Italy’s vaults are opening

Opportunistic investors have so far chipped away at Italy’s huge mountain of defaulted real estate debt, but significant portfolios should emerge this year.

CarVal Investors knows a thing or two about buying legacy European real estate debt. Since 2009, the US-based opportunistic buyer has snapped up loan portfolios in the UK, Ireland, Portugal, the Netherlands and Hungary. Italy is next on its hit-list.

Turin-based asset manager Fondaco announced this week that it had formed a partnership with CarVal to raise €400 million to invest in performing and non-performing real estate loans, with a 10 percent return targeted over six years.

Another opportunistic investor, AnaCap, this month bought a €177 million loan book of Italian SME debt secured by real estate from Barclays.

While CarVal’s fundraising and AnaCap’s loan purchase demonstrate that investors are keen to buy into the Italian market, they also illustrate that the mountain of defaulted property debt sitting on the loanbooks of Italian banks has barely been touched.

However, things are changing and 2017 is likely to be the year when Italy’s overall NPL market – estimated at €360 billion – opens up.

To an extent, it already has. Deloitte’s latest Deleveraging Europe report, published this week, shows Italy was actually the biggest loan sales market by value in 2016 across asset types, with €36 billion of completed sales and €39.7 billion ongoing. UniCredit, which offloaded more than €17 billion of NPLs into a securitisation vehicle last December, was the major seller.

The bulk of Italian NPLs sold to date relate to consumer and corporate loans, with slim pickings for those targeting property debt. But momentum is building as Italy’s banks feel the strain of being the weak link in Europe’s financial system.

The recapitalisation of the country’s banks is expected to flush real estate loans out into the market. The Italian government last December approved a €20 billion bailout of struggling banks, predominantly Banca Monte dei Paschi di Siena. The country’s largest lenders, including UniCredit, are finally addressing their non-core debt piles. Hopes are high that meaningful loan portfolios, including property debt, will emerge as a result of this activity.

But, naturally, the attractiveness of Italy as a real estate loan portfolio market will depend on how its government manages the situation. Previous prime minister Matteo Renzi began to implement measures to make enforcement and debt recovery easier. However, he resigned after voters rejected his referendum proposal last December and the onus is now on new prime minister Paolo Gentiloni to continue the overdue reforms.

Difficulty in enforcing Italian property loans is listed by almost all investors as the main reason they have held off from investing in the market. Progress has been made in this area, and with the government also creating a regime to allow guarantees to support NPLs coming to market through securitisation vehicles investors are hopeful about deals finally coming to fruition.

Italy is far from an ideal property loan sales market, and CarVal’s partnering with a local asset manager demonstrates that local knowledge is essential. But while the Italian NPL market remains complicated, there are signs we have reached a turning point.

For opportunistic investors struggling to find high-return business throughout Europe, more are likely to follow CarVal and AnaCap. They will be hoping that Italy proves to be 2017’s most fascinating European NPL debt story.