Morgan Stanley today published a paper which at once showed why the opportunity in Europe for non-traditional real estate lending is so large and also how buyers of bank-owned real estate are coming into their element.
The Wall Street bank said in a detailed paper called “Banks Deleveraging and Real Estate” that it expected as much as €600 billion of reduction in commercial real estate lending in Europe by traditional banks and a rise in lending spreads.
At the same time, it estimated that banks were 20 to 25 percent through their commercial real estate deleveraging – a faster pace than it had expected. The bank said the deleveraging had occurred in the last 18 months through a mix of sales accounting for 20 percent, repayments accounting for 55 percent, with asset repossessions especially in Spain and some write downs representing the remaining 25 percent.
The bank also said that it “remained concerned” that the ‘easier part’ of the deleveraging had been done and it was therefore watching for signs of slow-down from here as some banks “have indeed mentioned that the pace of reduction seen so far may not be maintained”. However, one area where it expects acceleration is Spain.
Indeed, a bad bank is being set up to warehouse and work through up to €90 billion of real estate-related assets to be transferred to a new company by banks and cajas. Morgan Stanley said it was watching Spain, where is expected faster asset sales from next year once asset valuations were fully adjusted. Santander, for one, has been accelerating its deleveraging plan, it noted.
It also picked two public companies that it saw as best placed to take advantage of the great deleveraging – The Blackstone Group and Oaktree Capital Management.
“We see Blackstone as almost uniquely well placed to benefit from the dislocation in the real estate space globally, given the significant fire power at its disposal. In the equity space, few players can compete for scale deals other than as part of a syndicate. We also see significant opportunity for Oaktree given $5.3 billion of real estate AUM, $200 million of dry powder plus an ability to make large real estate investments from its $28 billion AUM in distressed funds.”
Against this backdrop Morgan Stanley has seen during the past six months increased investor interest in debt funds, increased bond issuance, a gradual step-up in lending by insurers and sovereign wealth funds, which continue to buy in Europe, and a higher likelihood of REITS issuing equity to raise money on the capital markets. “The rising interest in debt funds is particularly vital, we believe, as these funds target a broad asset quality spectrum,” said the report. In its estimation, there is up to €200 billion becoming available to replace traditional bank debt from alternative sources mainly from bond issuance, insurers lending, sovereign wealth funds and private equity.
“Investor interest in debt funds is rising rapidly, with a threefold increase in the number of institutions that aim to allocate to debt. In addition, sovereign wealth funds from all over the world continue buying assets in Europe with several transactions in recent weeks. We are also seeing increasing efforts from insurers to lend to commercial real estate, a rapid uptick in real estate bond issuance (€6 billion issuance year to date, more than double the yearly average issuance volumes for the last decade). Lastly, we think it is important to flag that the 20 percent re-rating of quoted property stocks year to date suggests many listed players are now better positioned to issue equity,” said the report.
Going back to the banks it said: “Banks with large exposure have been able to reduce loans fast and we have been especially surprised by the progress made by the three banks with meaningful restructuring plans, Lloyds, RBS and Commerzbank. However, the fast deleveraging has taken its toll on earnings (especially in the non-core divisions) and they will likely remain under pressure.”