European CRE loan sales hit record €80b

Over a dozen megadeals have helped push Europe’s commercial real estate loan sales to a historic record of over €80.6 bn in 2014, according to figures by agent Cushman & Wakefield. Another €22 bn of debt transactions are in the works.

The figure - about 2.5 times the amount reported for 2013 (€30 bn) - was driven by a strong rise in large-ticket transactions, with the market seeing 16 deals over €1 bn in the past 12 months. ‘Strong investor appetite for loans has incentivised banks to put big portfolios on the market,’ explained Federico Montero, head of loan sales and partner at C&W EMEA Corporate Finance in London.

The month of December was no exception, with Cerberus taking a huge bite of UK and Irish property loans for as much as €2.9 bn. Betting on the recovery of the Irish property market, the New York-based private equity firm agreed to acquire Ulster Bank's Aran £4.8 bn loan portfolio from the RBS Group for £1.1 bn, or a discount of 77%. In addition, Cerberus also bought a £1.2 bn parcel of higher risk UK commercial real estate loans from National Australia Bank.

Cerberus is one of a long list of US private equity firms actively looking for bargains in Europe. According to C&W data, private equity investors from Northern America of the likes of Blackstone and Lone Star were behind 77% of debt transactions last year, and are expected to remain at the forefront of activity going forward.

ASSET MANAGEMENT AGENCIES EMERGE AS SELLERS
On the seller side, Ireland’s IBRC and NAMA were by far the biggest vendors by volume in 2014, with €18.7 bn and €10.1 bn of sales respectively, or over a third of activity. IBRC will no longer be active, having launched its final sale last year (the €650 mln Project Pearl which has yet to close), but its place will be taken by other asset management agencies (AMAs) which are gradually emerging across Europe.

Germany’s bad banks – FMS and EAA – are expected to be increasingly active this year, with FMS in particular recently launching the sale of its first European CRE loan portfolio. The lender has mandated C&W’s Corporate Finance team to sell its entire remaining Spanish and Portuguese commercial real estate loan books, with a combined face value of €755 mln.

The Project Gaudi package comprises 18 loans secured by 15 assets including the €400 mln Hotel Arts in Barcelona, a five-star hotel in Cascais, five shopping centres, four business parks in Madrid and Barcelona, a portfolio of 17 self-storage assets; and a number of residential and industrial development sites. Cerberus, Oaktree and Orion have reportedly bid for the portfolio, with offers at around 40% of face value. According to FMS’s 2013 annual report, the bad bank has a €13.4 bn CRE book, including €5.8 bn, or 43.3%, of German assets and €1.7 bn, or 12.6% of UK properties.

Spain’s Sareb is also expected to accelerate the pace of disposals in the next months. In December, the state-owned lender sold over €1 bn of assets through a number of separate portfolio transactions. It divested the Aneto portfolio of 39 loans with a nominal value of €237 mln as well as the Corona package of office buildings to Blackstone; one of two Agatha sub-portfolios comprising 38 performing loans with a par value of €194 mln as well as the Olivia portfolio of seven performing loans with a face value of €140 mln to UK-based alternative lender Hayfin Capital Management; the second Agatha sub-pool consisting of 10 housing developments in Madrid with a par value of €65 mln to D.E. Shaw; the €133 mln nominally-valued Project Meridian secured by 26 hotel properties in Spain, to Cerberus Capital Management while the €234 mln nominally-valued Kaplan sub-package is still in the process of being divested to Deutsche Bank.

SPAIN SET TO LEAD IN DIVESTMENT PROCESS IN 2015
According to C&W’s figures, nearly 40% of the total gross non-core real estate assets held by AMAs relates to Spain, which last year was home to the two largest continental European loan sales, namely the disposal of Catalunya Bank’s €6.4 bn residential loan portfolio to Blackstone and Commerzbank's €4.4 bn Project Octopus sale to a joint venture of Lone Star and JP Morgan. The country is still a long way from completing its divestment process, with over €100 bn of gross non-core assets on its balance sheets, more than any other European state.

