By Daryl Loo
Orchard Street Investment Management is planning to spend millions of pounds to buy majority stakes in properties with troubled mortgages, seeking hefty returns through restructuring deals with banks.
The property fund manager wants to commit an initial 60 million pounds ($85 million) from clients — either before or after the properties are repossessed by lenders — and is in discussions with several banks on the deals, its chairman Chris Bartram said on Friday.
"We would like to introduce our clients' investment into the equity of a portfolio (of properties) or a building in problem loan situations, with the bank retaining a substantial equity interest," he told Reuters in an interview.
Orchard Street, which manages 1.5 billion pounds in assets focused on UK real estate, will then attempt to restore the properties' value by refurbishment and renegotiating rents for example, before putting them up for sale, Bartram said.
"The idea is to agree to a 3-4 year business plan to restore asset value for the benefit of shareholders — principally our clients and the banks," he said.
The firm will seek returns of more than 20 percent to compensate for the higher risk, he added.
British banks such as HSBC, Lloyds, and the Royal Bank of Scotland had loaned billions of pounds in commercial mortgages, in a debt-fuelled UK property boom that ended in the summer of 2007.
The global financial meltdown has since led to plunges in values — with commercial properties down 40 percent since June 2007, according to Investment Property Databank — causing some buildings to be worth much less than the amount their owners borrowed from the banks.
Banks have generally been reluctant to foreclose on these assets, Bartram said, as they may not want to sell in a falling market and incur a loss.
"The starting point (for us) are banks who are interested to find partners to help them work out the situation, and there are beginning to be a number of deals where you can have these discussions," he said, declining to name the banks involved.
UK RETAIL BOTTOMING
Orchard Street, which manages the property portfolio of the Railway Pension, as well as a 300 million pound UK Special Situations Fund, said it also sees a bottoming in the prices of higher-quality UK retail properties.
"The debt cost versus cash yield on property is now extremely positive … we think the market is very buy-able at the moment," Bartram said, adding yields are as high as above 8 percent, while borrowing costs can be below 5 percent.
Property yields, the percentage of annual rental income to the price paid, had risen sharply in the past year as prices fell, driven by the drying up of credit, which scuppered major transactions, while risk-adverse investors shunned the sector.
The Special Situations Fund, whose main investor is GIC Real Estate, part of Singapore's sovereign wealth fund, had bought two UK retail properties for 44.4 million pounds this week, Bartram said, at yields of between 8 percent and 9 percent.
It had also managed to secure a 100 million pound debt facility with the Royal Bank of Scotland last November, Bartram said, but declined to disclose the borrowing cost on the deal, citing a confidentiality agreement.
"We favour retail assets bought in this risk-adjusted manner which we think is in our favour. We expect as the economy recovers to see a significant repricing," Bartram said.
