New sources set to swell tide of property loan sales in 2014

There is plenty of fuel to stoke the fire in 2014, as far as European loan trading goes. A known €21bn of planned deals next year and talk of more activity from markets outside those that have dominated so far suggest liquidity will be deep.

The key countries will still be the UK, Ireland, Germany and Spain, but more Southern European opportunities will arise. Potential returns are above those available in the US, while performing loans are also changing hands, and platform trades, such as Commerzbank’s sale of Eurohypo’s UK loan book, are likely to continue next year.

Spain’s market will be “ultra busy in the next six months [and beyond]”, says one adviser. Spain’s bad bank, Sareb, is an increasing source of deals, but activity is striking up elsewhere. For example, Commerzbank has appointed Lazard to sell its former Eurohypo Spanish business. The bank has a €5bn loan book with a €3.3bn performing and €1.7bn non-performing split. But “it doesn’t want to take a loss”, says a source.

Barclays is said to be in talks with Apollo and Cerberus to sell all or part of its €6bn -7bn Spanish loan portfolio. It lent to residential developers as well as commercial real estate and is “working to get rid of its non-performing loans”, a source says, adding: “Apollo and Cerberus are trying to convince Barclays to sell everything to them. The challenge will be how to do that without taking a big loss.”

Ireland will be another centre for loan sales in 2014. NAMA will market at least three more loan books and has engaged Ernst & Young to sell one, with a €200m-€250m face value. One of the other two is linked to Michael O’Flynn’s Tiger Developments – the group behind the Haymarket hotel, offices and shops scheme in Edinburgh – which has submitted a reverse enquiry. NAMA is also lining up sales in the UK and Germany.

Lloyds and RBS are also expected to sell loans in Ireland. One loan portfolio expert says RBS is his bet for next year’s biggest seller, based on the creation of its Capital Resolution internal bad bank. It has £38bn of property loans to get rid of, many in Ireland via its Ulster bank subsidiary.

At a Commercial Real Estate Finance Council Europe seminar on non-performing loans in London on 27 November, speakers including Mathieu Roland-Billecart of Ernst & Young’s real estate corporate finance team, and Tamara Box of Reed Smith, suggested that the balance of supply and demand is improving, as more banks have entered the market to sell over the past 12 months.

Lloyds’ share price success as well as improving property markets have encour-aged more institutions to follow suit, while regulation making it more costly to hold distressed loans is also pushing banks to dispose of non-core debt.

Growing demand in the Netherlands

Nationwide recently appointed Deloitte to help sell its non-core German portfolio. In other territories like the Netherlands, where there is oversupply of offices and industrial assets, banks are responding to growing investor demand. Angelo Gordon is under-stood to be working on an industrial deal there and Anchorage is also looking at the market. In July, Fortress bought a portfolio of CRE loans from Morgan Stanley with a face value of €1.05bn in a process called Project Vermeer.

“We’re seeing more interest from investors for countries like the Netherlands, Portugal, Poland and Italy; banks will start selling there,” notes a source. The line-up of bidders has become more diverse. Large US investors such as Lone Star, Fortress and Cerberus continue to take advantage of the many European opportu-nities, but several smaller, local players are  active too, with the average size of sales down from €500m in 2012 to €361m this year, according to Cushman & Wakefield Corporate Finance’s latest data (see table).

closed

An influx of leverage has helped open up the market. At least 10 banks now offer loan- on-loan financing, including Bawag, Credit Suisse, GE Capital, Natixis, Citi, Deutsche Bank, Goldman Sachs and Nomura, at 55-70%-plus leverage, with margins from 350 basis points to 600bps.

This has narrowed the bid/ask spread,  helping to get deals done. Vendors are also basing price expectations on previous deals, while clearer exit strategies and the division of portfolios into geographic tranches have helped create a competitive environment.

The market will be watching for the sale of several IBRC portfolios, including the multi-tranched, £4.82bn, non-performing Project Rock, which is scheduled to close this year. But there is a question mark over how many IBRC loans will be traded, because of strict pricing floors; if deals cannot be agreed, the loans will be transferred to NAMA, which is likely to offer them to investors again later.

With more than €23bn of European CRE and real estate owned (REO) deals – banks selling repossessed assets they have foreclosed on – so far this year, plus a further €29.6bn of deals under way, according to C&W (compared with 2012’s €22.5bn total), loan trading is snowballing. This trend is set to continue in 2014, with more sellers coming into the market. See Data, CRE loan sale tables

 

SHARE