Investors waking up to ‘zombie’ assets

While signs of recovery are positive, we are still very much in the recuperation stage. Picture: Jane Barlow

There is much being reported about the current economic recovery – and after what has been a very tough recession, it is certainly welcome. Numerous reports appear to show that business is finally starting to feel like itself again – order books are steadily filling up, banks are cautiously lending and employment figures are hinting towards economic growth.

Yet, while signs of recovery are positive, we are still very much in the recuperation stage, where the patient needs to rebuild his strength. Part of this will entail a “detox” of assets, where companies which are not strong enough to continue will wind up releasing more property into the distressed assets market and opening up opportunities for those poised to take advantage of this.

For a certain breed of investor, distressed property portfolios – often referred to as “zombie” assets – are starting to look less cadaverous. Now that capital values are increasing, distressed property offers investors the chance to enhance their asset profiles, normally at bargain prices. With economic recovery blooming, returns are beginning to look like a distinct possibility.

What’s interesting about this fledgling recovery is the size and scope of the distressed property deals coming to light. Across the UK, the experiences of a number of firms, including our own, is that we have noticed a bias towards more ambitious acquisitions, indicating an increased appetite for volume. In addition, by acquiring a mixed portfolio, purchasers have the ability to hold, develop and dispose of properties as best provides returns.

Another trend we’re likely to see more of is a bias towards specialist or localised distressed property deals where an investor will focus on a particular type of property or geographical area; but this will be balanced with the risk involved.

Development potential in distressed property assets is of course a good way of attracting investors. End users expect more from their premises these days, for example in terms of environmental performance, and those which can be developed specifically with the target audience in mind stand a much better chance of success.

This applies to both large and small deals, and is where knowledge of the local market and conditions gives a considerable advantage.

As well as local knowledge, our sector specialisms have also assisted us in being able to identify opportunities for clients looking for particular types of assets in a particular geographic location. This has resulted in targeted acquisition of property assets which benefits the client, the seller and their funder.

For those looking to invest in commercial property this year, the future is certainly brighter. Investors can achieve attractive profits if they select the right opportunities and develop them properly – but therein lies the rub.

For an example of why we should be optimistic but careful when dealing with distressed assets, we need look no further than Northern Ireland. Cerberus Capital Management, a leading US investment firm, recently paid only around £1 billion of the £4.5bn face value of Nama’s entire Northern Irish portfolio. These assets included a hefty proportion of commercial property in Northern Ireland, the Republic, the UK and Europe.

First Minister Peter Robinson has lauded the deal, which represents the Republic of Ireland’s largest disposal so far of distressed assets, as excellent news for the economy.

It is certainly a smart investment by Cerberus but deals of this magnitude will require considerable skill in the work-out phase post-acquisition and it’s important to work with advisors who know the conditions and context of the assets acquired to ensure value enhancement.

Although it might be tempting to rush out and buy up large batches of distressed property assets, it’s important not to let this recovery go to the head. The best way to maximise returns during this “recuperation” period is take things slowly, acquire only what will enhance your portfolio while reducing any toxic assets, and make sure you do not over-exert yourself with too large a volume.

Finally, completing legal diligence is essential in order to make sure you are able to validly acquire the assets, then deal with them in your preferred manner. Do this all and you will be in a much stronger position to profit when the economy has returned to full health.

• Jamie McIntosh is a corporate restructuring partner at HBJ Gateley