Pressure to deleverage keeps loan pipeline flowing in 2013


Loan sales in 2013 are set to top 2012’s €21.9bn, writes Cushman & Wakefield’s Federico Montero

As in 2012, deleveraging plans and economic uncertainty continue to ensure that the European commercial real estate (CRE) loan and real estate owned (REO) portfolio sale markets remain highly active, with more than €6.15bn of CRE loan and REO portfolio sales already closed in 2013.

This is just less than the €6.6bn sold in the first half of 2012 (see April issue), but the current €6.48bn in live sales and €44.16bn in planned sales suggests that transaction volumes for this year will be in excess of €30bn – significantly exceeding last year’s total of €21.9bn.

As expected and indicated in C&W’s European Real Estate Loan Sales report, released in February, the average loan size, excluding Hypothekenbank Frankfurt’s (formerly Eurohypo’s) €5bn sale of UK commercial real estate loans, has fallen from €658m in 2012 to €341m in the first half of 2013. This reflects attempts by vendors to market to a more diverse range of investors and maximise their recoveries. Nevertheless, the market is expecting several large sales, including a potential UK commercial real estate loan portfolio sale by IBRC (in liquidation) worth around €6bn.

Several big US private equity firms, such as Lone Star, TPG and Apollo, dominated the market last year, a pattern that has continued in 2013. More of them are seeking European opportunities this year – for example Davidson Kempner and Marathon Asset Management – as US investment returns fail to meet their expectations.

Hedge funds target Germany and Spain

 There has also been a rise in the number of hedge funds attempting to buy corporate debt of property companies undergoing restructuring in markets such as Germany and Spain.

As a result, there is now a greater depth of buyers in the four key loan sales markets – UK, Ireland, Germany and Spain – with activity expected to increase this year, particularly in Germany and Spain, as investors target different opportunities across the risk spectrum.

Last year, vendors sought to deleverage quickly through large loan sales; this year vendors are marketing portfolios with a more thorough understanding of their loan assets after careful data remediation processes. They also have a better comprehension of price expectations, thanks to evidence from previous transactions.

For now, the availability of loan-on-loan financing remains limited to the UK, Ireland and Germany, with lenders still not ready to look at other markets such as Spain.

In addition, loan-on-loan financing is often only obtainable where the lender has an existing relationship with the borrower or has a proven track record in the loan portfolio acquisitions market, for example Lone Star, Cerberus and Fortress (see p22).

Based on the deals we have seen, pricing remains steep, with loan-to-value ratios in the 50-60% range, margins of 600-700bps and loans subject to full cash sweeps.