Europe is emerging as a strong non-performing loan market, with an estimated €1 trillion of NPLs now on the balance sheets of the region’s banks, according to Ernst & Young’s 2013 NPL report.
This is the first time Ernst & Young’s annual NPL report has studied how respondents look at investment opportunities on both sides of the Atlantic, with European investors accounting for nearly a third of survey respondents asked for their views in January.
NPLs collateralized by commercial properties in Germany, the U.K., Ireland and Spain are attracting the greatest buyside interest. The survey shows that investors anticipate more distressed product from these regions that remain highly popular investment markets. Almost half of those responding to a question about where their primary market interest would lie in the next 12 months indicated Germany, with the UK running second with almost 40% of respondents.
“This year’s survey indicates an increasing appetite among investors on both sides of the Atlantic for European NPL product as they look to both diversify their investments and access potentially higher returns in a nascent market,” said Christopher Seyfarth, a partner in Ernst & Young LLP’s transaction real estate practice.
The Ernst & Young survey also shows that sales of NPLs could increase in Europe if investors grow more confident in the stability of Europe’s economy, and the euro and are more able to meet sellers’ price expectations. Over 50% of respondents believe that NPL opportunities will exist in Europe for at least the next three to four years
By contrast investments in US NPLs have declined on the back of fewer of investment opportunities, the report showed. The Federal Deposit Insurance Corporation (FDIC) was not as active in selling loans in 2012, and the amount of net NPLs in US banks’ portfolios is declining.
“The US market has not reached the sale volumes expected by investors and with banks continuing to recover, opportunities for investors become more limited as time moves on,” according to Seyfarth. “Yet, a substantial amount of NPLs remain on their books.”
More than half of the investors participating in the survey said they see the current US NPL market playing out within 24 months.