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EUROZONE: Thumb on the scale

Sometimes the most basic of questions come to the forefront, as indeed one has over recent weeks. Namely, is Europe going to see a deluge of attractive deals for opportunistic investors? Of all the opinions from investment managers and advisory firms, those from Apollo Global Management, Oaktree Capital Management, JPMorgan Asset Management, Cushman & Wakefield and Ernst & Young stand out for clarity.

Oaktree’s sage-like chairman, Howard Marks, said the investment flow in Europe continues to be moderate at best. The firm made a number of real estate investments in Europe last year, including its first major UK shopping center investment – the purchase of the Kingfisher Shopping Centre in the English town of Redditch for £130 million (€160 million, $210 million), but activity was less than expected. “We had hoped for a deluge, but European Central Bank actions and statements precluded that,” said Marks. “We have deal flow and, depending on the area, the country and the time, it ranges from a trickle to moderate.”

Apollo’s Marc Spilker has taken a ‘slightly more than before’ position. In an earnings call last month, the firm’s president said real estate was emerging as a “little bit more of an opportunity” than maybe it had thought one year ago in Europe. From his vantage point, there are certain parts of the market in Europe that have a greater ability to get financed today versus maybe six months or one year ago, which he believes will facilitate more transactions.
Indeed, Europe could be at a crossroads. Last year, there was a total of just under $15 billion of deals by opportunistic investors in Europe, according to JPMorgan Asset Management. The US bank noted that opportunistic deals accounted for 12 percent of all transactions last year, significantly above the average of 6 percent between 2007 and 2012. Joe Valente, head of property research and strategy in the bank’s real assets group, said 2013 might indeed present an “inflection point” to investors in the opportunistic sector, which has remained “unloved” as prime assets have recovered.

No one can foresee whether there will be a deluge, but certainly there are multiple reasons to suggest that more investment product could come to the market this year and next. JPMorgan said major banks had started the long road to recovery with improving levels of performance, allowing a few of the main operators to begin the process of writing down the value of assets on their balance sheet. Other reasons included a narrowing bid-ask spread, fear of further deterioration in value and, most importantly, that opportunistic transactions have increased significantly over the recent past. All in all, JPMorgan believes 2013 will be a “wonderful” period for opportunistic investment.
Two further studies have been produced recently, but they offered slightly contradictory predictions. In a report on loan portfolio sales in the UK and Ireland, Ernst & Young said that, while there hadn’t been the wave of transactions some market commentators had predicted, at least nine portfolios of nonperforming loans had come to the market with a principal balance of €8 billion over the last 18 months. It also noted that the loan sales market was still in its infancy and it expected banks to continue to use commercial real estate loans as a way to reduce their capital commitments.

Meanwhile, Cushman & Wakefield said the pace of loan sales would accelerate significantly in Europe over the next two years as banks looked to delever and focus on core markets. The top sellers so far have been based in the UK (28 percent), Spain, Germany and Ireland, but the property services firm said it was aware of sales being lined up in markets such as Portugal and Russia. Cushman & Wakefield also said it expected Spain’s new bad bank Sareb and Ireland’s National Asset Management Agency to accelerate sales.

Intelligence such as this cannot be ignored and certainly points to greater transactions. The argument seems to boil down to a sweeping theme. As banks stabilize, will they be able to sell portfolios or will their improved funding from quantitative easing lessen the reason to sell at discounts attractive to opportunistic investors?

Personally, I wouldn’t have thought there would be a deluge, but there will be more opportunistic deals to be done driven by the financial structures of legacy transactions. There will be some bulge-bracket deals, but the volume is likely to be bolstered on the smaller side – just right for the industry’s sharpshooters.

I think Howard Marks has it right: we are talking about moving from a trickle to moderate activity. Most banks will continue to work out their loans in-house where loan sales require too much of a discount. At the same time, there will be an increase in the number of smaller portfolio sales as banks look to widen the list of potential buyers to include institutions and specialist investors with less financial firepower that the Lone Stars and Blackstones of this world. Meanwhile, there will be a continuous flow of single disposals on a deal-by-deal basis.

The bigger question – perhaps for another time – is how opportunistic investors will fare with these assets, particularly as they look to exit them between now and 2020.