An estimated €100bn of European loan portfolios will trade in 2015 and up to half of this could be real estate, according to PwC.
Its annual market survey estimates that investors have €70bn of equity to spend, which combined with leverage, could fund significantly more deals this year. PWC expects portfolios with a face value of around €90-100bn to trade in 2015.
“At least half could be real estate,” says Richard Thompson, head of PwC’s portfolio advisory group. “We are still seeing a steady stream coming onto the market. I expect it to be a major asset class next year.”
PwC estimates European banks still have €1.9trn of non-core loans to shift. “We expect volumes of loan portfolio deals to continue to increase over the next few years,” says Thompson.
Italy is in investors’ crosshairs this year, as their interest shifts from Ireland and the UK; 17% of the buyers and sellers canvassed by PwC put it in their top five countries for investment. “Italy is finally beginning to happen. We’re seeing significant investor interest and the beginning of a stream of transactions,” says Thompson.
“There’s been a lot of talk about the bid-offer gap there, but I think that’s a bit of an excuse. Banks need to take the plunge and see what happens.”
Investors’ appetite for non-performing loans remains strong, with their interest broadly spread across all asset classes. But PwC expects real estate-backed transactions to continue to dominate the market, as the demand for corporate NPLs is still outstripping supply.
The average pricing on commercial real estate NPLs in 2014 was 46% of face value. This is not expected to change much this year, though PwC notes that strong competition in the most liquid markets – the UK, Ireland and Spain – is pushing investors to look at others that have the potential to offer higher returns.
Investors are looking for unlevered IRRs 20% on non-performing CRE loans, figures similar to those for other kinds of loans. But competition for deals has pushed prices up in a number of markets last year, while the return expectations remain broadly the same. “This could point to the adoption of more aggressive assumptions concerning potential returns,” says PwC.