E&Y: Europe’s €1 trillion NPL market to receive greater attention

Institutional investors could be poised to make greater inroads into Europe’s commercial real estate non-performing loans market, according to a report published today by professional services giant Ernst & Young.

In its Flocking to Europe: Ernst & Young 2013 non-performing loan report E&Y suggested the region is emerging as an NPL market in its own right with an estimated €1 trillion of NPLs currently on the balance sheets of its banks.

The firm said that institutional investors were expressing a greater appetite to diversify their exposure to this type of real estate debt from North America, widely regarded as the largest NPL market.

E&Y’s prediction stems partly from a workshop hosted by the firm earlier this year. At this workshop, the firm polled industry participants on their outlook for the NPL market in Europe in 2013. About 75 percent expected deal flow to increase in the year and 85 percent said they were in “buying mode”. In terms of most active NPL markets, 66 percent felt UK would be the most active, 22 percent said Spain would be and 11 percent pointed to Ireland.

E&Y also polled real estate investors, two-thirds of which hailed from North America. From this survey, the firm found that about 33 percent regarded Europe to be their primary focus over the coming 12 months. Within their European focus, Germany, the UK, Ireland and Spain were expected to be their prime hunting grounds. More than half of those polled predicted Europe would remain a prime market for NPL investment for between three and four years at least.

Daniel Mair, a partner at Ernst & Young, said: “NPLs collateralized by commercial properties in Germany, the UK, Ireland and Spain are currently attracting the greatest interest from investors.  German and UK banks have already experienced a fair amount of distress but clearly investors anticipate more product is waiting in the wings and these remain highly popular investment markets.”

Part of the story for investors taking European NPL strategies more seriously relates to less activity in North America than has been predicted. One reason for that is the number of problem banks in the US have declined. E&Y said the number of banks on the Federal Deposit Insurance Corporation’s “problem list” declined between Q4 2011 and Q4 2012 from 813 banks to 615 banks – their total assets declining $233 billion from $319 billion.

“The US market has not reached the sale volumes expected by investors and with banks continuing to recover, opportunities for investors become more limited as time moves on.  Yet, a substantial amount of NPLs remain on their books,” said Christopher Seyfarth, another partner at E&Y.

He said:  “This year’s survey indicates an increasing appetite among investors on both sides of the Atlantic for European NPL product as they look to both diversify their investments and access potentially higher returns in a nascent market.”