

Gifford West, managing director at The Debt Exchange, gives Real Estate Capital his forecasts for the European real estate loan sales market in 2017.
During 2017, real estate loan sales markets look likely to emerge in Greece, Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS). There will be more activity in Spain, frustration in Italy, and we will see a continued slowing of deal flow in Northern Europe.


For the secondary European loan market, 2016 was marked by two factors; economic recovery and bank retrenchment. In Western Europe, there was reduced activity as banks recovered, while in Spain there was an increase in loan sales as banks worked towards recovery. Continued retrenchment meant that there was a lack of loan sales in Italy, Greece, CEE and CIS. However, across Europe, there was a general growth in the stock of non-core and non-performing loans.
The system-wide drivers for 2017 are likely to be continued bank retrenchment, as well as the impact of external shocks such as Brexit and Trump.
The recent Italian referendum stands out as one country-wide shock worth watching. It may be followed by bank failures and it is likely to hamper the creation of the liquid NPL market so desperately needed by the mid-size banks for at least another 18 months.
The grind of bank retrenchment continues
Driven by a combination of historical losses, legacy positions, increased oversight, regulatory diseconomies of scale and bad public perception, the vast majority of traditional banks continue to place their growth ambitions into reverse and are trying to shrink business lines, operations, risk, and footprints.
To put it into perspective, if a ‘non-core’ bank was created consolidating all of the performing but non-strategic loans in Europe, that bank would be the size of Santander. And while loans maturing and refinancing will shrink the size of this hypothetical organisation, banks keep adding to its inventory. For instance, Nationwide most recently added £2.7 billion of UK CRE loans.
Europe’s non-core mountain will consume management time but will not drive transaction volumes in 2017 for the simple reason that many banks cannot afford to take the losses associated with selling performing loans at a discount. Expect this mountain of unloved loans to be chipped away at but GE Finance-scale transactions to be the exception to the rule. Banks just do not have the capital to sell performing loans below par.
Fewer ‘mega-deals’
The twin to this hypothetical European non-core bank, a European ‘bad bank’, would be smaller, but still the size of Rabobank. This is true even after the activity of the past three years in which we have seen dramatic, large sales of NPLs both by government institutions such as NAMA and Propertize, and banks such as Citi, Lloyds, RBS and Commerzbank.


The pace for 2017 will slow. Unicredit’s proposed €17.7 billion NPL sale, if completed, is likely to be one of a few bulk loan sales. Driving the trend towards smaller sales is going to be balance sheet considerations and the nature of the loans being sold. Banks cannot afford the losses and there are fewer large pools of homogeneous loans left on their books.
As with the disposal of performing books of loans, banks have to take their losses carefully. Few banks have the luxury of taking big hits given the pressure they are under to raise capital. Similarly, combining commercial loans from half a dozen CEE countries into a portfolio is likely to frighten rather than attract most investors.
Expect to see in 2017 small sales of loans made to banks’ relationship clients on investments in exotic locations (for instance a developer’s first and only foray into an unfamiliar foreign market), sub-scale business units remote from banks’ core operations (such as lending books compiled during short-lived efforts to lend in the hotel sector) and politically risky businesses that risk further alienation by the public and policy makers of bankers (for example church loans).
In Northern Europe, 2017/2018 will be about cleaning out what is left over.
Southern and Eastern Europe
Spain is an obvious contender for increased activity in 2017. With recovering underlying real estate prices, banks are increasingly finding that levels are being reached where they can sell loans. The need for the sales is only aggravated by further Bank of Spain scrutiny and potentially overwhelming REO exposure. Expect to see both large and small sales from Spain across the asset spectrum.


For Greece and the CEE/CIS countries, 2017 may be the year during which sales begin in earnest. A number of government initiatives appear to be coming to fruition and the pressure/incentives being applied by the various “troikas” and “quartets” may have broken log jams. These sales will be more likely to be below €100 million in proceeds and may address more challenging assets such as SME and commercial and industrial loans. For the bold, these may offer interesting returns.
Obstacles that appear to be gradually removed are the licensing of local servicers, the approval of international loan sale platforms by government agencies, efforts to reform local foreclosure laws and the loosening of capital control issues.
Italy unlikely to emerge
The ‘no’ vote in the Italian constitutional referendum spells frustration for distressed debt buyers for another year.


The people of Italy voted on 4 December to reject proposed reforms of the government, led at the time by Matteo Renzi. This is assumed to delay or derail reforms to the Italian foreclosure process and other banking related restructuring.
The math for buyers and sellers of Italian distressed debt is quite simple: more certainty and ideally shorter time frames would raise the values at which Italian banks could sell NPLs. Continued uncertainty would leave the bid/offer spread wide.
While the consumer unsecured distressed debt market will remain active, the referendum undermines the creation of a liquid market for SME and mortgage NPLs critically needed by the midsize and large Italian banks. The only alternative to gridlock in the mid-sized Italian banks is the creation of an active, standardised NPL market, similar to the one created by DebtX in the US and Germany.
The known unknowns
There are more ‘known unknowns’ than the market is used to. The biggest is the impact of the Trump administration on the related issues of the European economy, the political stability of the CEE/CIS and world trade.
Depending on how the Trump White House uses the various political and economic levers they inherit from the Obama administration, it is easy to paint wildly different scenarios for Europe. Layer on the implementation of the UK’s Brexit from the European Union, and 2017 should be anything but dull for distress real estate debt buyers.
Gifford West is the Boston-based managing director of loan sale advisor The Debt Exchange (DebtX).