Offloaded real estate bank loans could lead to ‘price deterioration’

By Bridging Loan Directory -

 

An upcoming influx of real estate loans for sale could lead to pricing deterioration as potential buyers demand bigger discounts, according to CBRE.

European banks are looking to offload nine loan portfolios worth €11bn by the end of the year – in addition to €7.5bn in loans already disposed of in 2012, according to data published by the firm.

The forecast falls short of disposals worth €20bn posted in 2011.

Despite more realistic pricing overall, CBRE attributed the more modest forecast to deal attrition this year where counterparties were unable to agree on pricing for large portfolios with significant distress.

Although he was unable immediately to quantify the attrition in percentage terms, real estate finance managing director Philip Cropper said potential deals had been complicated by buyers demanding the removal of specific assets from portfolios or – for example, in the case of some Spanish banks – because lenders testing the market had withdrawn portfolios they could not afford to sell at the prices offered.

Cropper suggested currently strong competition even for secondary assets could weaken as more loan portfolios came onto the market later this year.

“There is an advantage to being an early mover in the loan sale process,” he said. “Pricing is good now, but if there is a sudden increase in the number of portfolios available, the discount bidders look for will increase.

“As sales increase, pricing will deteriorate. If banks see pricing going in that direction, they’ll see the benefits to working out the portfolio themselves.”

Although the market could see more banks following RBS in focusing on the underlying asset – either by consensual agreement or via insolvency – Cropper pointed to the cost of gaining control of the asset and potentially time-consuming conflict with uncooperative borrowers who could stand to lose management fees and will have to write off their equity.

“Banks’ experience is often that the borrower’s motivation to sell is not as strong as the bank’s,” he said.

Most banks – especially those with significant exposure to secondary assets – are still more likely to pursue loan disposals as the most efficient strategy.

Among the portfolios currently being marketed is Lloyds Banking Group’s €2bn portfolio of debt underpinned by more than 700 assets.