As a cash buyer of UK property, backed by the second-largest company in the world, the fact that GE Real Estate has failed to secure any deals since the credit crunch hit the UK markets offers an insight into why the commercial investment market in this country has been near paralysed.
GE Real Estate’s UK arm agreed a major deal in late July, when it purchased the £417.5m UK Balanced Property Trust portfolio weeks before the problems of US sub-prime mortgage lenders crept into the UK financial markets. In hindsight, that wet summer month now seems like a distant, golden age.
“The world has changed,” says Mike Rowan, GE Real Estate UK’s managing director. “I don’t know of anything that’s been negotiated and closed in the past month. You have deals closing that were done before the markets changed, but nothing that’s been negotiated since.”
Rowan, who has left GE Real Estate twice since he joined its Dallas office in 1983, transferred from Chicago last July to head the UK team in its Berkeley Square offices. He replaced Alec Burger, who was promoted to a senior US lending role.
In March this year, the Chicago native led a team restructuring that split the company’s focus between private and public real estate markets. This involved Ilaria del Beato being appointed managing director of new business, and Mike Bryant being named managing director of public markets origination.
Since Rowan arrived, the team has notched up 27 deals, diversifying its £1.5bn office and industrial portfolio to a fairly even split between London and the rest of the UK. This year is shaping up to be its busiest yet, but the onset of this summer’s credit crunch now appears to have left GE, and the UK property sector, in a state of limbo.
“We continue to look at deals,” says Rowan, “but have not really found anything yet. It’s hard to know what to do. If we see an opportunity we like and believe in, then we will bid. We have bid on four or five things lately, but we haven’t won.”
Upper hand
As primarily cash buyers, you would imagine that GE Real Estate and its loaded peers would have the upper hand in a market that has, by all accounts, shown debt-backed buyers the door. But the freeze on liquidity that has slowed UK deal flow to a snail’s pace has thrown pricing into disarray. Yes, debt-backed buyers are gone but, according to Bryant, the cash buyers now bidding for properties are not putting their best bids forward.
“Of course,” he says, “we shouldn’t lose sight of the fact that sellers don’t generally take property to market over summer.”
Rowan adds: “But our hit ratio is less because of the credit crunch. The market’s just not as hot, and we are being a bit more conservative.”
He adds: “The challenge right now is deciding at what price you want to acquire real estate – we know liquidity is reduced, we know the capital markets are not open for the issuance of commercial mortgage-backed securities, so it’s trying to quantify what the impact is.”
Because that pricing is in doubt, buyers that have the ready cash are bidding considerably lower than they would have before summer. The anecdotal evidence points to sellers taking those properties back off the market and waiting for everything to become clearer.
However, Rowan believes that next month could provide some much-needed lucidity. “By the middle of October,” he says, “most of the quarterly valuations will be out – everyone’s holding back for them. Once they come out, more product will hit the market. We should get a better idea of valuations in the next two months.”
GE’s last successful bid was the £50m acquisition of an office building in Great Pulteney Street, Soho. That was closed in the first week of August, just days before the US sub-prime crisis became a UK concern.
The deal closed prior to that is perhaps the new team’s most prolific to date. At the end of July, it agreed to buy the UK Balanced Property Trust portfolio, a deal that calmed a storm of controversy surrounding the fund.
The portfolio was at the centre of a bitter feud between its former managers, Scottish Widows Investment Partnership, and its board, which backed SWIP’s replacement in February by boutique fund manager Cordatus.
Scottish Widows, a 27% shareholder in the fund, had convened an EGM to wind up the trust, claiming that new manager Cordatus – headed by its former employee, Tom Laidlaw – had allowed the fund’s valuation to drift too far from net asset value. The UKBPT board subsequently said that the motion smacked of sour grapes. It said that shareholders’ interests were far better served by a market auction of the portfolio, and hired Savills to do this. Not long after, GE Real Estate rode to the rescue and snapped up the 91-asset portfolio.
Bryant says: “We saw the portfolio, we liked the diversity of it and, as we got stuck in to individual assets, we saw value-added opportunities. It was complicated around the edges, but at the heart of it was a simple and straightforward real estate acquisition.”
Bryant says that GE plans to keep most of the portfolio, but will make some “insignificant” disposals of smaller assets. It will also be keeping Cordatus on board as asset manager, and says this will be “no different” from its other 24 partner arrangements. Nobody wanted to comment on the Widows versus Laidlaw scrap.
But then, GE doesn’t do controversy. As you would expect from anything owned by a formidable US cash monster, Rowan’s team is well versed in media-speak and they exude discipline, drive and serious dosh.
They need to – their operation is focused on generating returns for shareholders of General Electric, which is listed on the New York Stock Exchange and has climbed 25% in value since July last year.
“Adding value” is a phrase that crops up often in our meeting at the Berkeley Square offices.
Value-adding opportunities
“We consistently acquire assets where we see good value-adding opportunities, whether through refurbishment, redevelopment or reletting,” says del Beato. “The thrust of our ownership is to acquire real estate where we can work with partners at one end and add value the other extreme is ground-up development. We do a lot of the former but only some of the latter.”
They are yet to reveal their masterplan -splitting the team in two was a strategic move that largely recognised the growing importance of capital markets to the real estate sector.
So are they toying with the idea of a listed vehicle, perhaps even a REIT? “It’s something we think about,” says Bryant. “Like the whole market, we’re digesting the legislation, which is still relatively new. We’re keen to make sure we’re on top of what the options may be.”
As Rowan says: “There aren’t many options we don’t discuss.”
