CREFC: Booming NPL market 'has still more to give'

The investment market for non-performing real estate loans Europe still has a lot to deliver, despite the huge number of transactions completed this year, according to leading experts.

‘The froth has been skimmed but plenty of cream remains’, Tavis Cannell, managing director of Goldman Sachs International, told the Autumn Conference organised by the Commercial Real Estate Finance Council (CREFC) in London this week. His view was the answer to the Conference’s theme, which was the question ‘Frothy times?’

More choice
Most speakers and delegates agreed with Cannell’s view that the NPL market in Europe still has a lot to deliver, despite the huge number of transactions completed this year. Half of delegates believe investor appetite in the NPL space has increased over the last twelve months, while 75% are convinced that there will be enough liquidity in the market for secondary loan trades in the next two years.

A year ago market dynamics were in sellers’ favour, but now the market is more calibrated, Cannell said, partly because financing is more challenging to access and partly because there is less pressure to invest. ‘As the cycle has progressed the diversity of assets in the portfolios has also improved,’ said Steve McElwain, partner at Apollo Management International. ‘Now there is more of a choice for buyers.’

European countries are at very different points of the cycle, with Spain and Ireland ahead after acting decisively and Italy and the Netherlands at an earlier point from a supply standpoint.

Bad bank strategy
Italy, unlike Spain and Ireland, has chosen not to go down the ‘bad bank’ route. Some investors take it as a sign that there is no impetus from the government to solve problems and avoid that market. It is now too late, Cannell said: ‘The bad bank train has left the station by now, but the administration of prime minister Matteo Renzi has shown it can put reforms in place, so they must shorten the process and get the market moving again.’

Until now, he said, ‘Italy as not been a demand or a servicing problem but a supply problem, but my expectation is that there will be a lot more supply in the Italian market in the next 12-18 months.’ Looking ahead ‘there is a good pipeline, not just in Italy,’ said McElwain. ‘There will be a lot of activity in Spain, NAMA in Ireland will continue to sell and Benelux will also come to the fore.’

In the NPL market ‘most tired old stereotypes do not apply,’ said Hans Vrensen, consultant director of research and education at CREFC Europe. ‘Spain and Ireland have surprised many by dealing well with their problems through state-sponsored bad banks. They are now reaping the rewards through a return of economic growth and deal flow. My fellow countrymen, the so-called sensible Dutch, on the other hand, have left the cleaning up of their banks’ loan books until later. But they do have the big advantage of much more creditor-friendly enforcement rules.’

What is truly remarkable, he said, is that ‘eight years after the beginning of the crisis, we are still talking about doing clean up for the banks and selling large NPL portfolios. At the same time, many market segments are taking off, with many people wary and looking over their shoulder for trouble. The market feels like that airplane already in the air, but the cleaning crew is busy and still on board. Now is the time to look ahead and take advantage of the opportunities, be it in clean up or new lending.’