Where has all the distressed gone?

At the 2006 European Private Equity Real Estate Forum in London this week, participants discussed the future of the distressed space. By Aaron Lovell

There is no RTC crisis, as there was in the US in the late 1980s and early 1990s. There is not a currency crisis, as was seen in Asia in the late 1990s. Prices continue to trend upwards, even as rents fall.

So, what is the future of distressed investing? Private equity real estate professionals gathered to discuss that question at the 2006 European Private Equity Real Estate Forum in London this week.

Stevens: no “liquidity bloodbath”

With prices and fundraising hitting all-time highs, there are increasingly fewer and fewer deals with the traditional distressed profile – a suffering asset whose fortunes can be turned around by smart vulture funds, special situation experts and distressed specialists.

But the dearth of opportunities does not mean there aren’t any. Managers just have to look harder. At the asset-level, there seems to be a number of opportunities for the true distressed investor, particularly in the form of projects not hitting their numbers and misconceived development, said Gerald Parkes, a managing director at Lehman Brothers and the panel’s moderator.

Panellist David Marks, a managing partner at newly launched, London-based opportunistic investor Brockton Capital, offered up a laundry list of property and corporate distressed deals from the past year, including everything from high street pub chains to Swissair to the Ark, a London office complex built to look like Noah’s Ark. The property was recently dumped by a German open-ended fund – a distressed seller.

“If you look under enough rocks, there is always some corporate or asset-level distressed,” Marks said.

Gary Stevens, a partner with US-based secondary firm Landmark Partners Real Estate group, noted the recent municipal portfolios that have been sold in Germany, including a landmark acquisition by Fortress Investment Group of more than 48,000 city-owned flats in Dresden.

“As a former apartment developer, those apartments certainly looked distressed,” Stevens joked. He added that, even in the US, indicators were looking similar to the late 1980s when the RTC crisis ushered in the private equity real estate era.

“You will have a refinancing stress,” he said of the immediate future. “But you won’t see the liquidity bloodbath of the late 1980s.”

The panellists agreed that there were enough people with enough capital looking for deals that the money wouldn’t dry up anytime soon. Parkes pointed out the oversupply that had been seen in London in 1989, adding that that sort of oversupply was not being seen at this point. 

Most felt there would be changes in the market place, in terms of flatter rents and lower returns. 

“I think distressed is too strong a word,” Stevens said of the deals in the future. “But I do feel there will be a correction.”