Non-core loans: Spain shines

The Spanish non-core loan sales market dominated European activity in 2017, although volumes were concentrated in mega-deals.

The Spanish market was the driver of non-core real estate loan sales in Europe in 2017. Spain accounted for almost half of last year’s €104 billion of European non-core loan and property sales according to Evercore.

However, loan sales volumes were propped up by two mega-deals. Santander’s August 2017 sale of a €30 billion portfolio of loans and properties inherited through its acquisition of Banco Popular to a joint venture it formed with Blackstone dominated the market. In addition, BBVA last November sold the majority stake in its €13 billion Spanish real estate book to Cerberus Capital Management.

“Banks in Spain have restructured and are better provisioned to sell. The macro recovery continues to be supportive; that has created the right environment for investors including larger private equity funds to invest in large NPL portfolios with asset management platforms attached,” says David Ruiz, head of Deutsche Bank’s commercial real estate special situations group for Europe.

Even last year’s Catalan independence crisis, which led to December regional elections in which three pro-independence parties won a majority of seats, did not dampen investor demand.

“In the run up to the vote and shortly after, there was a slowdown in opportunities that came to the market and deals took a little longer to complete but this has mainly bounced back,” says Ruiz. “Demand for smaller, more granular assets securing your typical NPL portfolios in Spain continues to be relatively strong as the political situation has stabilised.”

Demand for Spanish non-performing loans has steadily increased in recent years, since ‘bad bank’ Sareb’s first property portfolio disposal in 2013, Project Bull, in which the bank sold a 51 percent stake in a package of 939 foreclosed homes to HIG Capital.

The financial crisis took a heavy toll on the Spanish economy and many institutions with vast exposure to real estate development, with property prices falling dramatically, many developments discontinued and developers put into insolvency. “As Spain was particularly badly hit by the crisis, the Spanish NPL market has developed to a greater extent than in other countries. Banks have completed transactions and investors have got comfortable with how Spanish law works; there are market standards for negotiating NPL deals,” says Carlos Daroca, a partner at law firm White & Case’s M&A, private equity, real estate and corporate practice in Madrid.

The increasing sophistication of loan servicing platforms in the country has been instrumental in the market’s development, with several private equity firms having acquired local platforms to enable them to manage large NPL portfolios.

“Servicers have accumulated a lot of experience in analysing portfolios, designing and implementing work-out strategies. The advice and support they have provided to investors has been essential in narrowing bid/ask spreads in the market,” says Daroca.

Sellers have become more active, with banks including Sabadell, CaixaBank and Bankia having made provisions against expected losses. In March, Caixa and Bankia sold €228 million and €290 million of foreclosed properties, respectively. Sabadell is currently marketing four non-core real estate and loan portfolios with an aggregate face value of €10.8 billion.

“After a few years with those provisions, values are closer to market values. Banks need to clean their balance sheets from exposure to real estate; they are more aware of that,” says Beatriz Barco Delgado, national director of strategic real estate advisory at Savills, Madrid.
Despite selling substantial parts of their non-performing assets since 2014, Spanish banks still hold the second highest non-core real estate exposure, after Italian banks, at €133 billion, Evercore figures show. Like all European banks, they are coming under increasing pressure from the European Central Bank to conduct deleveraging in a more structured and effective way.

As the Spanish NPL market has matured, returns have come in, in cases. “Having seen a 10 to 15 percent rise in residential asset values in the main cities and with assumptions around house price increases going forward, plus the fact that NPL investors now have access to leverage, pricing has become more competitive leading to, in some cases, compressed return expectations,” explains Deutsche Bank’s Ruiz.

However, with property yields low across Europe, Spain remains attractive despite compressed returns because perceived risk is lower due to current valuations and the stage it is at in the recovery cycle.

“Spain’s macro growth story still has several years to go; GDP growth is strong, unemployment continues to improve, banks are lending, and asset values are still attractive, further supporting recovery. This gives investors comfort that Spain continues to be a good place to be investing,” says Ruiz.

The profile of investors has evolved over the course of the country’s recovery. Those that bought portfolios initially were opportunistic hedge fund investors seeking circa 20 percent returns; post 2013 traditional real estate investors with an IRR target of 12 to 15 percent have returned, while even pension funds have started to join in; buying NPLs to diversify since returns are lower across competing asset classes.

Canada Pension Plan Investment Board in December bought Sabadell’s €800 million Project Voyager loan portfolio linked to construction, SME and hotel assets in its first investment in Spain, for example.

Investors have turned their attention to portfolios that include land assets, with a view to development, in a growing economy with rising demand for homes. “We now see portfolios including unfinished projects as well as a significant amount of coastal properties where there was a boom in development and insolvencies,” says Daroca.

Spanish banks still have a lot of NPL positions to work through while Sareb has €75 billion of non-core real estate exposure remaining on its books by Evercore figures, suggesting ample liquidity on the supply side. Spain has the most live and planned real estate sales of all European countries, at €71 billion, according to Evercore. The majority relates to planned sales from Sareb, Sabadell and Caixa, which are looking to sell portfolios worth a combined €68 billion.

In addition, several funds that bought into the Spanish NPL market in previous years are now seeking to exit those positions. Around 20 percent of Spanish NPL deals in 2016 were sold via the secondary market, estimates White & Case. In April last year, Lone Star sold €150 million of NPLs and residential assets to Cabot, for example.

Ruiz continues to see a very active pipeline, supported by continued strong macro recovery. “Sellers would prefer to sell assets in the current scenario than in three to four years’ time when the market may start to slow down,” he says.

Further M&A activity in the banking sector is likely to trigger additional non-core divestments as banks’ deleveraging plans are applied to new acquisitions, Deloitte’s recent Deleveraging Report notes.

Investors have plenty to like about Spain, with economic growth of 3.1 percent in 2017, an improving real estate market, and a legal framework that international creditors are comfortable with. Returns may be lower but so is perceived risk around investments, and with the rest of Europe also facing lower yields, Spain will continue to represent an NPL hotspot.