EXPO 2014: PE firms buy 76% of Euro deals

Private capital has taken center stage in acquiring European commercial real estate loans and real estate owned for sale in Europe, with 75 percent of such sales going to private equity firms.

Research out today from Cushman & Wakefield also suggests that the scale of opportunity is massive in terms of buying from European governmental asset management agencies in particular, as they have so far sold €96.7 billion yet still have some €264 billion of gross non-core real estate left to offload. Indeed, that represents 45 percent of the total exposure held by all European financial entities.

Unsurprisingly, therefore, Cushman & Wakefield said asset management agencies – or so called ‘bad banks’ – will be the “key vendors” for the next 10 years. It cited Spain’s Sareb as providing an anticipated 40 percent of the total non-core real estate assets to be sold.

Indeed, Sareb has the most non-core real estate exposure left of all of Europe’s bad banks, estimated at €107 billion. Next is the UK’s Asset Resolution Limited (UKAR) with €70 billion, then Ireland’s National Asset Management Agency (NAMA) with € 57.2 billion, Germany’s Erste Abwicklungsanstalt (EAA) with €10.4 billion and the same country’s FMS-Wertmanagement (FMS) with €9.7 billion, followed by The Netherlands’ Propertize with €7.4 billion. Austria, Slovenia and Portugal also have bad banks, and Cushman & Wakefield said others may be created following the completion of Europe’s Asset Quality Reviews (AQRs) this month. Of the non-core assets still held by bad banks, 51 percent are residential collateral and a further 31 percent is commercial real estate.

Turning to purchases to date, €14.5 billion closed in the third quarter, bringing this year’s cumulative tally to some €54.9 billion – a 200 percent rise on figures for the first three quarters of 2013. Following on from the second quarter, activity remained focused on Southern Europe, with Spain accounting for 54 percent of activity in the third quarter. Noteworthy trades included Project Hercules, the €6.4 billion Spanish residential loan portfolio bought by The Blackstone Group from Catalunya Banc.

At the same time, an interesting dynamic is emerging as “secondary sales” start to take place, meaning acquirers of mega-deals are busy bringing smaller repackaged portfolios to the market to capitalize on investor demand. A case in point is AXA Real Estate Investment Managers buying a €800 million slice of the former Project Octopus from JPMorgan and Lone Star Funds’ sale of Project Woodstock to Oaktree Capital Management, which involved former Eurohypo UK assets.

Another notable trend from the third quarter is the number of opportunities in markets that previously have experienced very limited or, in some cases, no activity whatsoever, Cushman & Wakefield noted. This includes the likes of Denmark, Austria and Romania, suggesting that opportunities are arising further afield. These relatively unknown markets are attracting an increasing amount of global capital, such as European investment banks and US private equity firms, rather than being dominated by local players as seen in previous years. Despite growing interest in CEE and Greece, some investors will be skeptical in investing in locations where more challenging legal systems exist, the firm said.

On the big question of who is really buying assets, it is private equity firms that have been by far the most active buyers, accounting for 76 percent of all closed transactions. Since January 2013, PE firms have invested almost twice the amount that has been transacted by every other capital sector. 2014 has seen the likes of Lone Star, Cerberus Capital Management and The Blackstone Group dominate the headlines.
As long as the pipeline of distressed debt opportunities continues to grow, there is a strong likelihood that PE firms will remain the key players in the NPL landscape due to the size of the deals and the risks inherent in these non-performing assets, making the market inaccessible to many investors, Cushman & Wakefield explained.

That being said, competition for deals is increasing, with the total number of investors making CRE loan and REO acquisitions doubling between 2012 and 2014. Similarly, the source of capital is broadening. In particular, publicly listed real estate companies are becoming more active within the sector, with the likes of Hibernia REIT and Hispania completing a number of significant acquisitions.