With regard to the recently completed and publicly known sale of all properties owned by NOVA Real Estate – Subfund 1 (hereinafter the “Fund”), we would like to present you with a more detailed report on the current situation in the Fund.
Dear investors,
with regard to the recently completed and publicly known sale of all properties owned by NOVA Real Estate – Subfund 1 (hereinafter the “Fund”), we would like to present you with a more detailed report on the current situation in the Fund.
I. Circumstances leading the fund manager to divest:
The Fund was established in 2015 as an open-ended fund, intended exclusively for qualified investors. The Fund’s strategy has been and still is to appreciate financial resources invested by investors, both institutions and natural persons, through acquisitions and long-term holding of commercial properties in the areas of retail, office and logistics, as well as industrial halls. In accordance with this strategy, the Fund bought a total of 19 properties between 2015 and 2020, the acquisition of which was financed by a combination of the Fund’s own resources (contributions by individual qualified investors) and bank financing from Czech and foreign banks.
From the beginning of the Fund’s existence to date, a total of 420 natural persons and legal entities have made investments in the Fund and become its shareholders. These investors subscribed shares for a total of CZK 1.027 bn and EUR 96 m (approx. EUR 138 m combined). Of this number, a total of 107 investors have exited the Fund to date, receiving a total of CZK 414.5 m and EUR 47.0 m (approximately EUR 64 m combined), and the average return on their investment reached 16.25%. In general, up to approximately mid-2020, the number of new investors and the amount of their financial resources subscribed significantly outweighed the exiting investors and the Fund was able to fully execute its strategy, including the planned appreciation of investment shares.
In the first half of 2020, the COVID-19 pandemic came to Europe, causing turbulence in the real estate market and raising questions about the financial impacts of closed retail properties, the massive onset of the work-from-home phenomenon, etc. In the second half of 2020, serious financial problems of the Fund’s largest investor, the Arca Capital group, became apparent and publicly known, which subsequently led to the declaration of insolvency of most companies belonging to this financial group. Despite these negative effects, the Fund’s portfolio, thanks to its active and careful management, continued to maintain occupancy exceeding 95% and remained in perfect condition, which was positively reflected in the Fund’s performance, which averaged approximately 7% p.a. by the end of 2022.
The fund manager, aware that Arca Capital probably would not remain a long-term shareholder in the Fund, immediately began approaching and negotiating with multiple
institutional investors from the Czech Republic and other countries regarding their entry into the Fund to replace the failing Arca Group. Negotiations during peak COVID were complicated both technically, due to various restrictions, and commercially, due to the general market downturn. Moreover, the chances of acquiring a significant new investor were significantly worsened by the complex situation in the Arca Group, where it was not (and still is not) clear how its bankruptcy will be resolved. The advisors responsible for developing the group’s rescue strategy were replaced several times. Creditors are represented by different groups with different ideas about resolving the group’s bankruptcy. Finally, the two main shareholders in the Arca Group acted quite irresponsibly and made any rescue of the group practically impossible by their destructive actions. Nevertheless, the fund manager managed to obtain very advantageous offers for the Arca group, where its position would be assumed by the purchase of its investment shares, from two leading and established real estate investors. In the second half of 2021 and at the start of 2023, these offers were submitted to the creditors’ committee of Arca Investments, a.s., which is the Fund’s largest shareholder in the Arca group. The creditors’ committee, together with its financial and legal advisors, met with both investors, discussed the offers and, in both cases, in 2021 and in 2023, rejected the offers for the purchase of investment shares and the Fund’s rescue.
Since the second half of 2022, interest rates have also increased significantly, which logically caused the Fund to have lower performance and higher liquidity requirements, while at the same time providing investors with an attractive range of alternative investments, meaning deposits with a return approaching the performance of property in general, which increased the pressure on the Fund’s cash flow.
Until mid-2023, the Fund managed to settle all requests for redemption from its financial reserves and stable rental income. However, as of 31 July 2023, the Fund registered requests for the redemption of investment shares in the total amount of EUR 77.7 m, which, given the NAV of EUR 121.9 m, represented a full 63.8% of investors who expressed a wish to exit their property investments. In this situation, the Fund obviously did not have enough liquid financial resources and the manager was forced to make a decision to suspend the redemption and subscription of investment shares, with the aim of preparing, in accordance with the current legislation applicable to qualified investor funds and the emergency liquidity management plan, the process of selling property assets, in order to obtain financial resources for the payment of all investors who expressed an interest in exiting the Fund.
