Casualties, but no sales glut

US fund managers will broadly welcome dramatic events in Ireland, the Netherlands and Spain this past week as evidence that Europe is finally sorting itself out…but it is not evidence of a sudden wave of sales to come

This past week, not one but three European countries have taken steps to resolve huge messes left behind by domestic banks that overextended themselves through real estate lending in the run-up to the global financial crisis.

On Friday of last week, the Dutch government took dramatic action by nationalising SNS Reaal, which would have been fine as a going concern because its mainstream bank and insurance divisions were relatively stable and healthy. However, losses from its €9 billion of property loans threatened the whole group with imminent collapse and could have placed the entire Dutch financial system in serious and immediate danger.

On Monday, the Spanish government began to sell the first properties under the auspices of its newly created ‘El Banco Malo’, officially called the Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (SAREB). SAREB, which so far has had €36 billion of properly assets transferred to it by Spanish banks, put13,000 properties that Bankia had on its balance sheet on the block.

And yesterday, the Irish government decided to abruptly liquidate the nationalised Irish Bank Resolution Corporation (IBRC), formerly known as Anglo Irish Bank, which has €19 billion of commercial property loans. Anglo Irish was chief among Irish banks in terms of profligate property lending and subsequently nose-dived, requiring Ireland to take on €31 billion of punishing, long-term debt in the form of promisory notes from the European Central Bank to save it. The idea behind liquidating the IBRC is to swap those promisory notes and their pesky high interest rates with government bonds in order to lower the interest rate and spread payments over an even longer timeframe. KPMG has taken control of IBRC in order to wind up the portfolio, and any unsold assets will pass to the National Asset Management Agency (NAMA).

Broadly speaking, these separate events will be welcomed by US-based fund managers that have complained for a long time that European banks need to deal with their problems and have ‘a market clearing event’. To date, many have been appalled that there hasn’t been a mass fire sale of property assets as there was in the US in the early 1990s.

There still won’t be, notwithstanding events in the Netherlands, Spain and Ireland.

The reason is that Europe is operating with low interest rates and quantitative easing. The banks don’t have a problem with cash as such but with their balance sheets, which have in turn presented their governments with accounting problems. This is exactly what Royal Bank of Scotland’s head of non-core business Rory Cullinan explained to PERE last year when he suggested there wouldn’t be a flood of assets at fire sale prices.

Instead, it will be a long, slow grind. It might not be exciting, but it should lead to a steady or slightly increased flow of investment possibilities. Advisor Ernst & Young seemed to agree with that assessment this week. In a report released Monday on loan portfolio transactions in the UK and Ireland, it noted that there had not been a wave of transactions over the last 18 months. “It is clear that the commercial real estate non-performing loan market is in its infancy,” the report stated. “Taking into account the scale of the deleveraging issue and the fact that we expect most banks to continue to work out their loans 'in house' because loan sales require too much of a discount, we expect the total volume of loans traded to remain broadly at the same level in the near term.”

Most likely, smaller parcels of assets will be released by Europe’s banks over many years as part of a deliberate, incremental process. As such, loan sales in the region will not be a Las Vegas-style all-you-can-eat buffet, but a Greek mezze instead. Hold the Greek, please.