31 January 2013 | InterContinental Hotel, Park Lane, London

EY Real Estate and Hotels Workshops

‘Setting a course for the future’

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Focused investment areas

New potential in NPLs

The commercial real estate non-performing loan (NPL) market is developing across Europe, providing new opportunities. EY’s Loan Portfolio team expects the flow of loan transactions to continue in 2013 as banks press on with deleveraging and more buyers enter the market. This view was confirmed by our delegate poll.

Almost three-quarters (74%) of professionals attending EY’s real estate conference expected deal flow in the European NPL market to increase in 2013. Two-thirds identified the UK as likely to be the most active European country for real estate NPLs in 2013, with 22% choosing Spain and 11% Ireland.

Q.

In terms of deal flow in the European real estate NPL market, how do you expect 2013 to compare to 2012?

In terms of deal flow in the European real estate NPL market, how do you expect 2013 to compare to 2012?

Source: Delegate poll results from the EY Real Estate Workshop 2013

A number of factors are driving the NPL market across Europe, including the deleveraging of bank balance sheets and many banks’ need to reduce exposure to commercial real estate. Changing regulatory capital requirements, foreign banks retrenching in their own markets, and the fact that selling loans is often an easier or cleaner exit route are also playing a part.

However, there are also barriers impeding NPL market growth. In a conference poll during an NPL breakout session, 50% of real estate professionals said the most important factor slowing deal flow was that banks and vendors were not provisioned enough to sell at a price that was realistic for buyers. More than one-third thought banks and vendors had unrealistically positive views on the underlying asset value, while 14% thought auction processes were too demanding or expensive.

“On the evidence of the NPL deals done over the last year in the UK and Ireland, we can now say there is a market out there. Looking at what will shape the UK market in 2013, Basel III and other regulatory changes will continue to have an impact and push banks to exit distressed loans. Strong demand from buyers will mean pricing may be attractive for banks in the short term. ”

Mathieu Roland-Billecart
Partner, Real Estate Corporate Finance, EY, UK

The future of retail?

EY’s Analysis of profit warnings for Q4 2012 found that the numbers of FTSE general retailer profit warnings had dropped from the same period in 2011, but also warned that rising sector insolvencies suggested retail distress was increasing. Across the retail sector there are mixed views on the future of retail, and it was a topic of debate at our Real Estate Workshop. Can shopping centers thrive across Europe? Some argue that to succeed in the long run, shopping centers need to become places where people want to spend substantial leisure time.

Mike Hussey, said: “I am a massive bear on retail property, particularly outside London and particularly where it’s not driven by the tourist industry or destination retail. Since 2005 or 2006, I have been saying I don’t think there’s a future in large-scale shopping centers. I cannot see how the level of supply in some areas will be satisfied by falling demand when people’s behaviors around retail are changing. But where there are pockets of under supply around the country, there are opportunities. To succeed, you need to be in the areas where there is some sort of future in terms of retail, which is probably around dwell time, leisure, eating.”

“The problem with UK retail property overall is not that it is over-developed — it is that it is under-demolished.”

Bill Hughes
Managing Director, Legal & General

“Retail is still attractive for core investors who want stable cash flow. They still believe in shopping centers, despite online retail, and they have, and still do deliver good figures. It is going to be more difficult, but by teaming up with partners like European center managers, we still believe that we can get good returns, especially because prices are less expensive than they were.”

Christoph Schumacher
Deputy Managing Director, Union Investment

“Retail is becoming increasingly hard even from an underwriting perspective; it is very hard when you are trying to underwrite debt from a turnover lease perspective; it's difficult to decide what value to give. Retail is changing and will remain a difficult asset class going forward.”

Stuart Hoar
Vice President, Citi Group

“After several years of austerity and protecting the business, it is now the right time for real estate businesses to become more focused on their strategies for profitable growth.”

Dean Hodcroft
UK&I Real Estate Leader, EY