II. Divestment process:
At the beginning of 2024, the fund manager selected a major international real estate agent, Savills, to hold a wide and maximally transparent tender for the Fund, approaching as many potential buyers as possible to purchase the Fund’s property portfolio, in order to obtain the best financial offer and conclude the divestment process within 12 months, i.e. by the end of 2024, in accordance with the decision on suspension. In view of the Fund’s status, fund legislation in general and the Fund’s duty to redeem investment shares based on shareholders’ requests and therefore not draw out the suspension of the redemption of investment shares for longer than necessary, the manager’s priority was maximum efficiency, both in terms of time and in terms of the sales price achieved. The recommended and preferred divestment strategy was to sell the entire portfolio to one bidder, with the manager being ready to divide the portfolio into two parts—retail and office, if it received a better combination of offers from two different bidders, which did not happen in the end. In the first half of 2024, the Savills team approached and negotiated with a total of 96 international and domestic investors, 24 of which expressed a deeper interest and analysed the portfolio. As of 31 May 2024, i.e. as of the deadline for submission of bids, the Fund had received 10 bids. Of these 10 bids, the manager, in cooperation with Savills, selected the best in financial terms and, in June, negotiated a binding bid with the winner of the tender, in a wording that gave the Fund satisfactory transaction security and satisfactory security of compliance with the terms and conditions offered, especially the price offered, so as not to endanger the Fund’s position in case of non-completion of the transaction. The winner of the tender was a leading domestic real estate investor, Českomoravská Nemovitostní, a.s. (ČMN).
In July 2024, the second phase of the process of selling the 16 properties, or rather the 12 property companies that hold the properties, began. The manager’s aim was to complete the process within 6 months, which was, in such a comprehensive transaction, undoubtedly an ambitious plan. However, this plan was executed and as of 31 December 2024 the Fund no longer owned any property or property company; on the contrary, it now holds financial resources on its accounts from the payment of the purchase price for all the property assets. Property transactions in general, including this one, usually take place using the principle of “closing accounts,” where within (in our case) 40 working days of the closing, which occurred on 18 December 2024, there is accurate accounting for and a calculation of the working capital of the companies being sold and the subsequent accurate calculation of the purchase price. The purchase price’s precise impact on the Fund’s NAV is therefore not yet known and the Fund will therefore remain closed for accepting redemptions until the end of January, in order not to damage any of the Fund’s shareholders.
However, it can already be stated and reflected in the Fund’s NAV for December 2024 that the current market did not confirm the value of the properties recognised by the Fund or
determined by the independent property appraiser who prepared annual valuations for the Fund, in accordance with legislation and the Fund’s articles of association, serving as the only relevant basis for the correct recognition of the properties’ value in the NAV calculation and the price of the investment shares. This even though the portfolio had 95% occupancy by tenants as of the date of sale, in particular tenants that were major multinational corporations with a high average lease agreement length remaining.
The value of the Fund’s properties, determined by the last expert valuation as of 30 September 2023, was approximately EUR 227 m. On the other hand, the value of the purchase price achieved in the transaction will be around EUR 183 m and it can therefore be concluded that, in return for the properties held, the Fund has earned approximately 80.5% of their book value. The new NAV, or the value of the investment shares, will be determined by several financial parameters, the most important of which by far is the Fund’s leverage, i.e. bank loans for financing property acquisitions. This leverage reached almost 70% in the initial years of the Fund’s existence and was gradually repaid down to the last value of approx. 52%. The loss of approximately 20% of the properties’ value was therefore reflected in the Fund’s NAV, or rather the value of the investment shares, twice over through the leverage, so the value of the shares fell by 38.59% in 2024. As can be seen from the above statistics, during its existence, the Fund accepted investments totalling EUR 138 m and paid out EUR 64 m in redemptions. If we add in the new NAV after the transaction (financial resources obtained by the sale of the properties) totalling approximately EUR 68.1 m, the Fund’s accumulated loss will be about EUR 6.0 m or about 4.4%. Since the Fund’s investors subscribed shares at different times at different values and some exited at different times at different values, the loss from the sale of the Fund’s assets of each current investor will be different and cannot be expressed by one number. However, the loss of the Fund’s current shareholders will certainly be significantly higher than the aforementioned average. In any case, the failure to achieve a better result in the sale of the Fund’s property assets is, for both the manager and undoubtedly for the Fund’s current investors, a large or small disappointment.
The reason for the failure to achieve the properties’ book value when selling them is clearly the fall in the property market at least across Western Europe and the US, which naturally also affects our region. This fall is mainly due to significant growth in interest rates and other more secondary effects, such as working from home, necessary ESG investment for buildings, etc. The Czech fund environment, due to the specific determination of the value of properties and the practically frozen real estate market, does not reflect this fact much, but, for example, publicly traded Western European property companies, in particular REIT investment funds and other publicly traded companies (for example, in neighbouring Germany) have lost tens of per cent of the value of their property assets due to trading of their shares in real time.
III. Steps by the manager after the transaction:
The manager extended the suspension of redemption and subscription of investment shares by one month until 31 January 2025 (see the decision published on the Fund’s website). From 1 February 2025, the option of requesting the redemption of investment shares in the Fund will be renewed for their value in the month in which the redemption request was submitted. Therefore, investors who apply for redemption in February will be paid based on the NAV as of 28 February 2025, which will be announced on 15 March 2025, in accordance with the Fund’s statutes and accounting practices. This value will already accurately reflect all the financial impacts of the portfolio’s sale. In view of the fact that the Fund now does not own any assets other than liquid financial resources on its accounts, it is able and ready to pay all investors who request the redemption of their shares in accordance with the Fund’s statutes.
The manager will decide on the next steps subsequently, in particular with regard to the number of applications for the redemption of investment shares.
Best regards,
REDSIDE Investiční společnost, a.s., fund manager
