might deal with the billions of assets it has not in immediate danger of non-performing, but which one day might be.
Experts suggest that without restructuring, the multi-let portfolio of light industrial assets originally acquired by Protego Real Estate Investors would be in danger of hitting an interest-cover issue within about 18 months to two years.
There are quite a few breaks in the leases of the assets between 2010 and 2013. That is why a specialist industry asset manager, IO Asset Management, has been appointed. Rockspring comes in as the equity provider. Therefore, the bank appears to have decided to restructure now in the hope of managing out an asset rather than waiting for the assets to possibly fail to perform.
The deal reportedly reflects a 13.5 percent net initial yield and the bank will provide a new debt facility amounting to about 60 percent of the purchase price (for which there would be an arrangement fee), with the remainder of the equity coming from Rockspring's TransEuropean IV fund.
The suggestion is that RBS will want to deal with these kinds of assets, where the income profile could become an issue, in the same way: structured, with asset managers on board, with a share of any potential profit.
This way, it would not feel too uncomfortable structuring transactions with private equity real estate firms. Seeing as RBS and Lloyds Banking Group have around £180 billion of assets on the balance sheet that need to be worked through, the hope is that by structuring it correctly,