Deutsche Bank and Lehman Brothers to lose cash after disbursements from secondary portfolios
Deutsche Bank and Lehman Brothers bought large portfolios of secondary assets in the Netherlands, believing that they could make more money selling assets individually. The strategy has not worked and the investors face losses. Recent updates on the loans show that values have fallen and may need to fall further to attract buyers.
In the first case, RREEF, which is owned by Deutsche Bank, and its Dutch partner, Lips Capital Group, are in talks with the special servicer of the securitised loan about the possible sale of 19 assets the two bought in June 2005. RREEF and Lips have failed to pay back the loan, which matured last year.
The loan has been in special servicing since last October and several attempts to refinance the properties have failed. The portfolio consists of 17 secondary office buildings in the west of the Netherlands and two logistics assets.
Moody’s pessimistic about value
Savills valued the portfolio at €155m in January, 18% lower than the purchase price, excluding fees and tax. Moody’s, however, believes that the current value is 16.1% lower than Savills’ figure, at €125m, given the secondary quality of the properties and a potential fall in rents. Moody’s valuation is €3m below the outstanding securitised loan amount of €128m.
RREEF and Lips bought the portfolio of 20 assets in June 2005 from BPF/Bouwinvest for around €195m. The plan was that Lips, with its local expertise in the Netherlands, would asset manage the properties before they were to be sold off individually. Like many buyers at the time, RREEF and Lips believed that the properties were worth more individually than together in a portfolio. Including acquisition fees and tax, the two spent around €210m.
In 2008, RREEF and Lips tried but failed to sell the portfolio. They were close to clinching a deal with Ping Properties at Expo Real 2008, the annual trade fair in Munich, according to a source. Johan van der Blom, co-founder of the Dutch property company, offered €200m for the portfolio. RREEF turned it down; it subsequently sold a small office building in Rotterdam for €4m-€6m.
In the second case, the owners of property company Uni-Invest agreed with the banks to halt further disposals because offer prices were too low.
Acting in a consortium, Lehman Brothers took Uni-Invest private in 2003 in a €1.8bn deal, for its LBREP I fund. As RREEF and Lips, the fund manager believed that the sum of the parts were worth more than the company.
Since 2003, LBREP has been selling the best assets, leaving the overall quality of the portfolio to deteriorate. During the past year, the fund manager sold only 23 assets, leaving 207 in the portfolio, and vacancy has crept up to 29.5% from 23%. Net operating income has fallen to €46.9m from €59.7m a year ago, partly because of asset sales but also because Uni-Invest is left with the inferior assets. Uni-Invest is the biggest investment among the remaining assets that LBREP I still seeks to exit.
The loan to fund the acquisition was securitised and has been in standstill for a year. LBREP has defaulted on paying back some €580m. Rating agency Fitch believes that Uni-Invest could be heading for a fire sale.
“The likelihood is that enforcement will have to take place in order to realise value and pay back noteholders, with uncertainty about timing remaining even at this late stage,” said Fitch in a note. “A last-minute fire sale cannot be ruled out, which could result in substantially lower recoveries than implied by current market value estimates.”
The €613m loan, originally provided by Eurohypo, has a reported loan-to-value ratio of 70.8% based on a November 2009 valuation. Last May, LBREP told investors that it had negotiated a two-year extension with lenders on €856m of debt, the majority of which was securitised. At the time, DTZ valued Uni-Invest at €946.1m. Moody’s valued the portfolio, which had 230 properties, 14.3% lower at €811m.
In the case of the RREEF portfolio, Moody’s valuation was 16.1% lower than Savills’.
Both cases highlight the discrepancies over valuations. More importantly, both owners face further losses.
