NPL sales plummet amid Covid-19 pandemic but 2022 could see record volumes
€40.4 billion of loan sales recorded during 2020
Last year saw just €40.4bn of secured loan sales in Europe with the Covid-19 pandemic leading to a sharp downturn in activity across Europe, according to the latest report from global real estate advisor, CBRE. This total represents a marked decrease from the record level seen in 2018, which saw a total of €162 bn of real estate backed loan sales, as investors struggled to underwrite potential non-performing loan (NPL) transactions in a volatile market and vendors were unwilling to sell at a discount.
Despite the pandemic halting total trading activity, Italy and Greece were the most active markets in 2020, selling €15.9bn and €11.1bn of loans respectively and accounting for a combined 66% of the market. The Greek market has already seen a significant uptick in transactions in Q1 2021, with a mixture of portfolio sales and securitisations totaling €15.7bn. Spain, Portugal and Eastern Europe were particularly below trend in 2020. Spain closed just €4.4bn of deals, less than half of the €11.6bn total recorded in 2019 and considerably down on the 2017 peak of €52.2bn.
According to the report, the majority of portfolios sold in 2020 were secured by mixed assets, including single-family homes and land. This demonstrates a growing trend for mixed-use portfolios which have become more common place in the market compared to previous years where commercial real estate was typically the sole collateral.
The economic strain caused by the coronavirus pandemic is likely to trigger a significant increase in NPLs as Government support and stimulus packages are phased out. Under a severe but plausible scenario, CBRE forecasts that size of the market could reach €1.4 trillion by the end of 2022, up from €550bn in 2020. In particular, CBRE expects to see an uptick in Retail, Hospitality and Leisure loan sales as LTV covenants come under pressure from lower capital values. The majority of activity is expected to be driven by Italy and Greece.
Read the report in full here.
After a very subdued market in 2020, we began to see the first signs of activity in Q4 and this momentum has carried on into the first quarter of 2021. There is no shortage of dry powder looking to deploy capital into NPL portfolios but the pandemic has created unexpected uncertainty in the market and the vast amount of fiscal stimulus provided by Governments and Central Banks throughout the pandemic has meant the true impacts are yet to be realised. Consequently, we expect to see the sharpest increase in NPLs occurring during 2022 and 2023 as likely covenant defaults begin to trigger distressed loan or asset disposals.