Cushman & Wakefield’s Corporate Finance team estimates that European banks and ‘bad bank’ asset management agencies have a gross legacy non-core real estate exposure of €584bn throughout Europe which is yet to come to market through asset and loan disposals.
Cushman’s forecast underscores the scale of legacy bank de-leveraging which is still to be worked through, the pace of which could well be dictated by the outcome of the ECM’s asset quality review, due this November.
More stringent capital adequacy requirements are expected from the review for non-performing loans on bank balance sheets which could trigger a further wave of incentives for de-leveraging entities to scale up their disposal of defaulted debt.
Already over the first half of this year there has been €40.9bn in 2014, according to Cushman, which reflects a 30% increase on the entire 2013 and more than a six-fold increase on the same six months last year.
With as many as €28.5bn in live portfolio trades, based on nominal unpaid loan balances, Cushman predicts that the full year see up to €60bn in loan sales and real estate owned (REO) entities.
In addition, a further pipeline of loan portfolio and REO deals valued as much as €38.5bn is waiting in the wings to come to market.
The average size of transactions has increased from €346m in 2013 to €621m in H1 2014, with “mega-deals” representing 71% of the closed deals in the first half of 2014.
Investor interest continues to extend further into southern Europe, with 29% of closed sales in the second quarter relating to Spain and more than €10bn of live sales taking place in this market.
US private equity firms continued to dominate in 2014, led by Lone Star which closed €15bn of deals in the first half, including cleaning up the majority of IBRC’s accelerated wind-up and Commerzbank’s Project Octopus.
Cerberus, with €6.3bn, was the second largest winner, with its recent wins including NAMA’s Project Eagle and Lloyds’ Project Avon.
The top five is completed by CarVal Investors, Blackstone and Oaktree Capital, which closed €3.3bn, €2.2bn and €2.1bn, respectively.
Cushman & Wakefield’s Federico Montero, head of loan dales, EMEA Corporate Finance, said in a statement: “The record loan sales volume seen so far in 2014 has been impressive, although the non-core real estate exposure of €584bn across Europe signifies the enormity of the deleveraging process still to occur.
“Additionally, the upcoming stress tests being enforced by the ECB will guarantee that the current high levels of activity in the market will be sustained in the next few years.”
Looking ahead, RBS is expected to be increasingly active following the establishment of its internal bad bank, RBS Capital Resolution, which holds c. €25bn of non-core real estate loans, c. 60% of which relate to Ulster Bank, reported Cushman.
In addition, several Spanish banks are exploring options to dispose of their soured assets, including Catalunya Banc’s current sale of its €6.9bn Project Hercules residential mortgage portfolio. UK and Irish banks still have a combined exposure of €244bn to non-core real estate, and therefore will continue to be key vendors in the market.
A wave of secondary sales in the mid-term following is expected to emerge from the major winners loan portfolio wins which could see a spate of wholesale exits through IPOs and cash-out securitisation strategies.