Editor’s Choice: Trapped elephant starts moving through the snake

Tristan’s CEO Ric Lewis can always be relied on to provide pithy statements and colourful analogies.

In an interview with PropertyEU last week, Lewis compared the flow of distressed loans and assets in the European real estate market to ‘a huge elephant trapped in a snake’. While the amount of capital to take out the trapped opportunity is underwhelming, the elephant is only just starting to emerge from the snake now, he said. ‘The size of the potential assets - the loans that need to be refinanced and the assets that are on banks’ balance sheets – is huge compared to the amount of capital. But it hasn’t all surfaced yet in the marketplace and if you look at what’s out there plus the capital that’s out, I think there is a relative equilibrium. It’s still a good buyers' market.’

Many fund managers would say it was about time that the elephant started moving. After all, we are now into the sixth year since the outbreak of the global financial crisis. But thanks to a little bit of price appreciation, the market has finally gotten closer to the clearing prices of the banks and a growing number are finding they can now afford to take more things off their balance sheets. As a semblance of normality returns to the market, banks are moving more of their legacy loans and oiling the real estate machine of acquisition, repair and renewal.

A clear signal that the machine is working again emerged this week with the report that Commerzbank has picked a preferred bidder for its €4.4 bn Spanish commercial property loan portfolio. According to well-informed market sources, a joint venture between JP Morgan and Lone Star has been selected as the winning buyer of the book, which is split roughly equally between performing and non-performing loans. JP Morgan is expected to take control of the performing loans whilst Lone Star will take on the sub and non-performing loans.

The sale, codenamed Project Octopus, is expected to be one of the largest Continental European loan disposals this year. Indeed, it is one of the biggest loan sales in this cycle, comparable in value to Commerzbank’s UK loan book which it sold in 2012 to Wells Fargo and Lone Star.

Commerzbank is not the only German bank clearing out its legacy loans. UK trade publication Property Week reported this week that Deutsche Bank is selling the remaining assets in its €1 bn Mars portfolio to UK-based Kildare Partners fund. The package reportedly features 26 office buildings and Le Méridien hotels in Munich and Frankfurt, and includes outstanding debt. Another big beast is also returning to the market: on Thursday Germany's bad bank EEA announced it is having another bash at selling property lender Westimmo following an aborted disposal two years ago to private equity group Apollo.

Americans dominate distressed landscape
So far the American players have dominated the distressed landscape in Europe. Indeed, when a bank on this side of the Atlantic signals it’s time to clear out its legacy loans, Kennedy Wilson is never far away. This week, the London-listed unit of the Californian investor added a £93.5 mln (€115 mln) portfolio of non-performing loans from Bank of Scotland to its European nest. The loans are secured against five assets in England from the Project Avon portfolio.

The real estate financing market is also seeing new birds feeding on the ongoing imbalances in Europe with partnerships between institutional investors and traditional lenders continuing to gain ground. Earlier this week, German bank Helaba announced it is expanding its real estate debt syndication activities in Europe through an alliance with multi-asset investment house, Standard Life Investments. Having established a debt capital markets platform in London last year, Helaba has now arranged and underwritten a £143 mln (€170 mln) loan facility with Standard Life Investments as syndication partner. The deal marks Standard Life Investments' first debt investment since launching its commercial real estate debt platform in 2013.

A day later, another German property lender Deutsche Hypo announced the creation of a new debt platform together with its German regional peer Nord/LB. The partnership is the second to be launched by property lender Deutsche Hypo in the recent past. In late 2013, the bank formed a joint venture with pension fund Bayerische Versorgungskammer (BVK) to finance commercial real estate in Germany.
'Banks are changing: the classical function as a pure lender is losing significance. Rather, it is important that banks acquire more capital and structure the financing in order to be successful,' commented Andreas Pohl, CEO of Deutsche Hypo.

Interestingly, adviser DTZ believes the increased competition in Europe’s core lending markets is leading to a funding surplus which should be ‘more than sufficient’ to plug Europe’s net debt funding gap. Hans Vrensen, global head of research at DTZ and co-author of the firm’s latest Debt Funding Gap report, claims surplus lending capacity is as much as €45 bn in the core European markets of the UK, France and Germany. In fact, the surplus is more than sufficient to plug the remaining €36 bn net gap and he now expects this surplus will be redirected to markets with remaining gaps like Spain and Italy. But, he warned, it might take longer than the next two years to re-direct the surplus to where it is most needed.

As Tristan’s Lewis poignantly pointed out, the elephant is just starting to emerge from the snake: there’s still a long road to travel before we’re through the aftermath of the crisis.

Judi Seebus
Editor in chief

Related articles
Tristan sees ‘good buyers’ market despite some crowded places
Helaba expands European debt syndication business with Standard Life
Commerzbank picks buyer for Spanish loan package
Deutsche sells distressed €1b loan package to Kildare
Kennedy Wilson nabs €115m loan portfolio from Bank of Scotland
German bad bank ramps up efforts to sell WestImmo
Deutsche Hypo launches first debt fund
Europe’s real estate financing market 'at a crossroads'
Lending surplus sufficient to plug European funding gap - DTZ

Other headlines this week
CEE BRIEFING: Healthy 'cocktail' of debt and equity lubricates deal machine
ITALY BRIEFING: Tight lending hinders local investment
Westfield looks at CMBS loan for London mall: reports
Spain's Realia sells majority stake in SIIC de Paris

For more news from our daily newsletters, please go to our website and click on LAST 7 DAYS (ordered by date)