Banks will set a new record dropping “Toxic” assets worth €70 billion

Pressure being exercised by the different banking regulators to entities so that they drop Real Estate from their balances is working. For now, 2018 looks like it’s going to be a record year in toxic assets, with transactions worth 70 billion euros. That’s the forecast from Mr. José Masip, partner of Financial Services and Real Estate at Axis Corporate, that expects the 50 billion that most of the sector dropped in 2017 will be largely overcome.

“At the beginning of the year, we estimated that the figures of 2017 would be reached due to the sales the market was studying, but we couldn’t preview the operation by Sareb” that put on the market the assets that Haya manages, that are around 25 billion. “In truth, there are few players that can take on a portfolio of that size and we would have to see how the operation affects the discount rate that normally happens in this kind of operations”, the director states.

During this year, the banks have already sold and set in motion operations for 45 billion euros. To these figures, we have to add another 10 billion of additional deinvestments that may take place in the second half of the year, according to market sources. The yearly deinvestment would reach 55 billion. Nevertheless, the same sources say that large portfolio sales (such as the one by Santander and Blackstone’s or BBVA with Cerberus, last year), that rise to 70 billion the liability released by the banks this year. “2018 and 2019 will be the years of most effort by entities to finish sanitizing their balances, with the goals of meeting the demands set by the European regulator”, the Portfolios team from KPMG Spain comments.

On the other hands, a report from the US investment banks Evercore sets the Spanish financial sector as the most active in Europe when dropping Real Estate. The document points out that in 2018 the Eurozone countries will drop about 80 billion in NPLs, 78% of which will come from Spain.

Nevertheless, to reach these announced dimensions, the entities have to step up their sale processes, as in Q1 only 4 billion were put out from balances. For the moment, no bank discards the wholesale sale of their assets, that allows getting rid of most of their RE liability.

Potential purchasers

Blackstone and Cerberus are precisely two of the most active actors in the European debt market with Real Estate collateral, followed by Fortress, Lone Star, Oaktree or Deutsche Bank and Goldman Sach, according to data from Axis Corporate.

Even if some experts point out that the opportunity cycle in Spain is coming to an end, Masip ensures our country has still the interest in this kind of investments. “Spain keeps getting the necessary indicators to keep attracting investors”. Thus, he points out that even if they are in other countries in Europe that are attractive enough, like Cyprus, Greece, Italy, and Portugal, don’t cast a shadow on Spain where investors stress the importance of GDP growth above the Eurozone, the improvement in homes´ rents, the drop in financing costs to firms and families and the better real estate attractiveness as investment, due to the bull market we’re currently on.

On their end, S&P forecast for this year a drop of 20 billion euros in toxic assets, only in organic operations, that is, without including extraordinary sales similar to Santander and BBVA that allowed them to transfer 43 billion in assets. Elena Iparaguirre, financial institutions analyst from S&P ensures that they keep the forecast, although she recognizes that the figures may be higher if the entities end up closing extraordinary sale operations. “There appears to be more investor appetite so that those happen”, says Iparaguirre.

More concentrations

The entities are the most interested ones in taking advantage of the Real Estate market conditions, to transfer their distressed assets, that keep a hold on most of their money with provisions.

According to data from Axis, currently, more of 80% of the assets under management are in the hands of real estate servicers. They are Altamira (Santander), Servihabitat (Caixa), Haya/Anida (linked to Cerberus by the purchase of the BBVA portfolio), Aliseda/Anticipa (Blackstone) and Solvia (Sabadell).

“In 2018 a larger concentration in the sector is previewed, with the possible sale of some of the current servicers or maybe socimis”, explains Masip, that believes that “their future in the short and mid-term is set by a diversification of strategies to undertake, that has the objective to bring a clearly differential value to the main actors that are more and more professional”.

“These strategies may go from specialization in rents management to the exploitation of a proprietary commercial network, against traditional channels, the bet for a larger internationalization of asset management or land development and Real estate developing activity”, the expert concludes.

Source: El Economista. Translation by Miguel Vinuesa Magnet.

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