Could Europe be next major destination for investors in non-performing loans?
New York, 15 April 2013
Although the US non-performing loan (NPL) market remained active in 2012 and the focus of many global investors, according to Flocking to Europe: EY 2013 non-performing loan report, Europe is emerging as an NPL market in its own right, with an estimated €1 trillion of NPLs now on the balance sheets of the region’s banks.
Ernst &Young’s annual distressed loan survey detects a major shift as the emergence of the European NPL market provides global investors with opportunities to diversify and access higher returns.
Christopher Seyfarth, a Partner in Ernst & Young LLP’s Transaction Real Estate practice, says: “This year’s survey indicates an increasing appetite among investors on both sides of the Atlantic for European NPL product as they look to both diversify their investments and access potentially higher returns in a nascent market.”
This is the first time EY’s annual NPL report has studied how respondents look at investment opportunities on both sides of the Atlantic, with European investors accounting for nearly a third of survey respondents asked for their views in January.
Daniel Mair, a Partner in Ernst & Young GmbH Transaction Advisory Services practice, says: “NPLs collateralized by commercial properties in Germany, the UK, Ireland and Spain are currently attracting the greatest interest from investors. German and UK banks have already experienced a fair amount of distress but clearly investors anticipate more product is waiting in the wings and these remain highly popular investment markets.” Almost half of those responding to a question about where their primary market interest would lie in the next 12 months indicated Germany, with the UK running second with almost 40% of respondents.
European NPL sales
Sales of NPLs could increase in Europe if investors grow more confident in the stability of Europe’s economy, and the euro and are more able to meet sellers’ price expectations. The recent turmoil in Cyprus has undoubtedly knocked that confidence but given the relatively benign reaction by the markets little permanent damage appears to have been done so far. Either way, sales activity is in its very early stages and banks could be selling NPLs for some time to come.
US NPL sales
According to the report, there may have been less investment activity in the non-performing loan market in the US last year simply because there were fewer investment opportunities. The Federal Deposit Insurance Corporation (FDIC) was not as active in selling loans in 2012, and the amount of net NPLs in US banks’ portfolios is declining.
“The US market has not reached the sale volumes expected by investors and with banks continuing to recover, opportunities for investors become more limited as time moves on. Yet, a substantial amount of NPLs remain on their books,” according to Seyfarth.
Seyfarth also points out that some NPL transactions were not completed simply because investors and banks could not agree on price, and that others simply stayed out of the market. Nevertheless, survey respondents expect the US NPL market to remain active, although that will apparently be for a shorter time frame than they anticipated a year ago. Well over 50% of respondents believe that NPL opportunities will exist in Europe for at least the next three to four years while a similar percentage of investors see the current US NPL market playing out within 24 months.
“The US economy continues its slow but steady growth, select commercial property markets are improving, and property values are rising, although not consistently across regions or property sectors. Challenges remain, but these developments should help bridge the pricing gap between sellers and investors and make conditions more favorable for NPL sales,” explains Seyfarth.
Furthermore, as the results of the 2013 study show, banks and servicers of commercial mortgage-backed securities (CMBS) face a steady volume of loans maturing over the next few years – and the risk is that this might again result in an increase in NPLs. “That risk could be a motivating factor for banks and special servicers to accelerate sales of their existing NPLs as well as sub-performing loans,” Seyfarth concludes.
Notes to editor
About Flocking to Europe: EY 2013 non-performing loan report
As the basis for this report, EY surveyed investors and market participants in Europe and the United States by asking them to answer ten questions relating to their investment activity in non-performing loans and their outlook for the sector. Responses were collected between late November 2012 and mid-January 2013. To download the full version of the 2013 NPL report, visit http://www.ey.com/realestate
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