High-profile property buyer sees correction

15 October 2007 — Britain's commercial property market is in the midst of a rational price correction but not on the verge of a crash, Marc Mogull, one of Europe's most experienced real estate investors, said.

The founding partner of London-based private equity real estate firm Benson Elliot told Reuters in an interview last week the market was going through a "mean reversion" and talk of a dramatic commercial property recession was wide of the mark.

"The true value of real estate and the prices paid in the past year or so have been way out of whack," Mogull said.

Total UK commercial property returns have slipped to just 3.4 percent in the first nine months of 2007 compared with 18-19 percent returns in the previous two years, as measured by the Investment Property Databank's UK All-Property Index.

But Mogull believes returns are simply falling back in line with those traditionally delivered by an equity-bond hybrid like property.

"Just because you could find someone to pay 3.5 percent for a property, it doesn't mean to say that defined value ... Everyone goes along with it until someone decides something isn't quite right," he said.

STAND-OFF

The influential investor said a current stand-off between buyers and vendors over pricing could last into 2008, when year-end independent valuations showed how far prices had fallen since the UK property boom ended.

But he was optimistic his company could continue to expand its assets under management irrespective of the impasse as his team championed a bottom-up investment approach and was not compelled to strike deals to hit performance targets.

"A lot of folks have raised too much capital. They're now wondering whether they should invest in a falling market and accept a lower return on equity just to spend the cash," he said. "Our investors don't have a rigid asset allocation plan, they are absolute return driven. If we don't like a deal, they would rather keep their money in the bank."

Mogull said Benson Elliot -- whose first fund is about 40 percent invested and has a portfolio of around 700 million euros -- made a conscious decision to limit fundraising at launch because it "never wanted to be under pressure to invest".

The firm has steered clear of investment in the UK since it started investing a year ago. It has also tended to shy away from markets already heavily populated with yield-chasing, over-capitalised investors.

Mogull said prime French offices and primary middle market residential property in Europe excluding the UK were among the sectors where he saw value. He said he expected to strike deals, both acquisitions and exits, by the end of the year.

MOTIVATED SELLERS

While Mogull said a crash was not imminent, he said an increase in motivated sellers would help revive flagging transaction volumes.

"I don't see distress out there right now. If others see some, then they have better eyesight than I do," he said.

"But we will see many more motivated sellers in the next six months than we have seen in the last two years."

Mogull advised owners to look carefully at equity reserves and gearing long before refinancing deadlines, in anticipation of banks seeking partial paydowns on maturing loans rather than just rolling them over as in the past.

"Never take on more gearing than is necessary and manageable. Volatility in equity markets can hurt you but only the banks can kill you," Mogull said.

He said financial market turmoil had not yet hurt private equity real estate firms but challenging times loomed for those who relied on heavy borrowing when loan terms eventually expired.

"The banks are in a position of strength right now. They are likely to say they are comfortable with real estate, but just not at an 85 percent loan-to-value," he said.

"They might say they want to be at 65 percent and then an investor is going to have to meet the shortfall with equity or become a forced seller."