As £9B In Funds Hit Termination Date, Investors Get Creative To Close Deals

Real estate owners are increasingly in need of fresh capital but don’t want to sell at knock-down prices. That is why buyers are turning to creative structures to get deals done, according to research from JLL. 

Recapitalisations, a major feature of the market during the financial crisis following the 2008 collapse of Lehman Brothers, are a significant feature of the market again amid the rising interest rates and falling values of the past year, JLL said in a research note.

One example is in the world of unlisted real estate funds, where €10.4B (£8.9B) of European funds hit their official termination date in 2023, according to data from INREV, leaving a stark choice: Sell the assets or extend the life of the fund. 

If those assets are put up for sale, the price being offered by investors might not be appealing, wrote the note’s author, JLL Head of Capital Solutions for EMEA Capital Markets Julian Schiller. In the office world in particular, the spread between what sellers are asking and what buyers will pay remains elevated, above 15% in many European markets. 

But investors might be forced to sell anyway. Situations forcing sales include banks demanding repayment of a loan and open-ended funds needing to redeem cash demanded by investors. This is where the need for creativity comes in. 

Price adjustment mechanisms have been the most common way to get deals done, Schiller wrote. JLL estimated that some 8% of all real estate deals it advised on across Europe, the Middle East and Africa used price mechanisms in the second half of last year, while none did in H1.

Shorter-term adjustment mechanisms can include seeing the agreed price on a deal move between exchange and completion according to swap rates. During the UK’s so-called Trussenomics period in the third quarter of last year, a time of daily volatility on where rates would settle, such mechanisms were particularly useful.

Longer-term mismatches in expectations over value can be rectified by allowing a seller to receive a share in any uplift in value over a set time period. 

Deferred consideration mechanisms, in which ownership is changed right away and not paid for until an agreed future date, have been brought into play, JLL added. Preferred return structures are another option, allowing equity in the asset being sold to be left in place by the seller, with buyers receiving a preferred minimum return.