The market players are different and the transactions are significantly more complex than 30 years ago
Perhaps the long hot summer in continental Europe is not the most prudent time to review how fast transactions take to conclude. However, with the benefit of over 30 years of experience in Europe I am convinced the average time from the start of marketing to closing has grown significantly. This conclusion seems to be counter-intuitive given advances in business technology such as e-mails, internet-based mapping, electronic registered titles to name but a few.
I have concluded that transactions are taking longer because the market players are different and the transactions are significantly more complex than 30 years ago.
My recollections of the late 80’s and early 90’s were that many transactions were completed between well-known institutional investors who predominantly operated in their indigenous markets. The consequences of this institutional investor dominance was that funding of transactions was often ”all equity” and deals were between parties who often knew each other. Therefore, concluding documents quickly and efficiently was conducted against a backdrop of trust formed from prior business experience and a desire to maintain a market reputation for future business. In short, the chances of concluding repeat business was high as markets had fewer participants and the majority of deals were between local/national players.
Today when I sell an asset, despite having a good idea of who is likely to submit a Letter of Intent, I am often surprised by who shows interest and how often several names are new to me. The old bonds of trust shown between limited numbers of market participants is harder to maintain in this new environment. Is this why we now have Non-Disclosure Agreements (“NDA”) that 30 years ago were only really used for stock market quoted Vendors. A regrettable downside to a more global market is a lack of trust between market players, the consequential use of NDA’s and another administrative hurdle to a transaction completing. The same industry changes that lead to NDAs also explains why more often than not the Vendor interviews shortlisted potential purchasers in order to find out first hand who they are and secondly, to understand where their funds come from. In my experience, the shortlist interview process always adds a minimum of two weeks to a transaction; as interviews need to be arranged, take place and conclusions drawn.
However, other significant factors have influenced the industry that impedes a transaction. To be clear many of these are positive changes and most do not warrant a whinge from a “long in the tooth” market player such as me.
These have come under several headings be they Anti-Money Laundering requirements, EU Competition Law or regulatory analysis to decide if the investment entity you are using is or is not a collective investment vehicle. All these items merit serious consideration, the collection of evidence and ultimately take time. Some can be completed before a transaction but most are transaction specific.
30 years ago, debt was sometimes utilised for closing and the time from contacting a lender to a drawdown was often only a couple of weeks. Banks were well-known players often from the high street. Successive real estate market recessions and a vastly increased in the range of global lenders has led to longer decision times, more security to document and, of course, more NDAs.
If the selected lender is looking to sell down part of the loan in a club deal or via a securitisation, the documentation may be significantly more complex that will take longer to review, negotiate and cost more with advisers.
Transactions today are without doubt generally more complicated than when institutional purchasers where the dominant players. As a result, there has been an explosion in the number of parties and people involved in each transaction. It is not uncommon for transactions in Europe to involve legal and tax advisers in the country of the asset and then a further tier of such advisers in Luxembourg where fund vehicles tend to be resident. Bank security has to be taken not just over the asset but over the shares of the asset owning entity, so the bank will need Luxembourg lawyers to execute a share pledge. Additionally, if the ultimate owners or investment managers are resident outside Europe, commonly South Korea or the USA, more advisers will be involved although this will usually be the General Counsel employed by the investor. Add to the mushrooming list of parties (and e-mail cc’s) the inherent and unavoidable delays in working in multiple time zones several investment committees stages and even perhaps a few languages it can be no surprise things take longer. Most continental European transaction of any size are corporate in nature that will always add a couple of weeks to the due diligence processes.
VAT was not always an issue in UK real estate but now direct and indirect taxes across Europe are a material part of every transaction. The complexity increases year on year by new taxes or changes to existing rules such as non-resident landlords, thin capitalisation and the non-standard applicability of VAT recovery rules across EU countries.
I admit I rather enjoy the complexities of transaction whether it is the challenge of closing them or the interest in working with multiple parties across many time zones and different cultures.
I have just signed a rather modest size acquisition in Europe that has taken eight months to commitment. We must now wait up to eight weeks to see in local authorities will pre-empt the transaction and leave us with a large abortive costs bill. The start to finish time will top out at over 10 months. All this complexity does mean smaller deal are less economic to most investors that is a great shame.
I regret I have no easy answers to shorten transaction time except a hope that more trust will return to the market, that there will be fewer NDA’s and there will be a change in working practises away from blanket cc’s of e-mails.