Managing Transaction Risk in the Real Estate Industry B
Broker Perspective
Danyalle Brinsmead
Vice President, Lockton Companies LLP
danyalle.brinsmead @
uk.lockton.com
Real estate investment structures come in many forms and traditionally involve publicly traded REITS and unit trusts with large institutional asset managers. However, investing into real estate using a private equity type fund structure is now a mature market and many managers are onto their third or fourth funds.
Whether it be the global capital players such as KKR and Blackstone, or regional funds such as DH Real Estate, Europa Capital and Moorfields – the one common theme, starting from 2009, is that a key focus has become the mitigation of risk – with a focus on lease performance, managing cash flows and renegotiating financial terms with lenders.
In practice, private equity funds focusing on real estate investments have their own specific risk, as well as many which are common to all private equity structures. Notwithstanding this, what are the key steps real estate fund managers should undertake when looking to exit an asset?
Danyalle Brinsmead is Vice President at Lockton Companies LLP specialising in special projects and is responsible for the development of innovative insurance products for the private equity, real estate and clean tech sectors. She has over 15 years experience in the insurance industry, working in Australia and Europe.
Richard Owen from the Lockton REAC team sets the scene, based on his experience, in describing the M&A environment for real estate funds, and it is no longer just “Location, Location, Location”!
1.) Minimal ground-up development activity, due to the lack of finance creating a barrier to a number of schemes commencing.
2.) The investment sector has responded to the lack of finance by adjusting and shifting away from debt financing, with buyers funding transactions by utilising joint ventures or co-investment structures, international equity fundraising or progressing with no debt whatsoever.
3.) The London real estate market has been popular (as has the Scandinavian region), due to a number of features including the politically stable environment within the UK. This has led to investors targeting the prime office markets, notably in the City, Canary Wharf and the West End, particularly from overseas equity.
4.) The way ahead is still uncertain, as there is a proportion of property lending due for repayment, renewal or refinancing over the next few years.
Specific issues for a vendor getting ready for asset disposal: n Cost reduction efforts will often focus on insurance and therefore fund managers will often need to critique the existing insurance arrangements.
n Due diligence on the insurance programme on the existing property, taking into account freehold and leaseholder interests.
n A key point is to review the insurances arranged by the freeholder to see if they are up to UK market standard. To make an overseas asset, (possibly insured via a more restrictive local insurance policy), more institutionally acceptable and to bring it up to a typical UK market standard, London Market insurance brokers should be considering the placement of an additional insurance coverage for the buildings/assets, the financial exposure (rent, service charge etc) and property owner’s liability on behalf of the relevant freeholder and funders. This is known as Difference in Conditions/Difference in Limits Policy(DIC/DIL).
Information required for an insurance review includes: n Up-to-date copies of the current real estate policy wordings and certificates of insurance for the asset.
n Confirmation that any tenants improvement works that need to be covered actually are and that details of the relevant amounts involved are covered under any proposed DIC/DIL arrangements.
36 Author Viewpoint
Risk and Insurance in Private Equity and M&A 2012/13
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