FINANCE The combination of improved loan pricing and the higher cost of capital attached to holding NPLs is creating an environment in which greater deal flow can be expected in the real estate loan transaction market.
A report from EY on the UK and Ireland loan sales market predicts that as lenders continue to accelerate their exit from non-core loans, more portfolios being brought to market will contain a mix of performing and non-performing loans.
The audit giant also envisages those portfolios to be increasingly focused on specific geographies, for example, where lenders are choosing to exit certain countries, and/or sectors.
The reduction in lenders’ non-core books will be further accelerated by continuing discounted pay-offs from borrowers who now face more favourable financing markets to refinance and/or recapitalise their businesses, it added.
Provided that the improved pricing and availability of debt funding holds, EY expects the flow of auctioned portfolios, off-market single loan/small portfolio trades and discounted pay-offs to gain further momentum in 2014/2015.
However, it warns that the UK and Irish CRE loan market needs to be taken in the context of increasing deal flow across Europe, which could see investors with a wider European remit look further afield for deals.
The report also updates on transactions from the first half of 2014 which totalled £21bn, including the IBRC process, or £6.3bn excluding the Irish agency.
While the total amount of loan balances transacted in 2013 significantly exceeded the two preceding years (circa £4.0bn in 2012 and £3.7bn in 2011), the nature of the transactions has changed, EY said.
Although non-performing loan trades still account for most transactions – by number – 2013 also saw the sale of lending platforms such as Eurohypo and Postbank.
Both of these platform sales involved a significant proportion of performing or sub-performing loans – marking a trend that EY says could gather momentum across Europe as banks continue to address their non- core exposures.
It also identifies improved pricing as a key trend, as improved investor sentiment has led to rising property values.
This increase in collateral values, combined with reduced equity return requirements and improved availability and pricing of loan- on-loan financing, has driven up loan pricing.
The combination of factors has resulted in the gap between the underlying asset values and loan prices narrowing, which in turn has improved vendor returns and is encouraging greater supply.
The report finds that a more mature market is emerging with a number of the more prominent buyers having now established experienced loan work-out platforms. This enables them to both price and, post acquisition, manage the assets in their portfolios more efficiently.
As more portfolios come to the market, some larger buyers continue to target opportunities in the UK and Ireland, but also other potential trades in Spain, Germany and the rest of Europe.
As a consequence of the increase in supply, some buyers are having to be more selective about which portfolios to bid for. This dynamic is slowly shifting the relationship towards a greater balance of power between buyers and sellers.
While NPL sales continue to dominate the market, a number of recent sales have included performing and sub-performing loans. Some of these transactions have resulted in investors forming consortia with a view to splitting the larger pool of loans into performing and non-performing sub-portfolios. This trend is also gathering momentum outside the UK and Ireland, it said.
Finally it noted several loan transactions where lenders have sold either large bilateral loans or their holdings in large syndicated facilities.
These sales often take place off-market or, more often, in restricted private auctions. We have also seen an acceleration in the trend of borrowers aligning themselves with other capital providers and offering discounted pay-offs to lenders, which, owing to the improvements in pricing, are now more likely to be acceptable to the lenders.
While there is no accurate way of estimating the scale of this market, EY estimates that it represented at least an additional £1bn of loan balances transacted over the past 12 months, based on its direct involvement in relevant situations since January 2013.
bridget.o’connell@estatesgazette.com