Activity is also expected to pick up in the Netherlands. Following the nationalisation of SNS Reaal’s troubled property finance division, the Dutch state has transferred €4.8 bn of predominantly Dutch loans to the new Propertize bad bank, and sales are expected to unfold quickly. The country has also recently seen the €430 mln discounted sale by local property financier FGH Bank of a Dutch mixed-use property portfolio last valued at €700 mln. US private equity group Kildare Real Estate Partners in December took control of the package by acquiring the related debt at a 39% discount in the country’s largest debt deal of 2014.

New European AMAs such as Propertize are expected to continue to emerge as banks strive to deal with the rise in non-core assets following completion in October of the Asset Quality Reviews (AQRs). Particularly in Italy, where lenders have been reluctant to recognise their problem assets, market experts expect mounting pressure and a possible government intervention in the coming months by way of a newly-created AMA.

Portugal, which has recently bailed out a failing bank, Banco Espirito Santo, has also decided to break up the troubled lender into a good bank and bad bank. ‘The clear success of the Irish and Spanish AMAs is prompting other European governments to replicate this formula and set up bad banks to work out their non-core exposures,’ commented Montero of C&W EMEA Corporate Finance.

COMPETITION FOR DEALS ON THE RISE
There is little doubt that investor interest will extend to these new geographies as well. Competition for deals has been steadily on the rise with the total number of investors in CRE loans doubling between 2012 and 2014. Similarly, the source of capital is broadening. In particular, publicly listed real estate companies are becoming more active with the likes of Hibernia REIT and Hispania, two Spanish REITs, completing a number of significant acquisitions. The high level of competition is gradually driving down returns, according to C&W. ‘Investors need to be more aggressive with their pricing and returns need to be adjusted accordingly,’ noted Montero. Targeted returns have halved over the past few years from a 20% Internal Rate of Return in 2009 to low teens on average at present.

In the UK and Ireland, where activity has been most hectic as the countries were home to 65% of deals in 2014, returns have already reached single digit levels. Germany, which is expected to see a big jump of activity in 2015, is showing returns in the low teens while in southern Europe returns are currently between the low and the mid teens.

Looking forward to the next 12 months, C&W Corporate Finance is expecting activity to remain strong, with the current forecast for the full year 2015 put at €60-70 bn. In total, the broker is currently tracking €21.7 bn in live sales across Europe, according to Montero. Undoubtedly, the largest portfolio on the block is Germany’s WestImmo, whose sale has been resurrected by bad bank EAA after a failed attempt in 2011. The bank owns a €10.4 bn loan book. Meanwhile, Commerzbank is believed to be considering the sale of two further major European CRE loan portfolios with a total unpaid value of almost €4 bn while Italian lender Unicredit is closing in on the sale of €3.5 bn of bad loans to US group Fortress for a price of €350 mln. The US asset manager is also on the verge of signing a preliminary agreement to acquire the Italian bank’s non-performing loan platform, known as Unicredit Credit Management Bank (UCCMB). Sources say the parties are still negotiating the price of the deal, which is expected to range between €200 and €400 mln depending on the number of UCCMB employees Fortress will agree to take over as part of the transaction.

TOP 10 LIVE CRE LOAN & REO SALES Source: C&W

VENDOR PROJECT TYPE COUNTRY FACE VALUE
EAA Westimmo CRE loans Germany €10,400m
Permanent TSB Project Leinster CRE loans Ireland €1,000m
Caixabank Bridge Portfolio CRE loans Spain €800m
FMS Project Gaudi CRE loans Iberia €755m
IBRC Project Pearl Resi loans Ireland €656m
Spanish Bank Project Toro CRE loans Spain €601m
Bank of Cyprus Project Ariadne CRE loans Romania €545m
Banco Sabadell Project Triton CRE loans Spain €500m
Permanent TSB Project Munster CRE loans Ireland €500m
Dunfermerline BS CRE Loans CRE loans UK €438m