FEATURE: Rise of the loan sales market

Europe is experiencing the beginnings of a loan sales market. According to two new reports, sales of commercial real estate loan portfolios in Continental Europe are expected to see substantial growth in 2013, although loan sales in the UK and Ireland are anticipated to carry on much as they did last year.

According to Ernst & Young’s Loan Portfolio Transaction Markets: United Kingdom and Ireland Update, the global financial services firm has seen “the beginnings of a nonperforming commercial real estate loan market within the UK and Ireland” over the last 18 months. In these markets, the processes for the nonperforming loan portfolios traded to date have tended to follow a two-stage approach, with a large number of parties involved in the first stage often cut down to three or four bidders for the second stage. 

In the near term, Ernst & Young anticipates the total volume of loans traded to remain roughly at the same level, given the scale of the deleveraging issue and the fact that most banks are expected to working out their loans in-house. This volume is likely to be achieved by an increase in smaller loan portfolio sales coming to market as banks look to widen the list of potential buyers to institutions and specialist investors with less financial firepower. 

Michael Lindsay, head of corporate finance at Cushman & Wakefield, contends something similar in his firm’s recent research on commercial loan sales in Europe. “While large loan sales of €500 million-plus are still expected to hit the market, there is a wall of capital available – much of it from investors – for smaller transactions in the €200 million to €500 million range,” he says. “Banks and legacy entities should consider tapping into this liquidity through appropriate scaling and composition for their planned sales. Selling into a deeper market should help banks maximize recoveries.”

Indeed, while Ernst & Young believes that loan sales volume will remain roughly the same in the near term, Cushman & Wakefield predicts that many European banks are poised to accelerate real estate loan sales activity this year. The firm’s latest research notes that some 33 completed loan sales transactions totaling €21.7 billion were recorded over the past 12 months, up a whopping 146 percent on 2011. Because of the build-up of activity among European banks, Cushman & Wakefield predicts that the market will see more than €25 billion of real estate loan portfolio sales in the coming year. 

“2013 is going to be a very active year in the commercial real estate loan sales sector, with the volume of transactions increasing considerably,” says Lindsay. He asserts this because his firm’s research suggests a trend towards larger portfolio sales. 

Of the €21.7 billion of loan sales in 2012, roughly half — €10.6 billion — were secured against commercial real estate, while €4.13 billion and €4.10 billion were secured against mixed-use and residential loans, respectively. In addition, the average transaction size of loan sales saw a slight increase in 2012, rising to €658 million from €549 million since 2011.

In terms of volume, more than 90 percent of the transactions in 2012 occurred in just four countries—the UK, Ireland, Germany and Spain. The UK alone accounted for 28 percent of the closed transactions, followed by Spain (26 percent), Germany (21 percent) and Ireland (18 percent). 

In particular, the UK and Ireland saw a substantial amount of activity in the nonperforming real estate loan space. For example, Lloyds Banking Group sold Project Forth, a portfolio of UK real estate loans with an unpaid balance of €908 million, to a joint venture between Deutsche Bank and Kennedy Wilson at a 50 percent discount, and Allied Irish Bank sold Project Kildare, a portfolio of Irish real estate loans with an outstanding balance of €650 million, to Lone Star Funds at a discount of 60 percent. 

All told, Lloyds offloaded more than €6 billion in commercial real estate loans during 2012. Cushman & Wakefield anticipates that this loan sales activity will spread throughout the rest of Europe as banks attempt to deleverage further in non-domestic domains and focus on their core markets, where they have greater knowledge and a higher head count. 

For example, while Ireland’s National Asset Management Agency (NAMA) was less active than anticipated in 2012, it is expected to accelerate its deleveraging plans this year. Indeed, NAMA already has completed one transaction this year – the sale of an €85 million junior note within a €270 million securitization of mainly Dublin offices and retail assets to Northwood Investors – and recently announced plans to sell two more portfolios worth more than €1 billion. 

In addition, since several private equity real estate firms have been vying to buy portfolios of troubled commercial real estate mortgages, Cushman & Wakefield expects that more players will look to set up offices to take advantage of the opportunities available.

Regardless of just how large the market in Europe will be in 2013, both global services firms agree that the commercial real estate loan sales market is here to stay. “We expect banks across Europe to continue to use loan sales as a way to reduce their capital commitment to this sector,” Ernst & Young’s report states.

Federico Montero, a partner in Cushman & Wakefield’s corporate finance team, says: “We believe other estimates of 2013 volumes to be understating the potential of the market. With evidence of more than €12 billion of live and planned transactions, we expect European real estate loan sales in excess of €25 billion during 2013.”