As the European debt crisis continues to unfold, some U.S. real estate investors look to the distressed Continent as an optimal time to look for bargain properties.
The New York Times has reported that Private equity firms, whose investors include pension funds, university endowments and foundations, are vying to buy portfolios of European bank debt consisting of troubled commercial real estate mortgages. Investors and advisers say, that by acquiring these loans at deep discounts, they hope eventually to earn generous returns of 12 to 18 percent.
The asset sales in Europe could dwarf the work of the United States Resolution Trust Corporation, which was charged with disposing of the troubled mortgages resulting from the savings and loan crisis of the 1980s, said Russell Platt, the chief executive of Forum Partners Europe, an investment firm with headquarters in London. “Most of the firms looking at this came of age during the R.T.C.,” Mr. Platt said. “You can see why a lot of folks are rubbing their hands and saying: ‘This could be very interesting.’ ”
Commercial mortgage-backed securities, real estate loans that are packaged together and sold to investors, are not as common in Europe as in the United States. Instead, most European mortgages remained on the banks’ books, which has been a drag on profits.
As the sovereign debt crisis continues, European banks are expected to sell such distressed assets in an effort to increase their capital and protect against future losses. Morgan Stanley estimates that such institutions may have to cut their exposure to commercial real estate by up to $760 billion.
“Getting the banks healthy is critical for getting the European economy healthy again,” said Gifford S. West, head of European operations for DebtX, a loan-sale advisory firm.
So far, the pace of sales has been modest. Last year, the region’s institutions received an infusion of capital from the European Central Bank, easing the pressure to trim their balance sheets.
“The market is opaque,” said Ben Carlos Thypin, director of market analysis at Real Capital Analytics, a New York research firm. “There’s certainly more going on behind the scenes than is clear now.” The buyers have primarily been big names in private equity that are based in the United States, and are accustomed to taking on risk.
The loan portfolios have mainly included commercial property in Britain and Ireland, often in what are considered secondary or even tertiary locations outside of the major cities.
Original article can be read here.