Against a background of continued economic uncertainty and impending regulatory changes, the pace of activity in the European real estate loan sale market will accelerate significantly over the next two years according to a new report from property consultant Cushman & Wakefield. Over the past 12 months, a total of 33 completed loan sale transactions were recorded, totaling €21.7 billion (up 146% on 2011), demonstrating that European commercial real estate (CRE) loan portfolios can be successfully traded. The market has made a strong start to 2013 and in view of the build up of activity amongst the banks and their legacy entities and their aggressive deleveraging targets, Cushman & Wakefield is forecasting over €25 billion of CRE loan portfolio and real estate-owned (REO) sales for the forthcoming year.
Of the €21.7 billion of loan sales in 2012, approximately €10.6bn (50%) of closed transactions were secured against commercial real estate, with €4.13bn and €4.10bn secured against mixed and residential loans respectively. The remaining transactions were a combination of REOs (€2.6bn) and infrastructure loan sales (€213m), representing 12% and 1% of the total value respectively.
During 2012 the average transaction size of loan sales also showed a slight increase, rising from €549m to €658m since 2011, suggesting a trend towards larger portfolio sales. However, there was wide divergence around these averages, with the transactions in each year ranging from €50m to €1.8bn in 2011, to €40m to €2.5bn in 2012.
Michael Lindsay, head of Corporate Finance at Cushman & Wakefield, said: "2013 is going to be a very active year in the CRE and REO loan sales sector with the volume of transactions increasing considerably. Whilst large loan sales of €500m+ are still expected to hit the market, there is a wall of capital available, much of it from end users investors, for smaller transactions in the €200m - €500m range. Banks and legacy entities should consider tapping into this liquidity through appropriate scaling and composition for their planned sales. Selling into a deeper market should help banks maximize recoveries."
Iberian Peninsula And Benelux To See High Levels Loan Sale Activity In 2013
Over 90% of the transactions in 2012 (by volume) occurred in just four countries - UK, Ireland, Germany and Spain. The UK market alone accounted for 28% of the closed transactions, followed by Spain (26%), Germany (21%) and Ireland (18%). Whilst 11 transactions were recorded in the UK market, 6 transactions were recorded in Ireland, Germany and Spain respectively. This demonstrates that the UK currently has the most liquid loan sale market in Europe, although it is anticipated that the Iberian Peninsula and Benelux may become the most active regions over the coming 12 months, especially with the establishment of Spanish asset management agency, SAREB.
Cushman & Wakefield analysis shows that during 2012, nine of the top 10 sellers were banks based in the UK, Ireland, Spain or Germany. Topping the list is Lloyds Banking Group, offloading over €6bn in CRE loans and Santander with over €3bn. However, it is anticipated that activity will spread throughout the rest of Europe, as banks attempt to deleverage further in non-domestic markets, focusing on their core markets, where they have greater knowledge and a higher head count.
European Asset Management Agencies Poised to Accelerate Activity
The numerous European asset management agencies are poised to accelerate activity this year according to Cushman & Wakefield's report. Whilst NAMA has been less active than anticipated during 2012 (selling only €398m of loans) it is expected to accelerate deleveraging plans this year. It has already completed one transaction this year; the sale of a €85m junior note within a €270m securitisation of mainly Dublin offices and retail assets to Northwood Investors, and has recently announced plans to sell two portfolios worth over €1bn. Similarly, with the establishment of SAREB, and discussions of further asset management agencies in other countries (for example the Netherlands), the range of sellers to be more evenly distributed. Finally, German legacy bank entities such as FMSW, EAA and Hypothekenbank Frankfurt (formerly Eurohypo) have been relatively inactive, but it is expected that more transactions will develop, for example the latter's planned UK loan book disposal
With 14 of the 33 transactions recorded over €500m, the market has been dominated by those who have the resources, expertise and capital to close these larger transactions. Cushman & Wakefield research shows that the top 3 buyers, Lone Star, BAML and TPG, accounted for (c. 47%) of the total volume closed in 2012.
Several private equity firms have been vying to buy portfolios of European bank debt consisting of troubled commercial real estate mortgages. Cushman & Wakefield expects that more players will look to set up offices to take advantage of the opportunities available.
US-based investors continued to show their market dominance, accounting for over 80% of the loan portfolios sold during the year according to the data. This increase in appetite has been shown by their increasing presence in Europe, often "setting up shop" with the specific aim of taking advantage of the many opportunities presented by deleveraging banks. This has come in the form of adding employees to the region, acquiring servicing platforms, or both. The majority of these investors will continue to take advantage during 2013, especially those who had a high level of unsuccessful bids during 2012.
Cushman & Wakefield is currently tracking over €3.6bn of live transactions, with knowledge of over €8.6bn of CRE loan and REOs sales in the planning stages. While 81% of the live sales are taking place in the mature markets of the UK, Germany, Ireland and Spain, C&W is aware of transactions being planned in immature markets such as Portugal and Russia.
According to Federico Montero, Partner in the C&W Corporate Finance team: "We believe other estimates of 2013 volumes to be understating the potential of the market. With evidence of over €12bn of live and planned transactions, we expect European real estate loan and REO sales in excess of €25bn during 2013."