January 29, 2013 / 12:05 AM / in 5 years

Europe's toxic property loan clean-up gathers pace

LONDON, Jan 29 (Reuters) - Sales of European property loans will rise by about 15 percent to 25 billion euros ($34 billion) this year as Spain and Ireland speed the sale of unwanted and bad loans, confronting the extent of the real estate crash as they clear their books.

Both countries suffered the worst of Europe’s property collapse, with prices falling more than 50 percent in some areas from the previous peak in 2007. Both have national ‘bad banks’ to purge lenders of their risky loans and after a slow start, during which better-performing assets were offloaded, both countries must now tackle the worst.

Sales will also pick up because of tighter rules governing how much capital lenders have to hold against risky assets like property and as banks’ sales operations set up several years ago get quicker, a report from real estate consultant Cushman & Wakefield said.

“There will be a big ramp up over the next two years”, said Michael Lindsay, head of EMEA corporate finance at Cushman & Wakefield. “There’s a possibility we will see the beginnings of a buyers’ market.”

Loan and bank-controlled property sales totalled 21.7 billion euros in 2012 versus 8.8 billion euros in 2011 with the UK, Germany, Spain and Ireland accounting for 90 percent by volume, the report said.

Irish bad bank the National Asset Management Agency (NAMA) was set up in 2009 to purge the country’s banks of nearly 75 billion euros of risky loans.

Early on it sold loans related to better-performing property in stronger markets like Britain. But it has sat on those tied to real estate like rural land for which prices have plunged by as much as 99 percent.

With no sign of a recovery for decades in many areas of the country, NAMA will ramp up the sale of loans related to land earmarked for homes and offices at farmland prices over the next 18 months, a spokesman told Reuters.

It is also currently teeing up the sale of 1.1 billion euros of loans relating to undisclosed assets, a source close to the process said.

Spain has taken longer to get to grips with its problems as the country’s banks were reluctant to mark down property assets amid fears about their own solvency. It established a bad bank under the acronym SAREB at the end of last year as a condition of Europe’s bailout of its banking system.

“We’ve seen more loan sales than property sales recently in Spain and the bad bank will speed that up,” said Humphrey White, head of investment in Spain at property consultant Knight Frank. “The market appears to be finding its bottom.”

Loans are typically bought at discounts of between 40 and 50 percent and investors make returns that can top 20 percent by buying in bulk to sell on in the manner of a wholesaler. Alternatively, they use development expertise to revamp properties before selling at a profit.

Large North American investors such as Blackstone and Lone Star have dominated European loan sales in recent years as many portfolios were in the 500 million euros-plus bracket.

Deals between 200 and 500 million euros will increase in 2013 to meet demand from smaller investors, the report said.

Lloyds topped the list of sellers last year with six billion euros of loan sales followed by Santander with three billion euros.

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