I has the misfortune of being in an auditorium with about 35 people who invested with Custom House Capital. The first thing that stuck me was their ages, the vast majority of them were 60+; a time when they should be enjoying retirement and not sitting in a windowless hall to find out if they would see their money again. Associate Director Noreen O’Shea of Horwath Bastow Charleton took the meeting with Partner, Chris Magill in support.
She opened with details of the German retail fund, the fund I was there to find out about. There was evidence she said of misappropriated funds in this investment. In fact, 53% of the equity used to make up this fund was misappropriated, with €8.5m taken from client accounts and €7.5m from bone fide investors.
Regarding the actual investment, €36m was used to acquire a number of supermarkets and mini shopping centres which are fully letted and generating a rental roll of €2.2m a year. Of this, €1.1m is used to pay interest and €500,000 pays off capital each year. €20m was borrowed to acquire the property, with €19m still owed. So far, the lender has not made any noise about the nature of the equity used to purchase the property. It seems they are quite happy as long as they are getting their money.
Chris Magill said that there is 8 years left on the leases with the tenants which will have to be negotiated in the future. The bank loan is also on a 5.8% fixed rate until December 2014 which will also have to be renegotiated. He said that there is a fine balancing act to be struck with the tenants on when to open negotiations so as to strike the best deal for the investors.
So what does the future hold for this investment? That will probably be a matter for the Luxembourg courts as all the properties are owned by a company that was set up there. While Horwath Bastow Charleton can’t say with certainty, should a petition be made to the courts to wind up the company, they are say to expect the bank will be paid first as a secured creditor, then the misappropriated funds and the investors, as shareholders, will be last.
With the properties worth an estimated €27m, the first two creditors will be paid and the investors wiped out. That of course if they get €27m for the properties. If there is a firesale, the value will drop dramatically with maybe only the bank getting their money back.
For those young enough, the hope is that these performing assets will continue to perform and as the global economy improves, the capital value increases also so they can be sold. Unfortunately for most of the people in that auditorium, they need the money now.