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Discounts and European real estate funds

Is the bid-ask gap for European real estate funds too wide to get deals done?

This week I’ve been talking to real estate secondaries sources about what they want to buy. One GP shared some interesting data points in the form of a list of buyers hoping to purchase positions in various types and vintages of European real estate vehicles, most at a significant discount to net asset value (five out of the 11 listed were hoping to secure 25 to 35 percent discounts to NAV). Some of those funds include Colony Capital’s diversified Colyzeo II and BNP Paribas’ Value Added Europe I, a fund of funds.

While it seems somewhat natural for buyers to push for discounts when appropriate, I was surprised by the 25 percent-plus discounts bidders were putting forward – particularly the 35 percent discount a buyer hoped to secure when purchasing €10 million-worth of shares in French commercial property fund Rynda en Primeur.

“There are always fund-specific catalysts or dynamics that drive the extent of the discount for any particular fund,” Eric Zoller, co-founder of US-based investment bank and advisory firm Sixpoint Partners, told me. “But the overall macro drivers are such that the European real estate market is further behind the US market and that is probably also driving discounts to be wider at the moment.”

Whether or not buyers actually secure those discounts is another matter, though. A similar list of 10, mostly European real estate funds with sellers seeking buyers showed most sellers asking for NAV or higher. Only two reflected sellers willing to accept discounts: an LP wishing to sell €20 million-plus in Carlyle’s third European real estate fund at a 5 percent discount to NAV and another wishing to sell a small (sub-€2 million) stake in Rynda en Primeur at a 20 percent discount.

These lists weren’t exhaustive by any means, but they did provide an interesting snapshot of the point at which buyers and sellers are starting negotiations.

The Rynda vehicle that first caught my attention may be a bit of an outlier, as it was the only one appearing on both lists and with a significant discount attached to both the bidding and asking price. The 2006-vintage fund raised €227 million for investment in French industrial and office buildings and is fully invested. Due to terminate at the end of 2014, the fund’s 10 institutional investors last year agreed to extend the fund’s life by two years. It also refinanced its debt facility with €78 million in senior debt now set to mature when the fund terminates in 2016. The fund’s value was 4 percent of NAV as of March 2011, the most recent publicly available performance figures from one of its LPs, Schroder Property’s fund of funds. (Rynda declined to comment on the fund’s performance and prospects.)

It’s unclear if stakes in Rynda en Primeur will be traded and at what price, but according to one US-based advisor, a 20 percent discount is in line with current market standards.

“I’ve seen real estate fund stakes trading around 80 to 85 percent of NAV. Once you get beyond a 20 percent discount it’s hard for sellers to rationalise selling. At those levels people generally won’t trade and sellers prefer to hold,” he said.