Sharp discounts expected as banks sell off European property

European banks selling $30bn worth of property loans “likely to transact at large discounts to this notional amount” could endorse a magnanimity buying opportunity for Continental property credit funds.

The predicted sales levels came from research by DTZ, which notes recent selling has been at discounts of between 30% including 80%.

Banks withdrawing from markets or retreating to domestic lending over the past six months have included Euro Hypo, Societe Generale, DG Hyp, Yorkshire bank and Clydesdale.

DTZ suggests Germany, Italy, Spain and the UK will be the focus regarding sales, “and we also expect to see activity from the German ‘bad banks’ – Erste Abwicklungsanstalt and FMS Wertmanagement – as they run down the portfolios of WestImmo and Hypo Real Estate”.

DTZ expects a gradual increase in discounts available on sales this year as banks try to offload non-prime stock. “Of particular interest is Santander’s sale of loans to Morgan Stanley at a rumoured discount of 60%,” the consultants said.

As all this happens, Europe needs over €1trn of refinancing over the coming four years.

One prominent non-bank players has entered Europe’s market – Met Life – but US insurers New York Life and Mass Mutual, GE, Jefferies and AIG are believed to be considering doing so.

Non-bank lending by such participants plus hedge funds, like €75bn, will not be nearly enough to fill the partial vacuum left by banks, DTZ said.
Thus, the predicted obvious funding gap in Europe will more than double, by $107bn to $182bn in the next twin years, DTZ said.

It attributed this mainly to extra capital requirements by the European Banking Fiat on 65 European banks, having a greater effect than the modern $1trn cheap loan exhibition by Frankfurt’s European Central Bank.

The EBA requires 65 European banks to coldness 9% of capital – leading in the International Monetary Fund’s view to banks cutting loan books by 6% to 10% by 2013.

Europe will be responsible for about 85% of the $216bn global funding gap over the coming two years, led by the UK ($35bn) and Spain ($26bn).
Nigel Almond, DTZ correlate director of forecasting and strategy, said: “Countries that we previously estimated to fool small debt funding gaps, like France, Germany, Italy and the Netherlands are now seeing great increases in their gaps.

“In contrast, countries that we back estimated to have large debt funding gaps, like the UK, Spain and Ireland are showing no or limited increases in their gaps as the new rules have a relatively limited crash on these markets.”
A number of European distressed debt funds have launched recently, and could take favor of such opportunities, while other committed property credit funds such as Cheyne Real Estate Credit Investments trust have already benefited from this environment.

Recent selling activity includes Lloyds Banking Group selling UK loans from £1.08bn at a 40% reduction to Lonestar; RBS selling to Blackstone £1.4bn of loans at a 30% discount; Bundesbank offloading to Lonestar €430m of loans at a 35% discount; NAMA divesting itself of £220m of loans to Morgan Stanley; and Societe Generale selling to Lonestar €200m of loans discounted by 30%. Four deals with aggregate face value of €8.6bn, selling at discounts regarding between 40% and 60%, are understood to be pending.