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Transforming Distress into Success: Insights from the NPL Portfolio Investing Webinar

August 9, 2023

Recently Drooms hosted an informative and engaging webinar titled “Transforming Distress into Success: Investing in NPL Portfolios for High Returns”. This webinar, led by Javier Rodriguez, Director of Business Development at Drooms, delved into one of the key developments in the real estate industry – the rise of Non-Performing Loan (NPL) transactions. The webinar featured an impressive line-up of industry experts, each offering unique insights and expertise. In this blog post, we recap the discussion, starting with an overview of the NPL market in various regions and highlighting notable trends observed by panellists.

Panellists’ Perspectives on the NPL Market:

According to Antje Mertig, Managing Partner at Steinberg Real Estate Management, the German banking market appears stable overall. However, there has been an increase in sub-performing loans and a rise in workload for restructuring departments. Despite economic turbulence, insolvency rates have only slightly increased in recent months. Antje also pointed out that the number of NPLs is expected to increase, and megatrends such as climate change and ESG (Environmental, Social, and Governance) criteria will pressure the real estate industry and its lenders. Furthermore, some debt funds need more personnel resources to manage non-performing exposures effectively. As a result, they may opt to hire costly advisors or swiftly sell off these exposures. The evolving landscape of the German real estate market, combined with various market forces and regulatory factors, will undoubtedly shape the future dynamics of NPL transactions and restructuring activities.

Jose Maria Gil-Robles, Partner at DLA Piper Spain, confirmed that there had been an observed increase in the number of NPL transactions. However, these transactions are smaller than in the pre-COVID period, with some cases seeing substantial reductions. It is worth noting that the current market interest extends beyond NPLs and includes performing and reperforming loans.

How to determine the fair value of an NPL portfolio

Benjamin Girard, Country Manager at AURA Real Estate Experts, shared that determining the fair value of an NPL portfolio involves considering multiple factors, including collateral quality and valuation, cost of services and legal proceedings, risk appetite, competition, and any actions taken to enhance the portfolio’s value. Evaluating these factors collectively helps investors fairly assess the value and make informed decisions when acquiring or managing NPL portfolios.

The impact of regulatory frameworks and legal considerations on the acquisition and management of NPL portfolios

Michela de Marchi, Segretario generale at UNIREC stated that the implementation of the European NPL Directive in December 2023 is expected to significantly impact the acquisition and management of NPL portfolios within the EU. The directive aims to benefit companies operating across multiple European member states by providing a harmonised framework, enhancing market efficiency, and boosting investor confidence. However, it will also bring increased compliance requirements that companies must navigate to ensure successful operations in the NPL market.

Potential exit strategies for investors in NPL portfolios

Antje Mertig and Michael Anter, Managing Partner at Arcida Advisors, GMBH highlighted the following in relation to Germany:

  • Implementation or Continuation of Workout Strategy: One potential exit strategy for NPL portfolios is implementing or continuing an effective workout strategy. This involves developing a plan to resolve the underlying issues of distressed loans and maximise their value. Depending on the size of the investor, this can be done in-house or through collaboration with an external special servicer ith the expertise and tools to process loan workouts efficiently.
  • Co-investment with Local Servicer: Many foreign firms interested in acquiring NPLs in Germany need a local presence. They consider entering a co-investment arrangement with a local servicer in such cases. This enables them to leverage the knowledge and capabilities of the local servicer while participating in the potential upside of the portfolio.
  • Selling in Tranches or Bundling with Other Portfolios: Another exit strategy is to sell the NPL portfolio in tranches or bundle it with other purchased portfolios. This approach allows for risk diversification and the potential to attract different types of buyers.
  • Loan-to-Own Strategy:Ssome investors are solely interested in acquiring distressed real estate. This loan-to-own strategy is particularly suitable for single loan transactions with substantial upside potential through implementing value-add strategies.

These potential exit strategies offer flexibility and cater to different investor preferences and objectives. By considering these options, investors can develop a comprehensive approach to maximise the value of NPL portfolios and achieve successful exits.

The impact of regulatory frameworks and legal considerations on the acquisition and management of NPL portfolios in different regions

Jose pointed out that unlike in other jurisdictions, in Spain, you do not need a licence to buy and hold loans, even though for several years now, there has always been a discussion around the need for investors to be registered as mortgage holders with Bank of Spain. This explains why, for years, NPLs have been acquired directly by vehicles based in Ireland or Luxembourg and the REOs are parked in Spanish ReoCos. However, for performing and reperforming loans, the preferred route for sellers and purchasers is the securitisation of one.

Advice to investors new to NPL’s

NPL investments are a very specific asset class. Therefore, in-depth legal and financial knowledge from the due diligence phase until the final recovery is required. To avoid costly mistakes, we recommend to carefully do the underwriting, do not overestimate potential property exit values and do underestimate cost and timing.

Overall, the NPL webinar hosted by Drooms provided attendees with a comprehensive overview of the NPL market across regions, uncovering notable trends and drivers behind the surge in NPL transactions. The panellists’ insights shed light on the growing interest in distressed assets, regulatory changes, and the importance of effective asset management strategies. Would you like to learn more? Click here to watch the webinar on demand.

As the NPL market evolves, Drooms remains dedicated to providing valuable resources and fostering discussions to empower investors and industry professionals. Stay tuned for more informative webinars and updates from Drooms as we navigate the dynamic world of NPL transactions and uncover new opportunities for success.

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