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Valuation of assets underlying distressed secondary and tertiary real estate loans remains a thorny issue, according to Jos Short, executive chairman of Internos Global Investors.

Speaking at the PropertyEU Distressed Investment & Workout Briefing hosted in London at last week by law firm SJ Berwin, Short pointed out that discounts have increased since the early sales. ‘You have to work the graphs and find the crossover points. It’s not all a bed of roses. Some investors are suing the valuers.’

Pointing to Portugal, Short cited an example of a loan sale in an asset class where no single transaction had taken place in 2012. As a result, the valuation included a clause citing the ‘market conditions’ - which freely translated means the asset cannot really be valued, he pointed out. ‘A lot of people are putting teams in Iberia, in Spain and Portugal, but it’s scary.’

Secondary and tertiary assets are inherently difficult to value, agreed SJ Berwin’s David Ryland. ‘There’s a big difference in what you might get from a particular auction and the sale of individual assets. Returns from wholesale to retail are much harder to realize. There are some easy gains initially, but often a big tail.’ Often it is also very difficult to predict how the other members in a highly structured vehicle will behave, he added. ‘Syndications are like the hedge market, it’s often difficult to know how they will work out.’

While the underwriting of many distressed loans is not perfect - ‘it never is’ - there is a lot of good news for distressed real estate investors, the panellists agreed. ‘There are some very interesting deals,’ Short noted, pointing to ‘very aggressive’ US hedge fund buyers. ‘Some have made a tonne of money. What you need are decent operating businesses that are in the wrong structure, for example healthcare and hotels. If you play the Harry Potter card, you will make money. But the risk on those sort of deals is way higher. If you get it right, you can make a tonne of money, but if you get it wrong, you can lose your shirt. It’s very binary.’

While vendors are becoming more realistic about their pricing expectations, the increased competition from US investors and other players is also oiling the sector, Mathieu Roland-Billecart, partner real estate corporate finance Ernst & Young, noted. ‘The pricing is getting tighter. There are some big auctions on the cards and new names coming through. The competition is working wonders for bank loans. I don’t know to what extent it’s affecting pricing, but it works great for the vendors. Investors are becoming more picky, but it’s not a vendor problem. There are more names to replace them.’

Click on the link below for a PDF of the PropertyEU report on the Distressed Investment & Workout Briefing.