European Distress and Colorado Brownies

Cushman & Wakefield recently released a thorough review of the European Real Estate Loan Sales Market in which the company estimates that nearly €600 billion of non-core real estate exposure needs to be worked out or sold across Europe in coming years. We think this presents a compelling opportunity for well-positioned investors to capitalize on distress as activity accelerates compliments of Europe’s bad banks.  A few notes from the report before wrapping up with a recent presentation we gave on the subject:

  • A record €40.9 billion of CRE loan and REO sales have transacted in H1-14, over 30% more than in the entirety of 2013 and 611% more than in H1-13. Despite the record volume witnessed so far, the deleveraging process throughout Europe is far from over. The upcoming stress tests being enforced by the ECB should ensure that the current high levels of activity in the market will be sustained over the next few years.

 EU Closed Transactions

  • Nine European “bad banks” hold over 46% of total gross exposure to non-core real estate. NAMA holds non-core CRE assets with a face value of €61 billion split between Ireland and the UK, while SAREB holds non-core Spanish real estate assets with a face value of €102 billion. Recall that KW purchased the real estate asset management division of Banco Popular last year after initially entering Dublin through a similar deal with the Bank of Ireland.
  • With €192 billion in gross non-core real estate exposure, investor sentiment in Spain should continue to grow. SAREB, the Spanish asset management agency holds over 53% of this exposure. Despite being two of the most dominant markets in terms of deleveraging over the last three years, the UK and Ireland still have significant non-core real estate exposure, highlighting the extent of the original problem and the large amount of assets yet to be sold or worked out. KW Europe is squarely focused on opportunities in these three markets.

 EU Non Core Real Estate

  • Despite the overall rise in average transaction size, there is an increasing number of smaller deals under the radar of the larger firms and too large for the private investor. Can you say sweet spot?

Bottom Line: Europe still represents the biggest NPL opportunity worldwide.  Perhaps the biggest distress opportunity ever seen.  We were recently invited to share our work in the region along with our investment thesis in KW/KWE with a new group of friends at ValueX Vail.  You can access our initial report here.

Already looking forward to heading back next year.  If nothing else, I’d like to spend some time better understanding why brownies in Colorado are ten times the size of those in the rest of the country. Anyone care to guess?