New Ernst & Young data indicate a major shift in the nonperforming loan market as investors from both sides of the Atlantic eye European assets.
An estimated $1.3 trillion (€1 trillion) of NPLs are currently sitting on the balance sheets of European banks.
If in 2012 the U.S. NPL market
Findings indicate “an increasing appetite” for European NPL product among investors on both sides of the Atlantic, said Christopher Seyfarth, a partner in Ernst & Young’s transaction real estate practice. He argues that investors are looking “to both diversify their investments and access potentially higher returns in a nascent market.”
This year’s report finds Europe “is emerging as an NPL market in its own right” that provides global investors with new opportunities in several countries.
According to Daniel Mair, a partner in Ernst & Young GmbH Transaction Advisory Services practice, NPLs collateralized by commercial properties in Germany, the U.K., Ireland and Spain are currently attracting the greatest interest from investors. He argues that since German and U.K. banks have already experienced a fair amount of distress, investors anticipate more NPL product “is waiting in the wings.”
Conducted in January, the survey is the first to inquire about investment opportunities on both sides of the Atlantic, with European investors accounting for nearly a third of the respondents.
Almost 50% of the respondents indicated Germany is their primary market of interest in the next 12 months, with 40% of respondents indicating the U.K. as their primary interest.
Past the recent turmoil in Cyprus, European NPL sales are expected to increase if Europe’s economy continues to stabilize “and the euro meets sellers’ price expectations.” Either way, the report finds, “sales activity is in its very early stages and banks could be selling NPLs for some time to come.”
According to the report, “fewer investment opportunities” drove down U.S. NPL investment activity in 2012 mainly because the Federal Deposit Insurance Corp. was not as active in selling loans in 2012 and also because the amount of net NPLs in U.S. bank portfolios continues to decline.
And banks continue to recover “the U.S. market has not reached the sale volumes expected by investors,” argues Seyfarth, further diminishing investor opportunities as time moves on.
Findings show banks and servicers of commercial mortgage-backed securities face a steady volume of loans maturing over the next few years, he added, which may 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 subperforming loans.”
Currently, he says, “a substantial amount” of NPLs remain on the books of U.S. banks offering “steady growth” opportunities in the select commercial property markets that are now improving. Despite challenges overall U.S. housing market improvements “should help bridge the pricing gap between sellers and investors and make conditions more favorable for NPL sales.”
It is the reason why survey respondents expect the U.S. NPL market to remain active, Seyfarth said, albeit “for a shorter time frame than they anticipated a year ago.”
Respondents were split in half in their future expectations: over half said NPL investment opportunities will exist in Europe for at least the next three to four years, while the other half expect the U.S. NPL market opportunity will close within 24 months.
