Wall Street Journal – Investors Play It Safe With Saint-Gobain Facility Deal

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A rendering of the Saint-Gobain facility.

Purchase of Philadelphia-area site shows less appetite for risk in commercial real estate.

A venture of a private-equity firm and Middle East investor has purchased Saint-Gobain SA’s North American headquarters near Philadelphia in a $123 million deal that shines some light on how this year’s turmoil in the global capital markets is affecting commercial real estate.

London-based 90 North Real Estate Partners LP and a unit of Arzan Financial Group of Kuwait bought the 65-acre corporate campus in Malvern, Pa., leased by the global manufacturer of building material. The deal comes as concern grows that the bull market that has dominated the commercial property world for much of the recovery may be coming to an end.

But the 90 North-Arzan venture took comfort that Saint-Gobain signed a 15-year lease for the entire 320,000-square-foot office facility on the campus, which includes a pond and walking trails. Founded 350 years ago to manufacture glass for the Palace of Versailles, Saint-Gobain officially opened the facility in October after it was upgraded with company products so it can be used as a customer showcase.


“We know the (market) sentiment is fragile,” said Daniel Cooper, head of 90 North’s operations in North America. “But investors want the income generation they can’t get from other investments and they want something with capital preservation.”

Commercial property has been hot until recently, with sales volume and values rising in many parts of the world. In the U.S., sales hit a post-crash record of $541 billion last year, up from $432 billion in 2014, according to Real Capital Analytics. An index of values of top class commercial property compiled by Green Street Advisors was at a record 123 in January, unchanged from December.

But repercussions from the selloff in global stock and corporate bond markets have been felt in real estate, fueling investor anxiety. Shares of real estate investment trusts have fallen further than broader market averages while bonds backed by commercial mortgages have weakened.

U.S. commercial property sales volume in January was $44.1 billion, according to preliminary data from Real Capital. That is down from January 2015 when $47.8 billion traded hands, Real Capital said.

Some analysts remain bullish. They point out that so far occupancy rates and rents show no sign of falling; foreign investors continue to have a strong appetite for property and interest rates remain low.

On the other hand, some question whether prices can go up much further given their sharp rise in recent years. Green Street Advisors is projecting that U.S. property values will decline by as much as 5% this year.

“To say there are mixed messages out there is an understatement,” said Douglas Harmon,senior managing director of Eastdil Secured, one of the country’s leading sales brokerages.

Experts say that while deals continue, sellers are showing a new willingness to cut their prices a bit to push transactions over the finish line. Some buyers are steering clear of riskier properties that need a lot of improvement or face large lease expirations in the near future.

Buyers are also becoming less likely to get involved in bidding wars. “I am not getting as aggressive,” said Mr. Cooper of 90 North.

The Malvern campus, which includes two buildings, originally was developed in 1968 as the headquarters for National Liberty Life Insurance Co. Between 1997 and 2008 it was occupied by the U.S. unit of Aegon NV. Arzan and 90 North bought it from a venture of Aegon and local developers E. Kahn Development Corp. and J. Loew & Associates.

Founded in 2011, 90 North works primarily with investors from the Middle East and Malaysia and has more than $1.22 billion of assets under management. The firm opened its U.S office in 2014 and since then has bought about $355 million worth of property here focusing on fully leased properties like the one in Malvern.

The 90 North-Arzan venture borrowed about 60% of the sales price from Santander Bankand Citizens Bank, of Louisville, Ky. The deal was structured so that it complies with Islamic code, known as Shariah law.

The property’s income is equivalent to about a 5.8% yield on the sale price and the investors in the deal will be getting a leveraged return of more than 8%, Mr. Cooper said.

Excerpt of article from Wall Street Journal