Editor’s Letter: NPL opportunity shifts south

Daniel Cunningham

A consequence of reckless real estate lending in the years preceding the global financial crisis is the huge lingering volume of distressed debt clogging up bank balance sheets across Europe.

From around 2011, as western European property markets recovered, opportunistic investors swooped and an active non-performing loan market emerged, concentrated initially on the UK and Ireland. It marked a seismic shift of unwanted loans from the banks to the private debt sector.

Many northern European lenders have reached the end of their deleveraging, but Europe’s NPL story is far from over. Indeed, the second act is just beginning and the action is moving to southern Europe. Markets including Italy, Portugal and Greece are set to join Spain as genuine NPL opportunities. Political pressure emanating from the European Central Bank is forcing a reality check onto banks that have chosen to ignore their NPL problems and loan sales will inevitably follow.

Estimates suggest that there is €2 trillion of overall non-core debt in Europe, around half of which is non-performing. Investment banking firm Evercore last September put Europe’s gross non-core real estate exposure at around €460 billion.

Tapping into that debt pile means investors need to enter unfamiliar jurisdictions. CBRE Capital Advisors said in March that it is monitoring €66.8 billion of dry powder amongst global loan purchasers, focused on Europe. There will be no shortage of investors desperate to buy southern European banks’ loan portfolios, and with those deals comes a need for support functions such as loan servicing, as well as the scope for opportunistic lenders to provide borrowers with the capital to refinance legacy debt positions. The prospects for Europe’s NPL market are explored in this month’s Special Report.

De Montfort offers insight

Biannually, for the last 20 years, the results of De Montfort University’s in-depth survey of the UK commercial property lending market have been published, and poured over by market participants.

The latest, covering the full-year 2016, has been revealed. It shows that the UK’s decision to leave the European Union resulted in 17 percent less loan origination compared to the previous year, with the majority of activity focused on refinancing rather than funding property acquisitions. However, the fact that lending volumes were slightly higher in the second half of the year, after the EU referendum, demonstrates that banks and alternative lenders remain determined to write new debt and capitalise on an extended cycle.

The results of the latest De Montfort missive are analysed and the report’s author, Nicole Lux, outlines her main takeaways from the findings. In a market in which loan data is not freely available, the De Montfort report provides a crucial insight into the ongoing fundamentals. For that reason, the results are worth careful consideration.

Enjoy the issue.