European Banking Sector Becoming More Proactive in Restructuring

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ULI Europe Annual Conference Paris 2012: The Only Problems Left Are the Big Ones

from attendees from a broad cross-section of disciplines, including property developers and owners, fund managers, financiers and senior public officials, who convene at the event to debate and explore how the real estate industry faces up to the current economic, political, and business trends.

Restructuring of the European banking sector has come a long way since the onset of the financial crisis. If nothing else, institutions now have a handle on the extent of their troubles and have built work-out teams to address them.

Banks have become more proactive in dealing with their problem debt and face increasing pressure as loan maturities approach in 2012 and 2013. Depending on the loan, the client, the location, and the property, there are three main strategies a bank can pursue: working with the borrower, selling the loan, and foreclosing on the asset.

Loan sales are expected to rise in the coming months as banks off-load noncore assets following the Royal Bank of Scotland’s sale of £1.4 billion (US$2.3 billion) of U.K. property loans to Blackstone in July.

Nonetheless, banks’ approach to new business is likely to remain prudent for some time, given that most lenders have adopted a cautious approach to real estate.

The European divisions of the U.S. banks were the first to exit their positions, taking writedowns early on. The European banks, which could not afford to suffer large hits in one go, lagged behind but are now starting to catch up. However, some houses have made more progress than others.

“The banks fall into two categories,” says Marc Mogull, founder of London-based Benson Elliot Capital Management and chair of ULI U.K. “The best-in-class banks absolutely have their minds on their problems and are making a sincere effort to sift through them without actually moving the market—i.e., without taking self-defeating actions.

“Other banks, including many on the continent, still have their heads in the sand. Property loans may just be the tip of a bad-loans iceberg—sovereign debt holdings being the latest source of worry—so it’s not surprising we’re seeing stock prices of certain banks getting whacked.”

Benson Elliot in May acquired a Barcelona office complex in a deal with Spain’s Banco Sabadell after the previous owners defaulted on a loan from the bank in 2009. “Virtually every deal we’ve done over the past two years has come from a bank, an administrator, or a borrower under pressure from a bank,” says Mogull. The group remains engaged with the banks, he says, but does not expect to see a flood of distressed assets hitting the market this year.

In terms of new lending, the industry has become significantly more conservative. Not only have margins gone up and loan-to-value ratios gone down, but many banks will only lend to existing clients on prime properties.

“We’ve moved from concerns about bad property loans to how much suspect sovereign debt banks hold,” adds Mogull. “The impact of sovereign debt writedowns on bank capital positions could have a significant impact on the flow of product into the market.

“We are now approaching the 2013 maturities bubble—a bubble that has only gotten bigger as banks keep rescheduling loans,” he concludes. This indicates banks still have more challenges to face.