Articles / Rubric: Companies and Markets

Great European Clearance Sale
May 2013 | Companies and Markets

Fearing aggravation of the crisis, European banks are selling off real estate assets, the prices for which have plummeted during the last couple of years. Experts say that now is the best time to buy cheap European real estate.

The banks have to sell off real estate to put their finances in order, to meet regulatory requirements. Sale of mortaged properties is growing larger with each passing year. Cushman & Wakefield forecasts that this year European banks will sell off €25 billion worth of commercial real estate and loans. In 2012 the banks sold €21.7 billion worth of real estate, with about 50% of these deals in commercial real estate.

The average size of transactions for the sale of debt-based assets in real estate increased in 2012 from €549 million to €659 million. “This year the amount of transactions in the REO section [property that is in the possession of a bank because of foreclosure – ed.] will grow,” says Michael Lindsay, head of the Corporate Finance team at Cushman & Wakefield. A large volume of transactions is expected in the real estate sector, worth more than $500 million. Growth of sales of “bad” real estate in the range of $200-500 million is being held back by the difficulty of borrowing.”

More than 90% of transactions in the sale of mortgaged property in 2012 took place in four countries – the UK, Ireland, Germany, and Spain. But most of the profit is generated by sales of mortgaged property in the UK. Meanwhile, a surge in sales of mortgaged real estate is expected on the Iberian Peninsula and in the Benelux countries, especially after the creation of the Spanish Asset Management Agency SAREB.

The analysis by Cushman & Wakefield shows that last year, nine out of the ten largest real estate sellers were banks founded in the UK, Ireland, Spain, and Germany. The list is headed by the Lloyds Banking Group, which sold $6 billion worth of debt-based assets. CRE Santander sold $3 billion worth. And many asset management agencies can accelerate the process. Thus the National Asset Management Agency of Ireland (NAMA) already closed a large deal this year on the sale of “bad” loans to the Northwood company for $85 million. The German “bad” banks FMSW, EAA, and Hypothekenbank Frankfurt also plan on selling debt-based assets.

The banks have now reduced their assets by no more than a quarter using sales, payments, and write-offs. European lenders have approximately €600 billion worth of real estate left, Morgan Stanley estimates. The banks’ activity  has been heating up because of rumors about the collapse of the eurozone.

Banks are also rushing to sell their distressed assets, since medium-term leases will soon expire, and tenants will hardly want to renew the contracts at crisis prices. Spanish banks are especially keen on getting rid of their real estate, and are offering their buyers considerable discounts. During 2012 alone, nearly 85,000 of such properties were sold at auction, using subsidies and discounted prices.

Investors were able to buy mortgaged real estate at record low prices. For instance, if the average price for a mortgage on a one-room apartment in Bucharest is approximately €20,000, a foreclosed studio in same city costs an average of €7,000, and in certain cases the price may even start at €2,350.

Such large American investment funds as Blackstone Group, Cerberus Capital Management, and Lone Star Funds are becoming the main buyers of debt assets. Last year, Blackstone Group acquired a portfolio of retail real estate for $321 million, acquiring 15 shopping centers in seven American states from Regency Centers Corp. In 2011, the fund acquired a portfolio of 588 retail real estate properties from Centro Properties Group for $9.4 billion.

Stephen Schwarzman, President and Founder of Blackstone Group, said that companies can acquire a huge amount of capital for investments in the industry when there are extremely attractive investment opportunities because of the owners’ financial hardships and the necessity to reduce the debt load worldwide. Today, one can buy real estate at a price lower than the cost of construction, with a potential for improvement.

But other buyers, for instance sovereign wealth funds of individual countries, small investment funds, and just rich people, are also interested in the assets. The American investment company Hibernian Pacific Holdings intends to buy European real estate properties; at the beginning of this year, the company announced that it would buy commercial real estate on the continent, as well as bank loans, valued at €600 million.

Enormous sales of non-liquid assets on the European real estate market have led to an excess supply, which promotes price collapse. In the next five years €413 billion in assets will be put up for sale in Europe, for an average, €83 billion per year. The majority of sales will go to the liquid markets of the UK and France.

In the last quarter of 2012, real estate in the eurozone countries got cheaper, on the average, by 0.5%, and in the first quarter of 2013, by 0.7%. And for all of 2012, European real estate dropped in price by 1.8% over the previous year.

Nevertheless, there will be no substantial collapse on the European real estate market, according to Cameron Sawyer, Chairman of the Board of Directors at GVA. “The banks have to sell their ‘bad’ assets that have accumulated since 2008 gradually, in order to prevent price collapse. In the last couple of months there has been considerable improvement on the European real estate market, and the banks are making use of the situation, increasing their REO sales,” he noted.

The banks are now trying to reduce their loan portfolios any way they can, he said; but very few are ready to lend buyers the money to buy real estate. “However, the situation varies in various countries,” says Sawyer. “For instance, in the countries of Southern Europe, the banks can’t meet the buyers half-way, whereas in Germany and the Scandinavian countries, the situation is a lot better. The buyers in those countries are becoming the driving force.”

Now is the best time to invest in European real estate, the experts say. “The ‘quantitative easing’ measures being used by central banks all over the world will eventually lead to a surge of inflation that will be hard to control,” says Sawyer. “Today, a lot of money is on the books of banks and companies. Even individuals are saving their money. Right now this money is not being used, so there is no inflation. But as soon as this enormous amount of money starts to move, the prices for commodities, services, and assets will skyrocket. Real estate is no exception. The year 2013 will be a good time to buy the most lucrative assets.”

Investors are said to be most interested in buying apartments, warehouses, and other buildings and facilities in the west and north of Europe. Large investment funds as well as small investors have been concentrating there.

In order to attract financing, the companies investing in real estate are now especially interested in upsizing. It is a lot easier for large companies to invest in real estate, and it is much cheaper for such players to borrow money. This has led to a revival of mergers and acquisitions in the European real estate market.

In January, the American Fund of Direct Investments Cerberus Capital Management bought British Admiral Taverns, which runs 1,100 pubs, from Lloyds Banking Group for ?200 million. A little earlier, the British direct investment fund Terra Firma spent ?3.2 billion to buy Annington, which leases out about 40,000 properties to the British Ministry of Defence.

Land Securities, the largest British trust investing in real estate, paid ?110.6 million for a 42% share in X-Leisure, the owner and operator of cinemas, restaurants, and fitness centers.

Text: Vera Kozubova

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