Asset quality review set to spark bank clean-up in southern Europe

The looming Asset Quality Review (AQR) of European banks is set to spark a new wave of bank disposals in southern Europe, PropertyEU’s Investment Briefing on distressed real estate heard in London this week.

‘The Asset Quality Review will have a serious impact on the real estate industry,’ noted Tassos Kitsantas, managing director of London-based Athlon Real Estate. ‘It will certainly have implications on the assets that banks are holding and I think Spanish and Italian banks will have to start clearing their portfolios. As the unbundling takes place, more opportunities will come onto the market.’

Around 130 ‘significant’ European banks are taking part in the Comprehensive Assessment conducted by the European Central Bank (ECB) in the run-up to its new role of direct supervisor to these banks. The Asset Quality Review (AQR) is an important part of this overall assessment which is widely viewed as the most comprehensive survey of the strength of the eurozone’s major banks ever to be conducted on such a scale.

In Spain, the number of banks has in recent years shrunk from 40 to 10 while US private equity giants like Blackstone and Lone Star have already pounced on a number of large loan portfolio disposals. On the lending side, foreign banking giants of the ilk of Credit Suisse, Merrill Lynch and Deutsche Bank have provided debt to the Spanish market, but US players with debt funds like Starwood and Cerberus have not yet been sighted. Indeed, debt funds have not been particularly active anywhere in southern Europe, but they may well become more active as the market moves forward, Kitsantas noted.

ITALY IS NOW ON THE RADAR
In any case, Italy is now moving onto the radar of foreign investors, according to Marco Casasole, a partner at Milan-based law firm CMS. ‘We’re seeing growing appetite from the US. The interest has been there for a while but there’s now a lot more optimism and demand as the repricing takes place. There’s growing interest in the bank portfolios and the non-performing loans (NPLs). That’s where investors have the greatest expectations.’ He cautioned, however, that the good market opportunities are not always easy to access. ‘The smaller portfolios and performing loans are possibly more attractive.’

While the usual suspects from the US are again in the vanguard in Italy, demand is also growing for certain types of assets from investors in China, Malaysia, Korea, Singapore and Hong Kong, Casasole said. ‘It hasn’t happened yet, but we started seeing them look at Italy in the first part of year. They are looking at core assets and long-term investments and are planning to stay.’

Major REITs as well as large and small fund managers have also been buying in Italy, noted Jos Short, executive chairman of Internos Global Investors. ‘There’s something there for everybody.’ Meanwhile in Greece, the dynamics of the market have improved, Kitsantas maintained. ‘There has been substantial activity in the hotel and resorts sector with some big American names chasing assets. It is an inherently small market, but it appears to be improving and there might be some things to look at in the next few months. Bond yields have come screaming in from spreads of around 50%. The next thing that looks like a bond is real estate and there will be some bond investors looking at this asset class,’ he predicted.

TIAA Henderson Real Estate is likewise eyeing southern Europe, but the region is not as mature as northwestern Europe, fund manager Jason Rodriguez warned. ‘The issue for us as an indirect investor is whether we can find attractive returns on a risk-adjusted basis. We continue to be cautious about Spain. Yes, we see the opportunity. But can we access it? When trying to generate liquidity, we have struggled in southern Europe relative to the north. You can’t get in and out quickly and if you look at the macro-economic picture, the occupiers are not there.’

The London-based fund manager also had a small portfolio of assets in Greece where acquisitions at yields of 10% are still possible. ‘But,’ Rodriguez said, ‘I wouldn’t propose going to Greece any time soon. There’s not anything like the opportunity in Spain, Portugal or Italy. Spain in particular is awash with capital.’ Italy and Greece are lower on the list, he added. ‘Italy is hamstrung by its very complicated legal structure and substructure. You have to feel very comfortable there as an investor and go in unleveraged. If you go a little bit up the risk curve or use significant debt, these are not the same markets at all.’

GREECE IS A LONG SHOT
Simon Martin, head of research and strategy at Tristan Capital partners, shares Rodriquez' view on Greece. ‘The fundamentals and capital markets are catching up, but Greece is a longer stretch. In Spain, the capital markets have moved a long way, but there is still room for opportunity. In Italy, there is less capital and it is harder to get into. There are opportunities for NPLs, but the opportunity is fragmented and they need to be pre-packed.’

In Spain, Internos recently sold two assets it had acquired from the Spanish Pillar Retail Europark Fund (PREF) it took over from British Land last year to a US group. Spain has clearly moved ahead of the other countries in southern Europe, noted Short. ‘But,' he added, 'it’s not time to draw up the gangplank yet!’

As the market develops, foreign investors are modifying their ambitions in terms of returns, he added. ‘Return expectations are falling, as they should, given also the low interest rates. Opportunity funds are now targeting returns of about 16-17% which is down from 20-25% previously.’