When it’s not a prime location: How to sell problematic real estate (loans).
EOS recognizes the potential of difficult real estate. For years, the financial services provider has been evaluating properties used as security for non-performing loans. More and more investors who want to sell problematic portfolios quickly are drawing on this experience.
- Increasingly, EOS is becoming established as a buyer of problematic real estate (loans): In the last fiscal year it managed to purchase a record-breaking portfolio worth millions of euros.
- Normally, such properties are difficult to sell, because investors want security against every conceivable risk.
- EOS draws on its experience in handling receivables secured by real estate. In this segment EOS has been analyzing the potential of difficult real estate for years.
In the current market situation, selling easily rented top-class real estate in prime locations is not a problem. But what do I do if my portfolio also contains real estate that is too risky in my understanding? Who is going to buy a package of supermarket buildings in a low-grade location from me? What do I do with residual stock in my real estate fund that I no longer want to realize myself? “With these kinds of transactions the contract negotiations can be drawn out over many months,” says Jochen Prinz, Managing Director of EOS Immobilienworkout in Germany.
The reason for this is that buyers want to protect themselves against all conceivable risks. “In the case of major deals in particular, there are always a lot of attorneys involved who discuss theoretical risks.” Prinz is convinced: “You can dispense with a lot of these mind games if you have experience in the real estate business and have had a lot to do with purchases where real estate is a major value driver.”
In recent years, EOS Immobilienworkout, which was established by Prinz in 2006, has proven several times that this process can be a lot faster. In fiscal 2017/18 alone, a subsidiary of EOS Immobilienworkout doubled its stock of commercial real estate; the largest deal had a value in the mid tens of millions: “This was a package of six properties in various German towns, mostly offices, a medical center and some residential stock.”
Real-estate specific supporting documents are often missing.
EOS has developed the expertise for such complex deals elsewhere: “We normally realize the real estate that we acquire as part of secured receivables packages,” says Prinz. And when loans can no longer be serviced, they are not always backed by a premium property as security. “But we are very good at recognizing the potential of a property,” says Prinz. “How is it rented? Who needs this kind of property as a tenant? What risks need to be evaluated? In the case of retail properties what is the local competitive environment like? Are the building data provided plausible? What measures would increase the value or are economically viable? What resources are necessary to increase the value added? How long will it take to implement these optimization measures and when is the resale of an improved property likely to succeed and at what price?” In addition, the documentation prescribed by law is often not complete. “Our aim is to return to the market a solidly leased and properly documented property that represents a reasonable investment.”
Our aim is to return to the market a solidly leased and properly documented property that represents a reasonable investment.
The idea of creating a subsidiary from EOS Immobilienworkout was prompted by a client. The aim is to be able to use the expertise to also directly handle performing loans or real estate . “One of our customers, a major US bank, wanted to sell a large portfolio consisting of non-performing and performing loans secured by real estate as well as real estate, without having to negotiate with several buyers for the various asset classes. So they asked us: “Could you take all of it off of us in a fast and streamlined process? We want to have the purchase contract on the table in three months.”
How a random deal became another business model.
Everything happened as the major bank had hoped, and within just a few months the EOS subsidiary responsible had increased the value and sold on around 80 percent of the real estate asset class from the portfolio. This success also convinced the EOS shareholders who had initially been somewhat skeptical, says Prinz. In the meantime, separate units deal with asset management and the property management of real estate. In the last few years there have already been some success stories with investments in the hundreds of millions range.
“Our major advantage is that we can act independently and therefore can decide quickly,” says Prinz. “Before we put work into a portfolio we briefly look at the real estate: the location, the look of it, and the data directly available. This also involves talking to the customer about their expectations. We then only undertake a very detailed evaluation if the customer is basically willing to sell at the agreed purchase price.”
It’s easier to negotiate with a company that is financially strong
He can then go into the contract negotiations “very relaxed”, says Prinz. “After all, we don’t need to finance our purchases, but pay it all from the resources available within our Group. That speeds up the whole process, because all we have to do is quickly obtain the necessary authorizations in a process that has been defined and regularly practiced for more than 13 years.”
For the sellers this is often a very new experience: “The typical reaction is: ‘Well that was easy! We’ll be happy to do it again sometime!’”
Photo credits: Getty Images / Ezra Bailey, shutterstock / Roman Sigaev, EOS