Church of England gambles £40 million (and loses)

http://www.guardian.co.uk/business/2010/jan/25/church-loses-40m-in-new-york

The Church of England has lost £40m from a disastrous investment in a buyout of two vast Manhattan housing complexes, Stuyvesant Town and Peter Cooper Village, that collapsed into default after struggling under huge debts incurred at the peak of the US property bubble.

Home to 25,000 people, the two redbrick housing estates comprise 56 buildings along New York's East River. Completed shortly after the second world war, they are known as one of the few remaining bastions of affordable living among the multimillion-dollar tower blocks of lower Manhattan.

They were bought for $5.4bn (£2.86bn then) in 2006 by a consortium led by a New York investment firm, Tishman Speyer, and the fund management group BlackRock, in the biggest US residential property deal on record. But after struggling for months to keep up repayments on loans attached to the buyout, Tishman today handed over the entire estates to its creditors, making the deal a landmark victim of the plunge in property values.

Financial backers of the deal will see their investments largely wiped out. Among the big losers are Singapore's sovereign wealth fund and California's huge state pension fund, Calpers.

The church commissioners, who manage the Church of England's assets, revealed that they are writing off "around £40m" put up for a 4% stake in Stuyvesant Town in June 2007.

"The commissioners are looking carefully at the lessons to be learnt from the loss, as well as from the impact of the financial crisis generally," said a spokesman for the church's financial arm, which is chaired by a former editor of the Independent, Andreas Whittam Smith. The hit amounts to less than 1% of the church's asset portfolio. But it was a large layout for a single investment and it comes on the back of other setbacks in the recession, which caused a sharp drop in the value of the church's investment portfolio from £5.7bn in 2007 to £4.4bn in 2008.

Residents of the 11,000 flats in Stuyvesant Town were staunchly opposed to the Tishman buyout, which was highly leveraged by debt and predicated, in part, on cutting the number of tenants paying below-market rates under "rent controlled" deals.
Popular among soldiers returning from the war when the flats were completed in 1947, the blocks, which together are the size of a small town, are surrounded by pedestrian pathways and leafy parkland. Over the past three years, Tishman has become deeply embroiled in litigation to get veteran residents to pay more rent and has even used private detectives in an attempt to catch tenants suspected of breaching leases that require them to use the flats as their primary residences.
Tishman and its partners failed to make a $16m loan repayment this month. In a statement, Tishman said it had spent the last few weeks "negotiating in good faith to restructure the debt and ownership" of the properties but concluded that surrendering ownership was the only alternative to bankruptcy. "We make this decision as we feel a battle over the property or a contested bankruptcy proceeding is not in the long-term interests of the property, its residents, our partnership or the City," said Tishman.

Experts say the valuation of the estates has slumped to barely $2bn. Ben Thypin, of Real Capital Analytics in New York, said the 2006 buyout was at the "height of the foolishness" at the peak of the American property boom: "They paid way too high a price. It was purchased at the peak of the market with too ambitious assumptions."

The church commissioners, whose investments are intended to support the Church of England's running costs and pay the pensions of clergy, defended their involvement, saying Stuyvesant Town was an opportunity to diversify the church's portfolio through a partnership with a "respected world-class manager and with strong international partners".

The commissioners' spokesman said the church carried out detailed due diligence with professional advisers but admitted: "The investment was made in June 2007, which with hindsight was at the top of the property market and immediately before the credit crunch. The investment was affected by the sharp fall in residential property values, and a legal ruling that many apartment rents would continue to be regulated regardless of value or the income of residents."