UK investment bank Evans Randall has become one of the first groups to launch an opportunity fund taking advantage of falling commercial property values and the need by some funds to sell off assets quickly.
Evans Randall is creating a vehicle 50/50-owned with Bank of Scotland capable of acquiring £1 billion (€1.3 billion; $1.9 billion) of real estate. The capital structure is believed to be 20 percent equity and 80 percent debt.
In a statement, the bank revealed the maiden deal is the acquisition of London office, Condor House, by St Paul’s Cathedral, which is an 110,000 square foot building purchased for £115 million at a net initial yield of 5.3 percent. Though there was no detail on the seller, LaSalle Investment Management reportedly put the office on the market six months ago for £130 million, so the sales price represents a 10 percent reduction.
Evans Randall says its vehicle is designed “to take advantage of what is perceived as a relatively short-term yield shift in the market, as some funds seek to liquidate assets in response to redemptions by their investors.”
Michael Evans, chief executive, said the firm believes it will see opportunities in the market over the next six to nine months.
“We will be directly targeting sales of high quality buildings, where the owners are seeking to liquidate their assets before yields start to shift back to the levels that we have become used to. We don’t believe the window of opportunity will be open for too long. It was key, therefore, that Bank of Scotland was able to move so quickly in helping us establish the fund.”
He added the opportunity fund will initially focus on the UK, where it believes the greatest opportunities lie. The firm says it has already seen yields shifting out 50-75 basis points where the seller needs to sell quickly. However, it is primed to also invest overseas.
The launch comes a week after property services firm King Sturge revealed it expects commercial property prices to drop more than 9 percent in 2008, adding to significant falls that have already taken place in the last six months of 2007. Retail and industrial is expected to be worst hit, while central London offices are tipped to offer greater resilience.
Falling consumer confidence among retail investors in some of the best-known UK property funds have led to mass redemptions in some cases, triggering the need for asset sales. New Star Asset Management revealed on December 10 that the value of its £1.7 billion Property Unit Trust mutual fund slumped 18 percent since July. In response to increased redemptions, some funds have made it more difficult for retail investors to pull their money out.
Evans Randall has been targeting returns of up to 20 percent on its real estate transactions, and sometimes more.
Its portfolio contains Bank of America’s UK and European headquarters in London’s Canary Wharf, and a share in 30 St Mary Axe, the officer tower better known as ‘the Gherkin’.
Back in October, Evans said the credit crunch was affecting confidence in some quarters but that this was not affecting the fundamentals of real estate across Europe.