Italy leads the way in CRE debt sell off

Italian banks have heightened the pace of removing toxic loans from their balance sheets as they find more buyers for the under-performing assets.

Italian banks led the way in clearing up toxic commercial real estate assets last year, selling off €25 billion of underperforming property loans, according to figures from advisory firm CBRE.

It is an increase of just over €5 billion from the previous year and twice the amount of non-performing loans sold by Irish banks, which totalled €12.8 billion, placing the country’s institutions second in dealing with toxic loans.

Southern Europe was slower to kick off its deleveraging programme after the global financial crisis compared with the rest of Europe but it is now expected to accelerate as banks in this region face louder calls to clear up their balance sheets, said Paul Lewis, head of loan advisory at CBRE.

He said: “Loan portfolio trades by banks represent a key component of Europe’s economic rehabilitation. While progress has been slow in some jurisdictions, we now expect a significant uptick, given both regulatory pressures and deep buyer demand for the right product, particularly in Southern Europe.”

Investors are increasingly allocating capital to vehicles specialising in distressed CRE debt across Southern Europe. CarVal and Fondaco teamed up on a platform expected to raise €400 million with a first close due shortly and last year the hedge fund Algebris continued its evolution in the space with the launch of its second Italian CRE fund.

CRE loans outstanding from the pre-2007 period dropped to 9 percent last year, continuing a trend that saw totals of 13 percent at the end of 2015 and 18 percent at the end of 2014. “The pool of outstanding lending is now dominated by loans made after the GFC, when capital values have been less stretched and more prudent underwriting standards have been in place,” the report said.

Last year, €116 billion of CRE debt was issued secured on transactions worth €255 billion, said CBRE – a drop from €125 billion in 2015. The UK market saw a rise in margins post-Brexit, while lending at the higher end of the LTV scale and on secondary properties saw a general increase across the year.