Commercial Real Estate Holds It Breath, Waits For Sale Of ING Assets

On the block, 450 warehouses and factories across Canada—all of the commercial properties Dutch financial giant ING bought in 2006, investing over $2 billion in cash. Now, mired in a financial debacle similar to the American banking crisis and beneficiary of billions in Dutch government bail-outs, ING reluctantly will sell its Canadian holdings to put some black ink on its balance sheet. Neither ING nor TD Securities, brokers for the sale, has any interest in selling the portfolio piecemeal, and the rest of Canadian commercial real estate marks time, treads water, or holds its breath until a worthy buyer comes forward. Although ING could manage a minor loss on the sale, the asking price remains in the $2 billion range.

Desjardins Securities analyst Jeff Roberts expressed the prevailing view:

We believe a number of large institutions and REITs are vying for this portfolio and it is taking a lot of effort to understand the opportunities because it is so large. For an acquirer that is willing to roll up its sleeves and give the portfolio a lot of TLC, we believe there is substantial upside in cash flow and value in the portfolio, which may have been somewhat under-managed over the past few years. [Source: The Globe and Mail]

Roberts put his finger on an issue as sensitive as raising capital: If a buyer uses-up its credit and cash to close the sale, it will have no resources left for the TLC many of the properties require. A truly well-qualified buyer must bring both sterling credit and a boatload of cash to the bargaining table.

No start-up enterprise, no matter how well capitalized, could assemble a portfolio comparable with the ING package, and the industrial properties are especially enticing, because no credible tenant would settle for a short-term lease. For some analysts, therefore, the ING sale provides a barometer for reading the power of the Canadian recovery. The experts wonder, have the nation’s industrial and light manufacturing sectors recovered sufficiently that they can fill ING’s vacancies and maintain a robust revenue stream for a new owner? Noting that every segment of the real estate market has declined in late spring and early summer, 2010, except the industrial sector, wary analysts feel somewhat encouraged. Adding irony to the anomaly, though, only industrial building permits were up during May and June, 2010, suggesting that many new enterprises prefer to construct their own plants instead of leasing from an REIT.

Avison Young vice-president Doug Johannson spoke for the record:

“This is an incredibly unique asset,” said Mr. Johannson, who is based in Calgary. “You want a critical mass in this industry, which is why ING bought it in the first place. There was a meltdown in the Netherlands so they have to unload, but it would be my guess that they are doing this very reluctantly.” [Source: The Globe and Mail]

Johannson, however, left open the question of whether or not a Canadian or an American REIT could muscle-up the motivation to overcome ING’s reluctance about the sale.