European CRE loan/REO sales: Cushman & Wakefield market commentary

Buoyed by the increased activity of asset management agencies such as NAMA and Sareb, the European commercial real estate (CRE) loan and real estate owned (REO) sales markets saw €23.1bn in closed transactions in the year to mid December, without including over €3.5bn of Spanish servicing platform closed transactions, writes Federico Montero, partner at Cushman & Wakefield Corporate Finance.

This is a slight rise on 2012’s €22.5bn total. C&W Corporate Finance is also tracking another €30.6bn of live deals, so there could be further completions this month as sellers and buyers look to close deals before the end of the year. The most notable are IBRC’s Projects Rock, Sand and Stone, with a collective outstanding principal balance of almost €18bn.

Activity in 2014 will be supported by a large pipeline of planned deals, which C&W Corporate Finance estimates has a face value of around €21.8bn, including Co-Operative’s anticipated sale of UK CRE loans and expected sales in Ireland from Lloyds. As in 2012, around 88% of sales took place in the key markets of the UK, Ireland, Spain and Germany. But vendors are increasingly looking to reduce their exposures throughout Europe, with deals being closed in the Netherlands, Russia, Finland and Italy.

As investor confidence has grown, interest has increased for opportunities outside the four key markets, with live or planned sales in Poland, Portugal and Scandinavia, and several pan-European sales. Top of the list of closed volumes once again is the UK, with €10.2bn, boosted by Hypothekenbank Frankfurt’s sale of around €5bn of UK CRE loans – Europe’s largest completed sale this year. Wells Fargo bought the €3.4bn of performing loans while also financing Lone Star’s acquisition of the €1.6bn non-performing loan pool.

Large US investment firms still dominate the market, accounting for around 80% of CRE loan and REO acquisitions so far this year. But as activity has spread across Europe and the average sale size has fallen from €500m to €361m, there has been a rise  in the range of potential buyers, with several smaller local investors paying above the odds to enter the market.

Many vendors have used the evidence provided by previous deals as a basis of price expectations, so sales processes have been  more effective, with C&W Corporate Finance recording only two defaulted sales, compared with eight in 2012. Clearer exit strategies and the geographic tranching of loan portfolios have helped maximise sale proceeds. A rise in activity by European asset management agencies has boosted deal volumes, accounting for around 45% and 40% of closed deals in Ireland and Spain respectively. IBRC, Sareb and NAMA also have around €25.8bn of cumulative live transactions – 84% of total live deals tracked by C&W Corporate Finance.

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Loan-on-loan financing is still more readily available for deals in the UK, Ireland and Germany than in other markets and is typically limited to borrowers with a proven track record in acquiring loan portfolios. Loan-to-value ratios are typically in the 55-65% range and margins are tightening  to between 400 and 600bps. Attractive margins continue to draw banks and non-traditional lenders into the market, with Bank of America Merrill Lynch providing £163m for Varde’s and Kennedy Wilson’s acquisition of ING’s Project Panther in September.

A key advancement in 2013 was the rise in the number of debt servicing platforms being bought in Spain ahead of anticipated increased activity. As Spanish banks look to raise capital without selling distressed assets, an obvious target for large US investors is to buy their servicing arms. C&W Corporate Finance tracked seven such sales in 2013, accounting for around €3.5bn, the most notable being Apollo’s purchase of Altamira from Santander, and Varde’s and Kennedy Wilson’s joint purchase of Aliseda from Banco Popular, both priced at above €750m. With Cerberus, TPG and Centerbridge also among the purchasers, US investors are ready to take full advantage of the wealth of opportunities expected to come from Spain in 2014, with these platforms enabling them to maximise recoveries.

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