Nationwide is considering bringing back a circa €1.05bn German property loan portfolio to market for the second time in just over a year, as the UK’s largest building society seeks to reduce its £2bn capital shortfall and exit non-domestic commercial real estate lending, CoStar News understands.
The sales process of the German commercial property loan portfolio is expected to be handled in-house, and the data tape is yet to be released to the potential investor base, but a revived plan to sell the legacy German loan book has resurfaced at the building society in recent weeks.
CoStar News understands that the performance of the German property loan book is approximately comprised of half performing loans, and half between sub and non-performing, with the book very granular including a large number of small loans across separate borrowers.
Nationwide first explored a possible sale of the loan portfolio just over a year ago, with a handful of private equity funds invited to price up the portfolio, including Apollo Global Management, Lone Star and Cerberus Capital Management.
The UK building society declined to sell the portfolio at the time, given that market pricing offered would have required taking additional losses to the impairment provisions held against the sub-and non performing element of the loan book, and therefore would have been capital destructive for Nationwide’s tier one capital ratio.
The timing of the possible return of Nationwide’s German property loan book comes as a renewed political and regulatory focus falls on UK bank and building societies’ capital shortfalls, by both the Treasury and the Bank of England.
Indeed, the recent near-panic in the City of London over the scale of The Co-Operative Group capital shortfall – revealed by the mutual to be £1.5bn – has diluted the government’s faith in the robustness of the mutual business model considerably in recent weeks.
Nationwide’s capital shortfall, under the revised leverage ratio mandated by the Prudential Regulation Authority (PRA) for all banks and building societies to follow, is £2bn – some £500m larger than the troubled Co-op’s.
The possible sale of Nationwide’s German commercial loan book is possibly part of a wider set of measures to considerably reduce its balance sheet and free-up that capital which must be held against impaired loans.
In the subsequent 12 or so months since Nationwide first undertook a pricing exercise of its German commercial property loan book, there are a mix of positive and negative influences on likely pricing in today’s market.
On the positives, in the last 12 months a deeper liquidity has emerged in Europe for performing property loans at shallow discount to par value, as new insurance and pension fund lenders emerge seeking to book-build performing loans.
Indeed even a sale at a single-digit discount could be capital accretive for banks and building societies’ tier one capital.
For sub and non-performing sales, a deepening – and cheaper – financing market has emerged over the last 12 months which could bring down the overall discount at which private equity funds price the loan portfolio, on a blended equity and debt basis.
In respect of the negatives, there are likely a greater number of impaired loans than 12 months ago, as loans default at maturity, while the leases run-down on the underlying property portfolio, potentially impacting the residual real estate value.
The net of these variables, as well as others besides, will determine the viability of a sale of the loan portfolio on a tier one capital neutral to positive basis, or otherwise.
A spokesman for Nationwide said: “There are currently no negotiations taking place for the sale of any commercial real estate loan books.”
However, CoStar News is not suggesting that any negotiations are currently underway.
Nationwide declined to comment further.