Tim Gosling in Prague -
Czech-based real estate developer Flow East is pursuing legal action against beleagured Irish property group Ballymore for alleged breach of good faith and improper process in the sale of several landmark buildings in central Prague.
Flow East Chairman James Woolf said that he was "astonished" by "the odd, and to my mind suspicious, circumstances surrounding the sale" of the baroque Savarin Palac on Prague's main shopping street, Na Prikope, and several connecting properties.
Flow East has also strongly criticised the conduct of the Irish government, which has taken over Ballymore's debts to Irish banks via the bad debt vehicle Nama, as well as global property consultancy Cushman & Wakefield, which is running the sale. Flow East said in its statement issued on July 20 that "the relationship between Ballymore, Nama and Cushman & Wakefield is obscure".
The British property investor says Ballymore reneged on an agreement struck earlier this year to sell it the Savarin Palac project, but that the Irish state fund Nama that now reportedly controls the property refuses to discuss the issue, or even admit it is involved.
"Not only had we been formally given exclusivity, we had also made it clear that we would pay the top price for Savarin, come what may. This wasn’t simply a verbal agreement; it was the subject of formal, legal undertakings negotiated and agreed between Ballymore Properties and Flow East," said Woolf in a statement.
While the lawsuit targets Ballymore, Flow East says it sees Nama - which has met a full gamut of problems as it has sought to sell its property portfolio across Central and Eastern Europe over the past five years - as the real culprit.
"We feel that the tender for Savarin Palace project has been less than fair," says Woolf. "No-one has been able to explain why our status as preferred bidder was suddenly rescinded. The relationship between Ballymore, Nama and Cushman & Wakefield is obscure: who is the actual vendor? Common sense tells us that it is Nama, but this is denied. With no explanations offered, we felt the integrity of this tender process should be tested in a court of law."
The dispute over the case now threatens to leave the historic building in the centre of the Czech capital in limbo for several more years.
In similar fashion to several Irish real estate developers in Central Europe that were caught out by the 2008 financial market crash, Ballymore's debt to Irish banks of over €1.5bn was taken over in 2010 by the National Asset Management Agency (Nama), a fund set up by the state to protect the banks by buying non-performing assets. Dublin has since been selling off property in a bid to recoup the debt.
The Irish press has reported that Ballymore owner Sean Mulryan is determined pay off all outstanding debt to Nama by 2016. Reports in May suggested around that half of the original €1.55bn had been settled.
Ballymore had planned to develop the baroque Savarin Palac and connected land and buildings into a complex of offices and retail units. The palac itself fronts onto Na Prikope; Prague's main shopping street and the leading high street in Central Europe for retail rents. Valuations on the project reportedly ran at around €75mn.
It was reported in January by the Irish press that Ballymore was about to strike a deal to sell the project to Czech developer Crestyl, whose backers on the deal reportedly included the UK's Cheyne Capital Management and GE Real Estate.
However, Woolf says he had an offer of €81.5mn - made in partnership with US fund HIG Capital - accepted by Ballymore on February 11. The Irish company granted him exclusivity on the deal, he says. Two days later, he claims, Ballymore changed its mind, quoting "the inability of Flow East to identify its source of funds and substantiate the offer". Woolf denies any such issues. HIG promptly withdrew, but Flow East immediately claimed to have found another investor.
However, in mid-June, reports emerged that Crestyl had won a tender, run by the local office of property giant Cushman & Wakefield, for the project at a cost of around CZK2bn (€74m). However, unnamed sources told local real estate media specialist CiJ at the time that no deal had been finalised.
It is understood that discussion has been taking place behind the scenes with middle men over the past couple of weeks to try to thrash out a solution. However, that process looks to have broken down, with no little bad blood between the protagonists.
The scuffle demonstrates the competitiveness of the market in Prague's historical centre, which has only become more fierce as the number of targets for development shrinks.
Flow East is a specialist in the segment, but has often clashed with the city and conservationists. Ballymore also has a strong track record in the region; GE Real Estate - although on the Czech market for a long time - is less experienced in such smaller scale projects. Crestyl is little known, though there are speculations that is informally connected to Ballymore.
"Presumably, [Flow East's] idea is to get Crestyl to back off, banking on it being unwilling to get mixed up in a legal fight," said one source close to both Flow East and Ballymore. "However, that will likely just see the project put back into limbo again for several more years."
While Savarin Palac itself is not in tip top condition, neither does it represent a major eyesore on Na Prikope. However, other buildings included in the project on adjoining streets are less well preserved.
"The Savarin Palace is important to us," said Woolf, whose company owns several addresses nearby. "It is a superb example of Baroque architecture which has been allowed to deteriorate. Today Savarin is a simple tourist mall dominated by fast-food outlets. Our vision is to return the palace to its former glory."
Flow East has a strong track record on refurbishing historic buildings in Prague. However, whether the palace's "former glory" included 30,000 or so square metres of shopping space alongside offices is not clear. On top of that, some suggest that while the project may have made a lot of sense when it was first floated in 2005, the centre of the city's ability to absorb so much space right now is debatable.
One thing that is clear is that the city authorities will not be impressed with that the spat continues. The project is earmarked to play a vital role in Prague's push to pedestrianise the bottom half of the famous Wenceslas Square, by providing underground car parking.
The fight over Savarin is not the first Flow East has clashed with Mulryan. Woolfe, widely known in Prague for his assertive business style, fought against the Irish investor's Markland company in 2005 over the modernist Kotva department store at the end of Na Prikope.
Sources suggest Flow East could find it as tough going in its latest case. "They don't have anything on paper as far as I know," says one source close to the case. "Meanwhile, what choice does Nama have now? If they give in to Flow East, then Crestyl will likely launch action."
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