Readers of Cushman & Wakefield’s latest update on European real estate loan sales might be forgiven for thinking the market is dominated by a rare group of bankers with a penchant for cryptic names.
Readers of Cushman & Wakefield’s latest update on European real estate loan sales might be forgiven for thinking the market is dominated by a rare group of bankers with a penchant for cryptic names.
The report offers a comprehensive overview of loan sales over the first half of this year with Irish bad banks NAMA and IBRC, and Spain’s SAREB featuring prominently. Readers who can get beyond the somewhat daunting list of acronyms are rewarded with a long list of portfolios with esoteric names like Project Lake, Sky, Sun, Salt, Sand, Rock, Stone, Tree and Pebble.
Of the ‘live’ transactions that C&W is currently tracking, Project Spring seems somewhat misnamed now that autumn looms beyond this exceptionally warm north European summer, but Project Chestnut and Acorn have just the right resonance for the second half of this year. Project Magnum and Donau surely have sentimental appeal to readers of a certain age, but my personal favourite is Project Pamela which shares the name of a horse in my Australian youth.
The list of loan portfolios – both live and sold - is a must-read in itself, but the report is also richly larded with facts and figures about the marauders that have appeared on the European debt landscape in recent years. It will come as no surprise to those who have watched this space that the biggest prizes have so far gone to US players, and that Lone Star is by far the biggest buyer of commercial real estate loans in the first six months of this year.
The US investor accounted for almost €15 bn of acquisitions during H1 as overall volumes rose more than 600% compared to the year-earlier period. It was followed at some distance by US peers Cerberus (€6.2 bn), CarVal Investors (€3.3 bn), Blackstone (€2.2 bn) and Oaktree Capital (€2.1 bn).
BIG VOLUMES
The figures are big, but then so is Europe’s real estate debt mountain. Cushman & Wakefield’s Corporate Finance team estimates that European banks and asset management agencies have a gross exposure of €584 bn to non-core real estate which is subject to disposal or work-out strategies. And although total sales volume for the first half of this year was higher than expected at €40.9 bn and the full-year figure has now been raised to €60 bn, the expected sales figure for this year is still only 10% of the remaining burden.
In other words, the deleveraging process throughout Europe may have accelerated in the first six months of this year, but it is still far from over. And although the UK and Ireland were two of the most dominant markets in terms of deleveraging over the last three years, both still have significant non/core real estate exposure.
Nevertheless, southern Europe is now also grabbing headlines, in particular Spain, and more is to come from Italy, C&W has predicted. With €192 bn in gross non-core real estate exposure, Spain represents a key market for opportunistic investors and is set to have a record-breaking year in 2014.
Spain already took centre stage in the first half of this year with one major loan sale valued at €4.4 bn called Project Octopus featuring Lone Star and JP Morgan as buyers. And just today, it emerged that Blackstone is the buyer of a mammoth package of residential mortgages dubbed Project Hercules which Bank of Catalunya had put on the market. C&W Corporate Finance also expects there to be a wave of secondary sales in the mid-term including the non-performing pool of Project Octopus.
By contrast to their Spanish peers, Italian lenders have a relatively low exposure to non-core real estate, but the upcoming asset quality reviews (AQRs) are expected to put Italy in the spotlight as well. C&W expects the reclassification of loans will lead to a higher level of non-performing loans held on balance sheets, subsequently resulting in the development of clearer exit strategies and further disposals in order to meet capital requirements. With Italian lenders UniCredit and Intesa Sanpaolo already in discussions to set up a bad bank, investors will start to circle Italy in the coming months, the adviser predicted.
MEGA DEALS ARE POPULAR
As investors continue to chip away at Europe’s real estate debt mountain, the transactions are becoming increasingly large. In the first six months, C&W recorded eight closed mega deals with a face value over €1 bn – and it is currently tracking a further four. As Frank Nickel, partner and chairman of C&W’s Corporate Finance EMEA unit noted, US investors have raised an ‘enormous’ volume of capital targeting opportunistic European real estate. ‘Mega deals prove popular to these buyers since they offer a chance to gain large exposures to key assets and markets in one transaction, saving on both costs and times.’
As a consequence of these meda deals, the commercial real estate (CRE) loan and real estate owned (REO) sales market is larger than the real estate investment market in both Ireland and Spain. Nevertheless, C&W has signalled an increasing number of smaller deals under the radar of the larger firms and too large for the private investors, in the €50-100 mln range. Following the purchase of the mega deals, the adviser now anticipates that there will be plenty of secondary bite-size offerings as the private equity firms look to maximise their proceeds.
There can be no doubt that the US private equity firms will continue to dominate the big lot sizes. Indeed, after gaining a foothold in the Spanish market, they are now jockeying for positions in Italy where UniCredit and Banco Popolare have put their respective servicing platforms on the market. But Europe’s debt mountain is like a microcosm of Europe itself – it has something for everybody. A new set of competitors has already entered the market in both Ireland and Spain for the smaller lot sizes and this trend is set to persist.
Newly established Irish REITs and their Spanish equivalents – or SOCIMIs – are publicly traded real estate investment trusts which benefit from corporate income tax exemption if they meet certain criteria. This means that shareholders hold a tax neutral position between investing directly in property or in a REIT. Ireland’s Hibernia REIT has already purchased a €67 mln Ulster Bank loan while Spain’s Hispania Real acquired the 14 mln Guadalmina hotel mortgage loan earlier this year.
C&W Corporate Finance estimates that this new breed of investors has raised a total of €3.5 bn with €1.3 bn and €2.2 bn to invest in Ireland and Spain respectively. Their lower cost of capital allows them to be aggressive in their bidding, which in turn is putting pressure on the returns of private equity firms.
It is easy to wax lyrical about such a mine of information as C&W’s latest corporate finance publication, particularly when something so mundane as a debt portfolio assumes near-mythical status thanks to evocative names like Project Hercules and Avon. But the key conclusion of the report does warrant enthusiasm: Europe’s mammoth debt mountain is growing smaller while the number of investors chipping away at its different inclines is increasing and diversifying. There is still plenty of work to be done, but the accelerated progress made so far this year is encouraging.
Judi Seebus
Editor in chief
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