Peter Pays Paul

Previously, I wrote about The Money on the Sidelines and the vulture funds waiting to strike.

It appears that a vulture fund in the U.K. has made their first purchase according to the Wall Street Journal article Vulture Fund Circles in U.K.

For nearly a year the veteran British property investment team of Raymond Mould and Patrick Vaughan has sat on their vulture fund, waiting for the right moment to pounce on the growing carnage in commercial real estate.

Now their venture, London & Stamford Property Ltd., is making its first move, buying the prime office building at One Fleet Place in the hard-hit City financial district of London for £74 million ($108.6 million). Given their track record for good market timing, the deal could be a watershed event indicating that the steep decline in British prime property is near its bottom.

Timing the Bottom of the Real Estate Market

Investing in a declining market has been compared to catching a falling knife, you want to catch it as close to the bottom as possible.

Most of the vulture funds have been circling, waiting to make sure that their prey was dead. In this case their prey is the commercial property investors that bought in the last few years with ridiculously low cap rates, high leverage, and inflated rents.

As the WSJ.com article points out this may be a risky move, or it may be a brilliant move depending on where prices go in the next few months. If prices continue to fall, the building may be worth even less in a matter of months.

However, if this is the bottom of the U.K. real estate market, their quickness to act may have allowed them to get a quality building at a great price and before others bid up the price.

Thus the analogy of the falling knife. If you act too soon, you may get cut. If you act to late, you have competition from other buyers and the value begins to go up.

Reaching the Bottom

This pattern is likely to be repeated here in the United States. A few brave vulture funds will decide that we have reached bottom and will make an acquisition or two.

One of two things will happen. If the value of these assets falls, the other vulture funds and investors will stay on the sidelines. If the value holds steady, expect to see a feeding frenzy as competition for assets heats up.

Photo: Circling Vultures by AndyRob

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