As stress levels rise for buyers of western European property given the intense competition, lower yields and the speed sellers are demanding they move on deals, some higher returning funds are looking at Eastern Europe where there is more air to breathe.
That is why this week's deal for a €495 million portfolio of non-performing and sub-performing real estate loans in Romania is so telling.
Bayside Capital, the credit affiliate of HIG Capital, together with AnaCap Financial Partners and Deutsche Bank acquired 3,500 residential and commercial loans from the Romanian subsidiary of Austria's Volksbank which issued copious amounts of loans to local entities to buy property in the run up to the global financial crisis.
Obviously, the trade-off for less competition and potentially higher yields in the Eastern European bloc is that it is harder and riskier to operate there due to less well known court procedures, tax intricacies, regulatory issues and servicing capabilities in the component countries.
Nevertheless, so long as one uses local expertise and builds in conservative growth assumptions amid the 'positive fundamentals' when putting forward final bids, some investors are once again feeling they can get comfortable with deals such as the Romanian portfolio.
Because almost all attention among real estate investors and the press has been on western and southern European countries, such as Spain and Italy recently, there has been little focus or analysis of the CEE region as an area for firms to fish in. Those looking like it that way.
Yet the main driver behind eastern deals is the same as for western deals; The Asset Quality Review (AQR) and associated 'stress tests' for European banks under the jurisdiction of the European Central Bank is forcing these financial institutions to sell assets off. At the same time, low interest rates and economies moving back to some growth in Eastern Europe is attracting foreign funds to come in.
Deal volume data is beginning to reflect this. Apart from in Russian where H1 2014 volume has crashed 60 percent compared to 2013, the CEE bloc saw a 15 percent rise in real estate sale deals according to CBRE, while Cushman & Wakefield also recently reported €2 billion was transacted in the H1 in Poland, the Czech Republic, Slovakia, Hungary and Romania, up 12 percent on the previous year.
Sharp eyed investors and advisors suggest to PERE that some non real estate assets such as consumer loans and SME assets put up for sale in the region have not traded. An example exists of a €2 billion CEE portfolio where only assets in the stronger counties including Poland sold but Balkans assets were left on the shelf.
Yet this is patently an early stage in the unwinding of CEE assets and it is really just beginning to unfold as a story. Croatian, Polish and Slovakian real estate assets were sold as part of Irish Bank Resolution Corporation (IBRC) trades during the last 12 months, and insiders say sales from UniCredit of Italy are likely soon. Indeed, funds need to be fishing around foreign banks – Italian, Austrian, French, German and Greek – for sales of CEE assets, because they have all been active in making real estate loans in the region and all will be adversely affected by the AQR. They are now looking to exit portfolios and even whole banks, though a lack of buyers for whole banks makes asset sales more likely.
In addition to pressure under the AQR, local banks have equity and fundraising limitations so there is a need to sell. To that end, some of the banks are already setting up good bank/bad bank structures – Slovenia is one case in point. In Bulgaria, one can also expect opportunities given its recent banking system distress.
It all points to activity ramping up further in CEE. For the brave and those with local connectivity, investors will search for better yields in the east while prices and intense competition continues to exist in the west.