US buyer prepares to spend £1bn on cut price UK property
A US private equity firm is preparing to spend more than £1bn on discounted UK real estate in the next six to 18 months including buildings from a series of property funds that suspended trading this week.
The plan by New York-based Madison International Realty is an early sign of how opportunistic investors might seek to take advantage of any downturn in the market triggered by the UK’s vote to leave the EU.
The group has already made contact with property funds that halted redemptions in the wake of the vote.
Seven property funds holding more than £15bn prevented redemptions this week as investors, anticipating a drop in commercial property prices, rushed to withdraw their money.
Property advisers including Knight Frank and Cushman & Wakefield said they were in touch with funds seeking to sell assets to generate cash to pay back to investors.
Other private equity buyers said they were also eyeing the UK market, but did not expect to see widespread distressed debt secured against commercial property, as in the 2008 crisis.
One buyer said, however, that he expected prime London assets to come on to the market at a discount from the suspended funds. “They’re not going to try to sell their trickier assets first,” he said.
Suspended funds own London buildings including 440 Strand, headquarters of the private bank Coutts; Riverside House, an office building on the south bank of the Thames; offices on Soho Square; and retail buildings on Oxford Street.
On Friday the UK’s financial watchdog indicated that some commercial property funds may need to lift suspensions and allow clients to take a haircut on investments. The FCA said it was in close contact with the funds. It has suggested it may look again at the design of these funds, which hold assets that cannot be sold quickly but offer investors same-day redemptions.
There is a risk of contagion in the market as a wide pool of other products invest in the property funds, and so could be forced to block investors from pulling their money. These include two multi-asset products run by M&G and three of Standard Life’s multi-asset products. Another three Standard Life funds have large stakes in Henderson’s suspended property fund.
Madison International Realty sent its senior management team to London on the day of the UK’s referendum on EU membership after seeing that the polls were “neck and neck”, said Ronald Dickerman, its founder.
“We can be a liquidity provider to open-ended funds with queues for the exit,” he said, adding that Madison would buy stakes in buildings from the suspended funds, but would not seek to acquire entire assets.
Madison has raised a $1.39bn equity fund and plans to allocate £200m-£400m of that to the UK. It will use leverage to amplify that to more than £1bn.
“We think the timing is perfect and we are looking to deploy a disproportionate amount of this fund into London,” said Mr Dickerman.
Madison does not buy entire property assets but uses a joint venture model to acquire stakes in buildings and portfolios. It owns 75 per cent of the Houndsditch estate, an office portfolio in the City of London, with the remainder held by TH Real Estate’s Central London Office fund.
Mr Dickerman said he hoped to acquire assets at a 5-15 per cent discount, with a focus on London offices and high street retail sites. He said the company also hoped to step in where deals in progress had collapsed because of Brexit.