Apr 28, 2009

Qui va piano va sano

A few weeks ago, following our annual press conference, we got this interesting question from a real estate equity sales desk: “I have one particular question on current disposal talks. If pricing is not very much of an issue and the buyers are mostly equity buyers and have little constraints regarding the debt financing, what is currently holding up the process?

This reminded me one of my first investment committee meeting in an investment bank environment. This was when I started in the principal investment field some years ago. We (the real estate guys) were explaining that we had received very encouraging offers for the direct real estate portfolio held by one of the bank subsidiary. The main feedback that we had from the members of the investment committee was that we should accept the offers and sell the assets. They were also wondering why the assets were not already sold, as it was obvious that the offer were attractive…

For the first time in my life I was confronted with capital market thinking. You want to sell an asset (or buy an asset), you pick up your phone, ask for a price, put an order and settle the deal forty eight hours later. Any contract or documentation that needed to be sorted out would be done by the middle and back office later on, without your involvement.

More than a decade following this meeting, the same question came knocking on the door again. What is holding up the process?

As bizarre as it might sound for those out there reading this on Bloomberg, nothing in that specific case is holding up the process. The process is going on. We are looking in the glue beneath the carpets to check whether there is any asbestos (two weeks to get the result back from the labs). In the mean time we are discussing the reps and warranty section in the contract that still needs to be discussed on a case by case basis. We might also spend a couple of days to agree on how we would settle the service charges between the tenant, us and the new landlord… Most probably that we will still need to send a technician to analyze the water damage that happened in the building while we were discussing all that. Then we probably need two weeks to find a suitable day for the notary appointment, which will ask for all sorts of documents, power of attorneys… which in turn will need some time to be drafted and checked. We will finally (assuming the water damage has not scared the buyer away) end up signing the Sale and Purchase Agreement with the buyer. Hold on, this is not over yet… The notary will then start working at his own pace (and if you think that real estate is slow, you should work with a notary… it really puts speed into perspective). He needs to waive preemptive right, and do all sort of other things that notary do (you do not want to know). This will take you another two month if you work with a master notary much longer if not. Stay where you are, not over yet… Then depending on when the notary have fulfilled all his work, you will wait for a minimum of 10 days and a maximum of 40 days before you actually get the money on your bank account. The bad news is that the process at this stage is still not over yet, as you need an additional two to three month for the transfer of title to be registered … I will stop it there however, getting the money is really all we were after…

None of the above reflects any of the transaction on which we are working on for the time being, but all of this is a true example of what I had to go through in previous deals.

The real estate industry is slow. And by slow I mean sloooooooooooow. A long term investor in real estate means a decade long investment. Asking if he had a long term perspective an equity investor once told me: “Yes we can be long term investors. We sometime hold our position for as long as 12 months”. The theory of relativity applied to real estate and capital market. It reads like this: in the real estate space, time, runs much slower than in the capital market space…

Nothing will prevent equity capital market players to ask the question again in the future to real estate players. You real estate people, what are you waiting for? Well, we are not waiting, we are moving. Slowly. You just can’t see it.

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