Banks will dispose of around €15bn in European commercial real estate loans this year through loan portfolio sales, forecasts PricewaterhouseCoopers, as both the geography of non-core assets and the concentration of deleveraging banks broadening.
PwC’s estimates, based on on-going direct dialogue with each of the de-leveraging banks, reflects a considerable 20% increase on last year’s €12.5bn in European CRE loan portfolio sales.
These figures are comprised only of loan portfolio sales of underlying European CRE and do not include European banks’ non-European de-leveraging or residential loan sales.
This year’s loan portfolio sales – including performing sub and non-performing – will likely again be dominated in descending order by loan portfolios in UK, followed by Ireland, with Germany and Spain evenly matched for third place, according to PwC’s Richard Thompson.
For 2013, PwC’s estimated €15bn in European CRE deleveraging through loan portfolios breaks down as follows: around €5bn in the UK, followed by €4bn in Ireland and a combined €6bn for the rest of Europe which will predominantly be comprised of a near even split of Germany and Spain.
These estimates are also in line with KPMG’s expectations for 2013.
Last year’s UK CRE loan deleveraging was led by Lloyds Banking Group, which traded projects Harrogate and Forth with Oaktree Capital Management and the Kennedy Wilson and Deutsche Bank joint venture, respectively, offloading a nominal balance of £1.4bn.
Among the UK’s largest activity was also NAMA’s trade of the £216m Project Saturn to Morgan Stanley Real Estate Investing and NAMA’s £40m loan sale to Development Securities last October.
This year is expected to see further UK loan sale deleveraging from banks – both in bundled portfolio and single loan sales, such as Lloyds’ two single loan sales last month: Cerberus's acquisition of the £150m Tritax loan for £85m and Canyon Capital Advisors’ purchase of the €140m Moran Hotel Group loan for circa €42m.
Lloyds Banking Group and IBRC, the rebranded Anglo Irish Bank, are considered the likely leading sellers.
However, there is an outside chance that Commerzbank could sell-off part of the £5bn performing UK loan book for Hypothekenbank Frankfurt, the rebranded Eurohypo bad bank, having appointed Barclays Capital in November to determine where discounted pricing would come in from acquirers on a legacy performing loan book.
Such a sale is far from the most probable outcome, but if it came to pass, PwC’s €5bn forecast for UK loan sales would be surpassed in one transaction.
Also coming down the tracks, is Lloyds' fourth UK non-performing loan portfolio, known as the £500m Project Wagner, for which details are still to emerge.
RBS has long repeated post the close of Project Isobel that it would not seek to run down its non-core real estate loan book through loan portfolio sales because the process is capital erosive, driven by a pricing mismatch due to confliction cost of capital between the buying investors and selling banks.
However, 2013 could see some off-market individual loan sales by RBS, CoStar News understands.
“One of the key issues for completing transactions is matching the bid-ask price,” explained PwC’s Thompson. “It is important to remember that even if both the buyer and the seller have exactly the same expectations as to future cash returns from a portfolio their expectations on price may differ as a result of return requirements.
“The cost of capital used by a vending bank may well be lower than the required return requirements of private equity and hedge fund purchasers and this difference can lead to large price differences, particularly in the case of longer dated assets or performing assets.”
Natale Giostra, head of UK & EMEA debt advisory at CBRE, said: “Pricing is a particularly key factor, and in 2012, we saw several transactions fall by the wayside due to the complexities of being able to accurately value large and intricate loan portfolios, where there are sometimes large levels of distress.”
Last year’s highest profile NPL failure was AIB’s Project Pivot, the UK NPL, which shrunk in size from £397m, to £383m, to just £100m. AIB changed the composition of the portfolio, and stipulated a floor price from finalist bidders, after the most attractive loans were removed from the pool.
Bidders ignored AIB’s floor price request, underbid, and Pivot collapsed for a second time within a couple of weeks last autumn.
PwC’s estimated €4bn in Irish CRE loan portfolio sales includes a hangover of two Lloyds Banking Group loan portfolios which were agreed in December: the circa €1.8bn (£1.46bn) Project Lane which will trade to Apollo Global Management’s Risali Limited for €184m (£149m), and the €380m (£308.3m) Project Pittsbourgh which is to close with CarVal Investors for €95m (£77m).
This aggregate €2.18bn of nominal disposals, due to close in the coming weeks, will already take Ireland past the half-way mark, while IBRC and NAMA are both expected to begin offloading Irish loan portfolios this year, with the latter currently in the process of assembling a €230m-sized portfolio, CoStar News understands.
RBS still had as much as £6.2bn in Irish commercial property loans at the end of the third quarter last year but single loan sales will likely be the exception to the rule, while for NAMA it remains political sensitive for the bad bank to sell domestic government owned assets at steep discounts.
The single largest Irish NPL sale last year was Allied Irish Bank’s €660m Project Kildare sale to Lone Star, which drew criticism in Ireland for the loss of long term economic value in the 400-strong underlying largely Dublin property.
AIB, which is 99.8% owned by Ireland’s government, has been criticised for selling the loan portfolio at a circa 60% discount which effectively transferred the long term economic value (LTEV) of the portfolio to Lone Star.
Unless there is a material change in the political temperature around Irish asset sales, NAMA loan portfolio sales will be careful, small and ultimately slowly disentangled from the bad bank’s circa €70bn loan book.
Germany and Spain
The first German NPL, Lloyds’ €850m Project Chamonix, is already down to a final four-strong shortlist of Cerberus, Apollo, Goldman Sachs Special Situations Fund and MSREF, which CoStar News revealed yesterday.
For German banks themselves, the hold and work-out strategy – also dubbed “kicking the can down the road” – is expected to endure, although they are likely to be disposals by the German band banks of non-core market exposures.
Hypothekenbank Frankfurt, the rebranded Eurohypo bad bank, is a case in point with the attempted sell-off of two Spanish NPLs: the €400m Project Copernicus and the ill-fated sale of the €370m Project Sol, which is secured by six shopping malls and two land bank portfolios.
Project Sol’s debt is comprised of loans partially syndicated and all in default which makes the process of attracting investors even harder because theu reduce control rights over the underlying collateral. Commerzbank may try and resurrect the sale of Project Sol this year.
In December, Spanish news service El Confidencial reported that Lone Star, Cerberus, Orion Capital and Varde were vying for a €2bn Spanish non-performing real estate loan portfolio.
2013 and beyond
Set against an estimated €2.5trn in outstanding total European real estate debt, PwC’s forecasted €12.5bn is just a fraction, but a pipeline of CRE loan portfolio sales is expected to endure for the next five years.
Thompson, who heads PwC’s European portfolio advisory group, added: “In 2012, we saw a large number of different banks bringing their portfolios to market, trying to capitalise on first-mover advantage and recognising that basic laws of supply and demand mean that the higher the deal volumes in future, the lower the price.
“This issue of price will clearly remain a key challenge in future for sellers in countries that are already developing as more mature markets.”
“We are also seeing greater transparency among many banks as to the scale of their non- core portfolios. Looking forward, PwC’s own pipeline of potential transactions is the longest we’ve ever seen and we believe there will be an active market for at least the next five years, and probably a lot longer.”