• Blackstone joins the hunt for distress

Blackstone has closed a Eu3.1bn fund which is focused on European commercial property, up from an initial target of Eu2.5bn.

In its sights is over leveraged traditional property investments. But with banks currently keener to work out loans than force sales at distressed levels there may be lean pickings.

There is certainly no shortage of distress. Research by De Montfort University in the UK indicates that there is currently about £15bn of loans on commercial property in the UK currently in breach of banking agreements. The value of loans in default is £8bn.

Research published last week by BNP Paribas showed that 19% of outstanding loans on commercial real estate in the UK are due for renewal in 2009, around £43bn worth. There is a further 14% due for refinancing in both 2010 and 2011.

The banks with the biggest exposure are RBS and Lloyds with £97bn each. In comparison, Barclays had just a £11bn exposure at the end of last year, according to BNP Paribas.

Chad Pike, senior managing director and co-head of Blackstone Real Estate, said in the announcement about the fund that it was "well positioned to take advantage of the inevitable recapitalisation of the property sector".

Blackstone engaged in something of a fire sale itself this week with the disposal of the Carmel Valley Ranch resort in California. John Pritzker, son of Hyatt founder Jay Pritzker, is understood to have paid $20m through his Geolo Capital Investment vehicle. Barely a year ago, Blackstone was touting the property for a significantly larger number, according to people familiar with the matter.

Supporting Blackstone's thesis of impending doom is KPMG. This week, Richard Fleming, UK head of restructuring at the firm, predicted that there would be a significant spike in insolvencies towards the end of this year. So far the number at 1,571 is some way behind the 5,000 predicted for the year as a whole. Commercial property was a sector tipped by Fleming to suffer more.

He added: "September is likely to be the crunch month for many businesses in tourism and leisure with the busiest period of the year over. With demand expected to be at new lows, even larger industry players could be affected."


HA Perspective: Even with the high volume of distressed debt, it is not a given that there will be a flood of opportunities as a result. The main issue currently is with covenant breaches and inability to refinance.

Banks can choose to ignore the covenant breaches and extend financing. Better this than take an offer of 50% of replacement cost on property, the level of bids from some of the funds.

Given that in the UK, the two banks with the biggest exposure to commercial property are partly Government owned, forcing owners to sell will create difficulties for the banks. The UK is one of the two territories where Blackstone expects to find happy hunting (the other is Germany). It might prove and long and arduous chase.

It is also worth looking at what the markets are stating. In the US, REITs put in their best ever share price performance during the second quarter, up almost 29% on average. Investors have become convinced that the worst is over and there will not be the failures feared six months ago.

And commercial property companies in Europe are now being tipped for a share price rise by a number of analysts.

To further encourage sentiment, this week Cushman & Wakefield reported that deal volumes in London increased in the second quarter for the first time in two years. The value of deals was more than double the first quarter, although still slightly down on the second quarter a year ago.

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