The European real estate market is characterized by considerable diversity in economic, legal, demand and supply drivers, with structural changes in Italy and Spain providing considerable opportunities for investors looking to capitalize in unique buying opportunities.
Core Investment Strategies include:
- Value-add, Income Generating Assets
- Non-Performing Loans
- Bridge Financing backed by Real Estate Assets
- Development of Residential Assets
Italian Distressed Assets
Italy provides fertile ground for opportunistic investors to take advantage of the structural, economic and financial changes taking place within that real estate market. Following the crash in real estate transactions, which bottomed-out in 2012, the banking sector has been seeking exits from their exposure to distressed assets.
Varia Europe participates in the market, through participations in VSO compartments, in two ways, by either purchasing portfolios of claims backed by real assets at a substantial discount to Gross Book Value, or by partnering with the bank and taking over the management of the process for exiting the projects through a profit-sharing scheme. Both options provide banks with the ability to exit their exposure and for Varia Europe, through Stoneweg, to cherry pick profitable opportunities and manage the risk profile of our exposure.
There are three specific streams of investments in Italy in which we aim to have a direct exposure. These include non-performing loans backed by real assets, prime development opportunities in key urban locations, such as Milan and Rome, and value-added commercial income assets with quality, secure tenants.
This is an opportunistic strategy through direct asset acquisitions and portfolios of claims. Primarily a capital-gain orientated return profile with an underlying investment horizon of between 3 to 4 years.
Gross NPL and Bad Loan Trends
(Source: PwC – The Italian NPL Market, June 2018)
Spanish Bridge Loans
The Spanish real estate sector, as well as the financial and credit sectors as they relate to real estate, have undergone a fundamental and deep restructuring since 2008.
This is an investment into senior secured loans with first lien mortgages on properties across Spain in situations where bank lending is not available or is limited. Bank lending remains particularly constrained for the purchase of development land, predevelopment activities, early construction loans and certain mortgage bride refinancing and/or debt restructuring situations.
The investment area of interest is short-term loans from 3 months to 3 years, with individual loans ranging between €1 million to €15 million in size. The average maturity is expected to be less than 2 years and with an average LTV of approximately 50%.
Geographically, the core areas of interest are the key cities of Madrid and Barcelona, and the country’s top coastal locations: the Costa Brava around Barcelona, the Costa del Sol (Malaga and Marbella) and the Balearic Islands. Secondary cities with buoyant local economies and top tourist destinations also fall within the relevant investment universe.
Ultimately, the value and quality of the collateral, combined with specific segments or situations of institutional financing constraints, will be the overriding drivers in portfolio allocation, with an expected overweight towards the core locations.
Varia Europe takes a positive view of the real estate market within Spain based on economic fundamentals, demand / supply drivers and real estate pricing shifts which have taken place over the last few years. The market entered an expansionary phase in 2018 having been in recession between 2008-2014 and recovering through 2014- 2017*.
With rising household wealth, demand is supported by macroeconomic and demographic fundamentals. We are witnessing strong momentum in house prices at a time when affordability is at a strong level, particularly when compared internationally*. These upward trends in pricing have been taking place since the low of 2013 and new build prices have grown by double digits since then*.
Improving employment, increasing household income, favorability for international investors and better mortgage terms provide an attractive backdrop for the residential development market. Our market indicators suggest prime residential and large / medium-sized cities are entering an expansionary phase which is predicted should last until 2021-2022*.
Underlying investment projects have a target three to four-year development timeframe. De-risking in the portfolio takes place through pre-sales and down-payments during the property development cycle. New housing is well below equilibrium levels, the supply shortage has not been met and we continue to invest in a market which we consider to be attractive.
*Underlying data sources: Aguirre Newman research, Bank of Spain, JLL research, Ministerio de Fomento, CBRE
Residential Market Entering an Expansionary Phase