More banks can be expected to finally begin dumping their non-performing loans this year, affording investors their first real chance at acquiring commercial real estate assets at bargain prices, according to a new report.
The sheer volume alone of commercial mortgages coming due over the next five years is expected to put pressure on lenders to sell some of those which have gone sour, Ernst & Young's fourth annual NPL survey found. Of the estimated $1 trillion in loans maturing by 2017, according to the report, more than $100 billion are already in the non-performing category.
“Nothing is certain in the distressed market, but the decisions banks make this year on whether or not to reduce their exposure in the commercial real estate debt arena will tell us a lot about how long the distressed market has to run,” says Chris Seyfarth, a partner in E&Y's Transaction Real Estate practice.
The survey also found that investors already are chomping at the bit. And not only did they allocate more capital last year for buying NPLs from banks, they also had considerably more success in closing deals than in previous years.
Indeed, investment activity was at its highest level in 2011 since E&Y began the survey in 2008. And according to those who responded, the expectation is that sales volume will remain high again this year. “In fact,” says Seyfarth, “the survey found that investors generally expect the NPL market to remain active for another two to four years.”
The survey also found that of those who sought to purchase loans last year, two thirds met with success. That's a big improvement over 2010, when fewer than half successfully closed transactions.
Respondents to the survey are mindful of the impact the FDIC is having on the market, especially with the relatively high level of FDIC- designated “problem banks” and their potential for selling off both single and multiple bad loans.
Regional and local banks also are garnering the attention of investors because these smaller institutions have made thousands of acquisition, development and/or construction loans, which, because of the housing debacle, constitute a share of the distressed loan market.
American investors also are looking further afield, according to the report, which says Europe's sovereign debt crisis has not gone unnoticed. They see Europe as a NPL market that offers even more opportunities and greater returns than are available in the United States, the E&Y study says.
Respondents cited concern over the general availability of financing. Nevertheless, they say they are continuing to seek leverage as part of their investment strategies. Nearly seven of 10 expect some level of financing to facilitate their purchases this year, down from 84% in 2010. Of those who expected or required leverage, about a third are aiming in the 51%-60%. Only a few expect to need financing for more than 60% of the purchase price.
