More Banks Expected to Sell Non-performing Loans in 2012

Michelle Remo, “Big 4″ observer
March 15, 2012 /

After years of slim pickings, investors are finally enjoying an uptick in opportunities for acquiring commercial real estate assets.

According to the latest Ernst & Young US nonperforming loan (NPL) survey, At the crossroads: Ernst & Young 2012 real estate nonperforming loan investor survey, investors could also see more opportunities to acquire commercial real estate debt instruments in the year ahead.

Despite improvements in bank earnings and declining loan loss reserves, the sheer volume of US commercial real estate loans maturing in the next five years – estimated to be close to US$ 1 trillion – could put pressure on US banks to step up their efforts to strategically sell some of the more than US$100 billion in NPLs, currently on their books.

The Ernst & Young survey, now in its fourth year, found that in 2011 more investors allocated capital for buying NPLs from banks – and that those investors experienced a higher rate of success in closing transactions than in previous years.

“In 2011, investment activity was at its highest level since we began our survey four years ago, and, according to those who responded, the expectation is that sales volume will remain high in 2012. In fact, the survey found that investors generally expect the NPL market to remain active for another two to four years,” said Chris Seyfarth, a partner in Ernst & Young LLP’s Transaction Real Estate practice.

According to Seyfarth, respondents to the survey are mindful of the impact the FDIC is having on the market, especially with the relatively high level of FDIC- designated “problem banks” and their potential for selling off both individual NPLs and NPL portfolios. Smaller banking institutions are also garnering the attention of investors.

According to the survey, regional and local banks that have made thousands of construction loans and acquisition and development loans in regional or local markets across the US constitute a significant part of the commercial property loan market in the US – and, due to the downturn, a significant part of the distressed loan market.

“Nothing is certain in the distressed market, but the decisions banks make this year on whether or not to reduce their exposure in the commercial real estate debt arena will tell us a lot about how long the distressed market has to run, “ says Seyfarth.

The survey also found that of those who sought to purchase loans last year, two thirds met with success – an improvement over the previous year, when fewer than 50% successfully closed transactions.

Despite concerns about the general availability of financing, investors also continue to seek leverage as part of their investment strategies, with 67% of respondents expecting some level of financing to facilitate their purchases. Interestingly, however, this is down from 84% in 2010. Of those who expected or required leverage, about a third aimed for leverage of 51%-60% and only a few expected to need financing for more than 60% of the purchase price.

US NPL investors are also casting their nets wider in search of the right deals. Europe’s sovereign debt crisis has resulted in more banks in Europe restructuring their balance sheets and considering the option of putting portfolios of distressed loans on the market. This has not gone unnoticed by larger US investors, who see Europe as an NPL market offering more opportunities and potentially higher returns than are available in the current US market.


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