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European real estate loan sale market to hit €40bn in 2014

As real estate loan sales from European asset management agencies gather momentum, Cushman & Wakefield’s Corporate Finance team forecasts more than €40 billion of transactions in 2014; a 32% increase on 2013’s total.

The figure, released as part of the team’s latest research report, European Real Estate Loan Sales Market 2014 , would mark a rise of €10 billion on last year’s total and indicates growing momentum and market maturity across Europe.

Cushman & Wakefield Corporate Finance recorded €30.3 billion of closed of European commercial real estate (CRE) loan and real estate-owned (REO) sales by banks, non-bank financial institutions and asset management agencies in 2013. The figure was bolstered especially by the increased activity of asset management agencies such as NAMA and SAREB and large ‘bad banks’ such as IBRC (in special liquidation).  Compared to the €22.5 billion sold in 2012, this reflects an increase of 35% with the number of completed sales nearly doubling from 45 to 84.

Loans secured by CRE accounted for the majority of such sales recorded by Cushman & Wakefield Corporate Finance during 2013 (73%), with €22.1 billion in completed transactions compared to €11.1 billion in 2012.  A further 18% of the total was attributable to REO sales, a significant increase from just 5% in 2012 evidencing the acceleration of the disposal process of repossessed assets by banks such as RBS and Lloyds Bank. The remaining 9% corresponds to transactions involving whole CMBS, residential or corporate loans.

A late surge in loan sales in November and December last year accounted for almost 38% of the total volume for 2013, as both vendors and purchasers attempted to meet year-end targets.  Meanwhile, 2014 has started as strongly as last year ended: 10 transactions have already completed in January, with Morgan Stanley’s disposal of €5.6 billion of European CMBS and senior loans, including the servicing platform, to Mount Street contributing to the majority of the €7.1 billion total to date.  With many banks and asset management agencies still some way off completing their deleveraging plans, Cushman & Wakefield Corporate Finance anticipates a continued high level of loan and REO sales activity over the coming year.

Michael Lindsay, EMEA Head of Corporate Finance at Cushman & Wakefield added: “2013 saw another significant increase in European loan sales activity.  Whilst Europe has yet to achieve the levels of liquidity witnessed in the US, the last 12 months have seen more buyers and sellers becoming familiar with the characteristics and dynamics of the European loan sale market with consequent pricing benefits for sellers.”

Large investment firms with US headquarters continue to dominate the market – they accounted for 70% of all acquisitions in 2013.  The likes of Lone Star, Apollo and Cerberus continue to take advantage of the many European opportunities available with pro forma returns above those achievable on home soil.

As activity has spread across Europe and the average size of sales has decreased from €500 million in 2012 to €360 million in 2013, there has been a notable increase in the range of potential buyers with several smaller local investors paying premium prices to break into the market.

An increase in activity from the various European asset management agencies has boosted transaction volumes, accounting for c. 59% and 40% of closed transactions in Ireland and Spain respectively. Overall, the asset management agencies have contributed to over €4.8 billion of the total closed transaction volume, roughly six times the €799 million completed in 2012.  In addition, NAMA, EAA, FMS and IBRC (in special liquidation) have cumulative live sales of c. €35.8 billion representing 80% of total live transactions, further demonstrating their status as key vendors in the European market.

Fledgling loan sale markets to provide lucrative opportunities

As in 2012, around 89% of sales by face value in 2013 took place in the key markets of the UK, Ireland, Germany and Spain as lenders continue to reduce their largest exposures.  While activity will undoubtedly remain high in these four markets, there is also evidence that vendors are increasingly looking to reduce exposures throughout the rest of Europe, with transactions recently being closed in the Netherlands, France, Russia and Italy.  Additionally, as investor confidence has grown, interest has grown for potentially lucrative opportunities further afield with live or planned disposals in Poland, Portugal, Romania and Scandinavia.

With loan-on-loan financing anticipated to become more readily available in several less core markets around Europe and the establishment of further asset management agencies, such as the Dutch asset management agency ‘Propertize’, the loan sale market is set to expand across the continent. In particular, Cushman & Wakefield Corporate Finance expects a significant increase of activity in the Netherlands and Italy.

A platform for profit

Six Spanish servicing platforms were purchased in 2013 by US investors ahead of an anticipated increase in opportunities in that market.  As several Spanish banks looked to raise capital without selling their distressed assets, those banks’ servicing arms became a target for a number of large US investors. Cushman & Wakefield Corporate Finance recorded the sale of six Spanish servicing platforms in 2013 accounting for c. €3.4 billion.

The rationale behind these acquisitions is to overcome the lack of transparency in the Spanish market; having people on the ground will ultimately enable them to gain better information on  transactions, therefore making the processes more efficient and maximising returns.

Promising pipeline

Cushman & Wakefield Corporate Finance is currently tracking €45.2 billion of live transactions indicating that the busy start to the year will continue.  Looking further ahead, activity in 2014 will be bolstered by the substantial pipeline of planned transactions which have a face value of €33.7 billion.

The report also predicts the European CMBS market will continue to grow during 2014, with forecast issuance of between €12 billion and €15 billion. Notwithstanding the timely return of investor interest in new European CMBS issuance evident in 2013 providing some refinancing potential, with €31 billion of European CMBS maturities over the next three years Cushman & Wakefield Corporate Finance anticipates a continued supply of whole CMBS loan sales over that period.

Federico Montero, a partner in Cushman & Wakefield’s EMEA Corporate Finance team, said: 2013 was a remarkable year for the European loan sale market.  As sellers developed their loan disposal strategies and pricing expectations, the pace of deleveraging has accelerated drastically.  Similarly, the flow of investors into the market hasn’t shown any signs of abating.  With more opportunities emerging in a greater number of countries, volumes sold will undoubtedly increase during 2014.”