US investors see Europe as a potentially larger NPL market, offering more opportunities and potentially higher returns.
Since our 2009 survey, the market for distressed CRE loans has gone from developing — some might say dormant — to the most active market investors have seen in some time. Many investors were busy in 2011 looking for investment opportunities and closing transactions.
Our annual real estate nonperforming loan investor survey provides a snapshot of today’s market and offers future insights.
Real estate investment and opportunity funds were the majority of the investors who responded to our 2011 survey, representing about 55% of respondents.
Take a closer look at our findings.
The forecast for 2012 is mixed, with some market observers concerned that property values could level off or even start to decline, while others are forecasting growth. This uncertainty could cause some banks that had been holding NPLs in the expectation of a continuing property market recovery to instead decide to sell them.
The following are highlights of the survey:
Acquisitions. Investors had a high success rate in 2011. Of those who sought to purchase loans, two-thirds said they completed acquisitions. Their preference is to buy via negotiated transactions or broadly marketed auctions. Respondents noted that purchasing via online auction is the least desirable option.
Europe. Europe’s sovereign debt crisis has caused more banks in Europe to restructure their balance sheets and consider putting portfolios of distressed loans on the market. This has not gone unnoticed by some US investors, who see Europe as a potentially larger NPL market, offering more opportunities and potentially higher returns.
Capital. In our 2009 survey, a fourth of investors said they did not plan to invest any capital in acquisitions of distressed loans. In 2011, that figure fell to about 12%. About a third said they hadn’t decided on an amount. Those who allocated less than US$100 million and those who allocated US$100 million to US$500 million were about evenly divided.
Leverage. Leverage continues to be desirable, with 67% of investors expecting some position of leverage. Interestingly, this is down from 84% in 2010. Of those who expected or required leverage, about a third aimed for leverage of 51% to 60%. Few expected more than 60%.
Deal size. The proportion of investors looking for deals of US$50 million or less has declined over the three years of the survey to a little more than a third of investors in 2011. Investors seeking deals of US$50 million to US$500 million have remained fairly constant at around 40%. Not many investors are looking for deals of more than US$500 million, no doubt because there aren’t many who can commit that level of capital on a single transaction.
Returns. Investors raised their return expectations in 2011, with 25% looking for returns in excess of 20%, up from only 8% in 2010.