The vulture has landed

While CEE markets are still coming to terms with the correction process, buyers with cash are on the look-out for opportunities. The first deals of the so-called vulture funds have already taken place. Who’s next in their sights?

Mladen Petrov

Elliott Spitzer, the former governor of New York who was dismissed after a prostitution scandal extensively covered by the media in 2008, made it back into the press a few months after he was forced out of office. However, this time the photos of Mr Spitzer were not appearing in the tabloids, but in the business columns. How was this possible? The disgraced governor has simply reinvented himself as an investor with an interest in real estate. The plan was simple: a team of investors formed by Spitzer in the summer of 2008 is on the look-out for distressed real estate assets around the US. With a kitty of as much as USD 500 mln to spend on acquisitions, the fund plans to revamp the properties and flip them for a profit, promising returns of more than 20 pct over the year. 

This is pretty much what vulture funds, often referred to as opportunistic funds, are all about. Elliott Spitzer is not the first to come up with such an idea, and for what is worth, he won’t be the last to benefit from the rapid returns from property flipping once the market starts to pick up. The Blackstone Group has earmarked almost USD 11 bln for investing in distressed assets around the globe, while in Europe the Apollo Real Estate Advisors fund has been set up, with over EUR 1 bln at its disposition. The fund, known for its opportunistic investments, will invest 30-40 pct of that sum in the UK. Another 30-40 pct of the fund will be invested in Western European countries such as France, Germany, Switzerland, Italy and Spain, with the remainder being invested in Central and Eastern Europe. Pirelli Real Estate of Italy is also looking to establish a similar EUR 1 bln fund, while LaSalle Investment Management, the investment division of the Jones Lang LaSalle real estate consultancy, has already established a fund for opportunities across continental Europe, with EUR 5 bln already having been raised last year.

The appearance of such funds is generally taken to be a sign that the market has hit the bottom. “These players appear when there is blood on the street,” one analyst comments. The positive side to these funds – bringing much needed liquidity to the market – should also be appreciated. In addition to investing in distressed properties, vulture funds are also interested in acquiring governmental debts, companies in serious debt or troubled firms which happen to possess large real estate portfolios.

In the eye of the vulture

The analysts we spoke to claim that so far they have yet to observe any particular interest in acquiring property in Poland from vulture funds. Developers, however, and especially the ones who find themselves under pressure from the banks, are not afraid to admit that they have put a large number of projects up for sale. Who will acquire them? In the opinion of Jarosław Wnuk, head of investment at King Sturge in Poland, an increasing number of funds are already sniffing around for opportunities on the local market. “I don’t think, however, that these funds will come out as classic vulture funds, as this may scare the potential seller off. Nevertheless, when the deals are closed, we are unlikely to hear much about them,” 
Mr Wnuk comments.

Nevertheless, the situation across the CEE region tends to differ. Bulgaria is one of the exceptions. For more than a year now, ‘Eurobuild CEE’ has been monitoring the difficult situation on the Bulgarian holiday homes market. “The much publicized residential market has obviously suffered here. The problem with this is that it has affected the average man on the street, who could afford a EUR 30,000 flat. However, when a teacher from Manchester or a civil servant from Berlin loses their money, it hurts them much more than if it happens to a UK or German investment fund. This in turn has helped to increase the negativity now being felt towards Bulgaria as an investment location, which is quite unfair. For example, there is still an under-supply of residential units in all the major cities and this is rarely, if ever, mentioned,” argues Andrew Peirson, country manager of King Sturge in Bulgaria.

As the correction in pricing continues, funds such as the Irish-based Appreciating Assets or the Dutch-based Property Invest have started to flock at the seashore. The former has raised EUR 7 mln for the acquisition of homes from UK and Irish-based buyers rushing to sell them. With the bank lenders knocking on the door, these home owners are forced to accept the prices they are offered, which in the case of Appreciating Assets means on average EUR 60-70,000 for a large apartment in a good location. According to the company, their offer is not speculative, but realistic as it reflects the actual, post-bubble value of the property.

Different points of view

“I wouldn’t particularly call the people I meet vultures, but there are certainly individuals coming here with a view to pick off distressed sellers. The majority of funds interested in Bulgaria are looking at 12-14 pct yield profiles. This however creates a huge gap between the price levels of sellers and buyers. The market here was untouched for the majority of last year and therefore people simply do not believe values have dropped all that much,” comments Andrew Peirson.

Despite the different price expectations, deals in Bulgaria are happening. “We are seeing enormous interest in such deals, especially from funds with Russian capital. And to be honest, the deals are great! So-called vulture funds are buying currently frozen residential projects and apartments for as little as EUR 390-600 per sqm, depending on the location. Deals are being sealed not only in the seaside and winter resorts, but also in Sofia,” reveals Mihail Chobanov, CEO of the Bulgarian Properties agency. What will be the funds’ next step? Appreciating Assets for example is planning to retain the acquired flats for at least 5-7 years and rent them out, believing that the number of tourists will grow steadily in the future.

According to King Sturge’s Andrew Peirson, the office market is of particular interest to opportunistic funds. “The sheer plot size of shopping centres is putting buyers off, but most of the funds we speak to are opportunistic and looking at EUR 10-20 mln sites. This takes out the shopping centres and really only leaves the office market.”

Balkan deals

Recently the Albanian-based real estate agency introduced the SEE Property Fund, which will be focusing on commercial real estate investment in South Eastern Europe. “I wouldn’t call the SEE Property Fund a vulture fund. We are just here to use the opportunities the markets in the western Balkans currently offer,” explains Marin le Corre, managing director of the fund, which he describes as an “investment vehicle”. The fund is currently talking to European institutional investors. “They don’t know these markets that well, so they are very cautious, but we see positive signs th