(Bloomberg) -- UK investment manager Intermediate Capital Group Plc is suing a real estate services firm over property valuations it says were inflated and against which it lent hundreds of millions of pounds.
The case revolves around an estimated £500 million ($657 million) owed to ICG funds by caravan park owner RoyaleLife, people with knowledge of the matter said. The retirement-focused real estate business collapsed last year and its owner, Bob Bull, was declared bankrupt.
Three separate ICG funds are taking legal action against Avison Young, a Toronto headquartered real estate brokerage, according to public filings. One of those funds expects it could lose more than half of what it’s owed by RoyaleLife.
Avison Young provided valuation reports on many of RoyaleLife’s sites, the people said, asking not to be identified because the information is private. The figures were critical to determining how much ICG would lend against the caravan parks, which were the main source of collateral for the loans.
Real estate lenders extend credit up to a maximum proportion of a property’s valuation, with UK senior debt providers typically offering a ratio of around 60% for much of the past decade. Inflating the underlying valuation would allow a landlord to borrow more, reducing the amount of equity they require and juicing their returns while exposing lenders to a higher risk of losses in the event prices drop.
London-based ICG, which manages over $100 billion of assets, has hired solicitors at Mishcon de Reya to carry out the litigation. Lawyers acting for ICG sent Avison Young a preliminary notice letter about the case in February and filed the case in August, according to some of the people and public documents. ICG has not yet served Avison Young, and has until December to do so in order for it to become an active claim.
An ICG spokesperson declined to comment. A spokesperson for Avison Young said the company is “unable to comment on any work carried out by Avison Young on behalf of its clients.”
Cheap-Money Era
RoyaleLife specialized in caravan parks, similar to trailer parks in the US, that were pitched as ways for older Britons to trade out of their brick-and-mortar houses into prefabricated homes on plots reserved for the over-55s.
The case represents a major challenge to real estate valuations during the cheap-money era when asset values soared to record highs. Many investors were exposed by the sudden increase in interest rates in 2022, prompting a blame game as lenders sought to limit losses.
Others owed by RoyaleLife include Avenue Capital Group Llc, Sun Communities Inc and Octopus Investments Ltd.
ICG’s move is reminiscent of the aftermath of the global financial crisis when a flurry of claims were lodged against appraisers after property values crashed. It also raises questions about potential conflicts of interest within real estate brokerages, who offer investors a range of services including sales and leasing advice, as well as providing valuations. Similar concerns in the accountancy industry, which also offers a wide range of consultancy services, led to calls for a break up of audit and advisory work.
Short sellers have targeted European property companies and questioned their valuations, highlighting landlords including Adler Group SA, CPI Property Group SA, Vivion Investments Sarl, SBB and Home REIT Plc.
ICG’s suit is being brought by three separate investment vehicles, including the firm’s flagship senior debt group and two units of its Longbow real estate debt business.
All in all, ICG believes it is owed more than £500 million by RoyaleLife, Bloomberg has previously reported. The extent of the losses expected to be suffered by ICG investors isn’t clear from fund documents. The majority of the investing was done from investment vehicles in Luxembourg, which have not yet reported how much they expect to lose on the deals.
However, some of the lending came from a closed-ended fund listed in London, ICG-Longbow Senior Secured UK Property Debt Investments Ltd. In accounts for the year through January, it made provisions for losses of more than £17 million on the RoyaleLife deal, accounting for about 54% of the money owed to that ICG fund.
ICG declined to comment on the amount of any losses it expects for its other funds.
In May last year, ICG initiated legal action to seize RoyaleLife parks by placing the holding companies into administration. The RoyaleLife sites that are controlled by ICG have been transferred to new entities and taken over by a new operator.
In the same month, Bob Bull appeared in the Sunday Times’s “Rich List.” In a profile, he spoke of how he built the business up from the ground from his large house in Hampshire, complete with a bowling alley, pool and six double garages for his fleet of supercars. That house has since been repossessed as part of bankruptcy proceedings launched by lenders.
--With assistance from Jonathan Browning and Jack Sidders.
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