A market for non-performing real estate loans could emerge in Greece in the coming year, suggested panellists at Real Estate Capital’s Finance Forum: Europe 2016 this morning (28 September).
Speaking about the European NPL market, Giles Horridge, head of legal at Sabal Financial Europe, explained that Greek banks’ lack of adequate provisioning had been a barrier to NPL sales in recent years. He added that buyer and seller price expectations were gradually converging.
“Greece will be a strong area of interest next year,” said Horridge. “We looked at it 18 months ago, but the bid/offer spread was too wide.”
CBRE Capital Advisors’ head of global loan servicing, Clarence Dixon, agreed: “Greece will be much easier than Italy. In Greece there’s a mixed bag of structures; there are classic NPLs but also a lot of commercial assets that were leased, so from an enforcement point of view it makes things easier.”
Dutch loan sales will continue into next year, Dixon said, adding that the German market is active, albeit in smaller, private transactions which are “more common than people realise”.
The audience for the panel discussion, which was chaired by White & Case partner Jeffrey Rubinoff, was polled on where the best NPL opportunities would be in the coming year. A total of 31 percent voted for Iberia, 19 percent said Central Europe, while the UK and Italy each polled 17 percent. Only 3 percent voted for the Netherlands.
Pricing remains a major barrier to the Italian NPL market, said Federico Montero, head of real estate portfolio solutions at Evercore. Until there are appropriate levels of provisioning by the country’s banks, improvements to the legal system regarding enforcement and the establishment of a ‘bad bank’ to concentrate NPLs, the market will remain subdued, he suggested.
“Until we see that, we won’t see a big volume of transactions,” said Montero. “Pricing needs to be bridged in order for there to be transactions.”
On the subject of loan-on-loan financing, Sabal’s Horridge insisted that there is liquidity: “The market is deep enough. Heading to Central and Eastern Europe it thins, but generally we are happy with the terms on offer and the depth of the market.”
Polled on when Europe’s banks will run out of loans to sell, the audience was optimistic. While 3 percent each voted two and three years and 13 percent thought five years, 81 percent of the audience said never; banks will always have loans to sell.
“There will always be a market somewhere,” agreed Dixon.
Earlier in the day, panellists discussed the European market for mezzanine debt, moderated by CREFC Europe chief executive Peter Cosmetatos. Dan Pottorff, national director at LaSalle Investment Management, said that loan-to-value ratios and pricing in the mezzanine space have “remained remarkably stable” in the last couple of years.
“In 2012 and 2013 mezzanine generated quite attractive returns; it was more like equity,” Pottorff explained. “Margins came down during 2014, but returns and leverage have remained very much within a band since.”
Dale Lattanzio, partner at DRC Capital, added that when his firm began providing mezzanine in 2010/2011, pricing was higher than now, “although not dramatically different”. However, since the early days of mezzanine lending, market data has improved, off-setting risk to a degree, Lattanzio said: “Being able to see where real estate fundamentals are headed slightly off-sets the risk you take.”
Alternative sources of capital will continue to operate in the European market, providing mezzanine debt as banks grapple with increased regulation, added Paolo Bortolotti, vice president for private real estate debt at Partners Group: “The system will hold well. There will still be space for alternative lenders.”
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