The good the bad and the debt

New regulations from the ECB have given real estate investors a lot to think about in the non-performing loans market, but appetite remains strong. Theo Andrew reports

Since the great financial crash of 2008, non-performing loans (NPL) have been weighing heavily on banks’ books, but despite new regulations from the European Central Bank (ECB), global appetite for NPLs in Europe has continued to grow, particularly for real estate.

Published in April, the new ECB guidelines on NPLs mean financial institutions have to put the necessary governance in place with a clear strategy in order to take on bad debt, but the move hasn’t affected demand for NPLs, according to Deloitte.

Research by the advisory group suggests there is approximately $300 billion in funds available for distressed debt in Europe, and the big players are looking to the big markets to deploy.

Partha Pal, finance practice partner at Ropes & Gray, says: “Although these cover a mixed set of assets, it is usually real estate-backed NPLs that start to trickle through first. The first wave of NPLs always tend to be real estate related. The reason for this is it’s relatively easy for investors to work out what the underlying collateral is worth.”

“You could find an opportunity to buy a lot of corporate debt, but determining its real value in markets such as Italy is harder than working out the value of real estate loans because real estate involves collateral, which is easier to value and to extract value from.”
According to Deloitte’s figures, NPLs being backed up through residential portfolios have been doing particularly well throughout 2017, with €21.8 billion being transacted compared to €3.9 billion of commercial real estate (CRE)-backed loans.

In August, Tunstall Real Estate Asset Management acquired five loans backed by a strong portfolio of 20 Dutch assets comprising of office, retail and warehouse properties, for €31.7 million. The purchase was on behalf of its newly-launched Netherlands-focused discount pay-off debt fund (DPO Fund 1), which made its first close with initial commitments totalling €55 million.

However, it is not the €11 billion Dutch debt market that is investors’ prime target.

Italy has seen €43.5 billion of NPLs transacted in 2017, and here, the story is somewhat turned on its head. Europe’s largest NPL market has seen €3.3 billion of CRE-backed NPLs transacted so far in 2017, with a further €2.5 billion in the pipeline, compared to just €0.3 billion in residential-backed loans.

In July, Bain Capital Credit acquired almost €1 billion of Spanish and Portuguese NPLs, primarily secured by real estate. The global investment manager purchased €489 million worth of the bilateral loans from Spanish bank Banco Ibercaja and a further €476 million of real estate-secured loans from Portugal’s state-owned Caixa Geral de Depósitos.

Pal says: “The number and size of portfolios coming onto the market from Spain has definitely been a noteworthy feature, and this year in particular the amount of flow and actual transaction that has been done in Italy is also very significant.”

“Investors are looking to Portugal as well, although it is a small market, relatively speaking, and the big players like volume because of the large amounts of capital they have to deploy.”

In that sense, the Spanish market certainly has a lot to offer. This year alone, it has completed €4.7 billion in NPLs and has a further €31.7 billion in the pipeline. Santander’s takeover of Banco Popular means the Spanish bank now has €53.2 billion of NPLs on its own, according to Deloitte figures.

Another market that was taken to the cleaners during the financial crisis was Greece, and now many are lining up to take advantage. Economic improvements and favourable reforms mean the country has taken €1.8 billion in NPLs this year, and has another €3.3 billion ongoing. A stark rise on the on the €200 million transacted in 2016.
Pal says: “Other than Spain and Italy, Greece has been a market I have heard a lot about recently. Piraeus Bank has recently done its first deal and I believe the Bank of Cyprus was trying to do a deal too, but it has been put on hold.”

Cyprus has only seen two transactions this year, despite having the highest NPL ratio in Europe and a €21.3 billion non-performing market. NPL servicers such as Situs, Capita and Mount Street are continually looking at new locations where they can service NPLs.

The market for real estate-backed NPL is ripe for the picking, and there will be a definite uptick in transactions as investors warm to the regulation changes, and as markets such as Greece and Cyprus make it easier for deals to get done.

“As you move into less familiar and less creditor-friendly legal environments it becomes harder to do this business,” Pal says.

“Real estate is still the single most important area in both residential
and commercial.”

“You will see some brave souls looking at consumer loans and some looking at corporate type loans but, from what I have seen, 95 percent real estate NPLs is what people seem to like.”
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