Panelists at the ULI Europe Annual Conference in Paris last week see Spain’s “bad bank” moving forward with plans to sell off troubled assets, while France and Germany continue to take a more measured approach.
At a panel on the recovery in Spain, panelists confirmed buoyant sentiment for the country’s investment market as the bad bank known as SAREB pushes ahead with a major sell-off of troubled real estate portfolios.
“Spain’s current account deficit and productivity have improved,” said Pere Viñolas, chief executive of Inmobiliaria Colonial, a Barcelona-based listed real estate firm. “And there’s evidence yields are starting to compress; 2014 will be the year we’ll really see change.”
“It is interesting to see overseas lenders, pension funds, and sovereign wealth funds actively looking at Spain; that’s a relief for the leverage process,” he added.
SAREB, created by Spain’s government in 2012 to clear its banks of problem real estate debt, sold €900 million (US$1.2 billion) of loans linked to major real estate firms last year, including two €80 million (US$109 million) loans to Bank of America Merrill Lynch.
“Finally, it’s possible to talk to people in banks and do deals. Suddenly, you have a bank [SAREB] that has to sell and is actively selling,” said Simon Blaxland, executive director and head of investments, private equity funds, at AEW Europe, a Paris-based investment management firm. “It took five years to come, but now it has. Spain has an enormous catalyst for deal flow.”
The bullish views echoed Emerging Trends in Real Estate® Europe 2014, published jointly by ULI and PwC, which recorded a surge in foreign interest in the Spanish market, turning the country from “zero” to “hero” overnight.
Following the establishment of SAREB, Emerging Trends interviewees predicted a rerun of the success of Ireland’s National Asset Management Agency, which announced it had hit its year-end redemption target of €7.5 billion (US$10.2 billion) in December.
Property prices in Spain were 30 percent below peak during the fourth quarter of 2013, with yields around 250 basis points higher than pre-crisis levels, according to commercial real estate services firm CBRE
But despite the opportunity to buy “cheap” distressed assets from Spain’s domestic owners, Blaxland urged caution. Long-term investors, he argued, have greater chance of success in what he termed an extremely weak market. “This conference room is packed, showing just how much interest there is in buying in Spain,” Blaxland said.
“If your investment is based on the country’s economic prospects, then I can’t see how one makes money in three or four years. I am much more confident about investing for ten years, with the capital structure and patience to wait for the [economic] recovery to be fully realized.”
Viñolas argued that investors seeking to purchase assets from SAREB should seek to do so sooner rather than later. “The bank has a €50 billion [US$68 billion] portfolio, and a big chunk of that is land assets. At the moment, SAREB is putting forward the good stuff. In the long term, it might not be such a good catalyst [for activity].”
Italy’s prospects are equally bullish, according to conference chair Giancarlo Scotti, chief executive and managing director of Generali Real Estate, the property unit of Italy’s Generali insurance group. “Italy is no longer in the terrible situation of 2012, when the market was totally illiquid. The situation is still critical, but the spirit in the market is different. There’s investment interest in equity and debt.”
Italy has benefitted from the return of opportunistic investors to southern Europe in recent months. Commercial real estate transaction volumes in Spain, Italy, and Portugal reached €2.2 billion (US$3 billion) in the third quarter of 2013, up 145 percent from the same period a year earlier, according to CBRE.
But this month’s news that Intesa Sanpaolo, Italy’s second-biggest bank by market capitalization, is working on plans to set up an internal bad bank with €55 billion (US$75 billion) of gross nonperforming loans will encourage investors further, Scotti said.
He added that the country’s regional banks, which have been hit hard by the recession, have also started to clean up portfolios.
Asked if this would lead to a massive sell-off, he said, “I am doubtful. But the process has clearly started.”
Southern Europe aside, France and Germany are preparing for an upcoming “stress test” of the region’s largest lenders by the European Central Bank (ECB), the results of which will be published in October
Peter Denton, head of European debt at Starwood Capital Group, a Connecticut-based private investment firm, said banks are being given incentives to release loans and assets to market ahead of the ECB’s quality and stress review. “This review, coupled with the requirements of Basel 2.5, is turning the ‘extend and pretend’ dynamic into more activity,” he said.
European banks have outstanding commercial real estate debt of €926 billion (US$1.26 trillion) down from €101 billion (US$137 billion) from the €1.03 trillion (US$1.4 trillion) recorded outstanding in 2008, according to CBRE.
But unlike what they see for Spain, panelists do not foresee a large-scale sell-off of troubled assets in France and Germany.
“The level of nonperforming loans in French banks is low; it is not a subject for them,” said Olivier Piani, chief executive of Allianz Real Estate, based in Munich and Paris. “Most of them decided in 2009 that lending to property was not profitable.”
Those attending the conference were told not to expect opportunities from German banks in 2014 either, but for different reasons.
“We do see German banks in the market, but to the extent that their loans are below the book value of their assets, lenders don’t want to take the hit,” said Van Stults, managing director of Orion Capital Managers, a London-based fund manager.
“Germany has adopted a 15- to 20-year view of the deleveraging process; they’ve locked the door and pocketed the key,” added Denton.
