Another one bites the dust

The demise of Belgian built-to-suit developer IIG: was this a case of incompetence or was it just down to plain bad luck?

Nathan North

A large company going under during an economic crisis may not be altogether surprising. But such an occurrence always begs the question whether the collapse was due to mismanagement, over-ambition or sheer misfortune. When Immo Industry Group (IIG) recently announced that it had gone bust, precisely such an inquest was needed into where it had all gone wrong. IIG was a Europe-wide developer of built-to-suit warehousing projects, and at the time it went into administration had developed 18 industrial parks in 9 different countries. Its recent difficulties date back to September last year, when its financial partner Belgravia Asset Management also hit the rocks. The investor was part of the Jersey-based Belgravia Financial Services Group, which had all its activities suspended early that month pending an investigation by a Jersey Financial Services Commission. The latter was concerned that the group was “currently without adequate or effective management or financial or accounting controls in place,” and that “the true and correct value of the investments or other assets of the suspended funds cannot currently reasonably and reliably be ascertained.” The management has been removed and the financial group is now under criminal and regulatory investigation.

Two words: ‘eggs’ and ‘basket’

Whether or not it was wise for IIG to get into bed with dodgy off-shore investors may not be quite the point that needs to be made here. An anonymous source on the Polish market feels that the problem may lie with the fact that the developer had “put all its eggs into one basket through being fully-reliant on one investor.” In a statement issued to the press by IIG announcing its bankruptcy, the version of events given is that after the suspension of Belgravia the company then turned to the financial market to solve its liquidity problems, “but was faced with a heavy storm, as the bank crisis was at its worst. The global economic crisis led financial institutions to refuse project financing to IIG, despite the fact that IIG’s business model consists of strong company guarantees by IIG’s clients.” The press release goes on to add that this was compounded by weakening currencies, and so despite the best cost-saving efforts of the company, it was unable to fulfil its obligations to staff and suppliers, forcing it to go into liquidation.

Another anonymous source, this time an expert working on the Belgian market, tends to concur with the company’s version of events: “IIG was growing normally, and was a competent and ambitious company. But to become ambitious at the start of a major crisis is rather unfortunate timing.” He goes on to add that if it had been able to foresee the economic crisis, then the company would still be solvent, but this lack of foresight was something that nearly everyone had suffered from: “Maybe the crisis should have been foreseen 18 months ago – but nobody wanted to open their eyes. Everybody wanted to earn more – and that’s why they were blind.” However, it remains the case that other developers look set to survive the credit crunch – at least into the near future. Our Belgian source puts this down not to mismanagement on IIG’s part, but to the fact that the company develops and sells its built-to-suit projects, rather than holding them in portfolios like ProLogis, Goodman and the other big beasts of industrial real estate. As he explains: “I think most of the competitors of IIG own their buildings, but this is a company that was in a bad situation because it had to sell what it builds. At the moment it is better to invest in real estate rather than in providing services to the end users. It is better to have capital in ‘stones’ than in human resources at the moment. Real estate brings profits, but HR doesn’t.” One implication of this remark is that IIG was too top-heavy in terms of personnel – so was this also a case of too many cooks spoiling the broth?

Catalogue of errors

Our Polish source, however, has a drastically different view about the competence of the company: “IIG made one big chain of mistakes – including the buying of land in locations where the demand would not reach the required level for some time.” He mentions 50-ha in Piotrków and land around Poznań as examples of this reckless approach. He admits that IIP (the Polish subsidiary) was unfortunate in losing a lot of key personnel to rivals such as Panattoni last year, which left the company in some disarray. For him, the over-reliance on Belgravia, combined with a series of strategic mistakes and key people jumping ship before it sank were the main factors behind IIG’s demise.

So how are other warehousing developers coping with the economic turmoil? Ben Bannatyne, the head for Central and Eastern Europe of ProLogis, outlined to us his strategy for the months ahead: “The global financial crisis has forced us to take vital steps in order to maintain liquidity, which means the halt of any new developments and land acquisition, the selling of our Asia operations and putting the expansion onto new markets on hold. Our current focus is on the lease of existing stock, our customer retention and offering superior property management.” Clearly, having alternative means of revenue, in the form of income from tenants and the option of selling assets, represents a clear advantage over a ‘pure’ developer such as IIG. Our Polish source feels that what happened in the case of IIG could have been avoided with the right approach: “All developers are sailing through stormy waters – this is a difficult time for everyone on the market. But if they are well-managed, with good people and a good strategy, then they should be able to get through this.”

Fitter, healthier, more productive

As for what the downfall of IIG means for the market as a whole, our commentators would seem to be in agreement that this is an isolated case, although our Belgian friend ascribes it more to bad luck than mismanagement. But the expression ‘clearing out the deadwood’ does spring to mind in this instance, meaning that stronger, healthier companies are likely to absorb or displace weaker, poorly managed ones. Ben Bannatyne is of the opinion that further consolidation in the sector will occur, and that “larger developers [will] start positioning themselves to weather the storm, but will be ready to react quickly when signs of recovery appear.”

And as for the liquidation process itself, on March 23rd Delin Development Group, with the agreement of creditors and the Belgian Court of Commerce, acquired all the assets of IIG’s and formed a new company, Ulogis, to take over IIG’s business. Filip Schelfhout, the former executive chairman of IIG, has been appointed Ulogis’ CEO. Initially, the activities of the new company will be focused on Europe, but the intention is to expand to other continents in the future. The new entity will take over IIG’s existing portfolio of built-to-suit projects (currently 29 projects), but unlike the latter will also be active in speculative development. Presumably, some harsh lessons have been learned by the management of the new company – but this still remains to be seen. ν