TPG, Apollo, Blackstone and Cerberus emerge as leading players in local real estate loans
The long legacy of the vast books of bad debts accrued by Spanish banks has proven to be good business for US private equity groups, which have emerged as custodians to the country’s real estate woes.
TPG, Apollo, Blackstone and Cerberus have become powerful players in the highly profitable Spanish loan-servicing industry, which has emerged from the country’s banking crisis and has been critical to its recovery.
TPG acquired its majority share in Servihabitat from Caixa Bank in 2013. Today, the business — a specialist in recovering value from loans and real estate investments for its clients — manages €50bn of assets, up from just €2bn in 2008. In 2016, it made more than €100m of earnings before interest, tax, depreciation and amortisation on revenues of €285m.
Apollo, Cerberus and Blackstone have invested in similar businesses, typically referred to as “servicers”. Their business is simple — they manage, on behalf of banks and other investors, the process of recovering value from distressed loans and the real estate that the loans were used to develop or buy.
The crash in property values following the financial crisis still haunts the Spanish economy, with loan servicers often having to negotiate new terms on borrowers’ bad debt or recover ownership of the physical buildings on which the debt is based.
Their role as investors has not always made private equity firms popular in the country, but the move into the servicing market has proven profitable, both financially and for the knowledge it provides about the national real estate market.
“We have helped not only TPG but other investors,” says Julián Cabanillas, chief executive of Servihabitat, which is still partially owned by Caixa. “We have an enormous knowledge about the market in Spain, the trends, what is moving . . . we have a huge quantity of information.”
For many US private equity groups, experience of earlier financial crises, such as the Asian crisis during the 1990s, ingrained the importance of the servicing process in non-performing loan investments.
In Spain, opportunities for private equity companies arose as banks sold their servicing platforms, as part of a post-crisis shedding of assets.
Haya Real Estate, which includes a former Bankia servicing platform, is owned by Cerberus. Apollo bought a majority stake in Altamira, Santander’s platform, and Blackstone owns Anticipa, formerly of CatalunyaCaixa.
At the centre of the demand for servicing is Sareb, the Spanish “bad bank” which took on more than €100bn of gross bad assets in late 2012 and early 2013 from the country’s crippled banking system.
In 2014, Sareb awarded contracts to four servicers — Haya, Servihabitat, Altamira and Solvia. The platforms at that time paid almost €600m in total to Sareb, which it says will be paid back depending on performance.
“The servicing industry has evolved, has come of age,” says Jaime Echegoyen, chief executive of the bad bank.
Sareb has made €17bn of revenues since its origin and needs to complete its operations ahead of a 2027 deadline for its operations. “I think we can go a little bit faster,” he adds. “The major part is for us to make the servicers be really optimised.”
The businesses also provide another form of value to investors: information. For such investors, servicing platforms provide a window into transactions across a national market for non-performing loans, which complements potential purchases of loans and real estate.
“We own it [a servicer] for the data from the underlying management,” says one private equity investor.
The large portfolios of loans held by US private equity companies provide a further benefit of also owning a servicer.
Servihabitat looks after loans owned by TPG but a much larger proportion of its assets under management still come from La Caixa and Sareb. Spanish banks still carry bad loans on their books other than those transferred to Sareb, whose financial assets are made up of developer loans rather than consumer-facing loans.
However, the nature of the business has caused social and reputational issues for the servicers, and their overseas owners, as the buildings are repossessed and their occupiers and owners evicted.
In parts of Madrid, it is still common to encounter large developments occupied by squatters. “It is in the last two years that more buildings have been occupied,” says Diego Sanz, 39, who lives in a Sareb building. “The crisis displaces itself.”
In Madrid, cases opened for squatting have risen over recent years. In 2015, the latest data available, there were more than 4,000 cases opened, compared with about 3,000 in 2013 and just over 1,000 in 2010, according to official figures. “There are some regions where we believe by default any apartment we repossess is squatted,” says one executive at a leading servicing platform.
Other servicers acknowledge the political sensitivity of the business model. Sareb has signed agreements with regional governments and municipalities to provide flats for social housing since 2013.
The nascent industry faces another challenge — the self-limiting nature of success. “One of the challenges in the servicing sector is ‘what could be the future of these companies’,” says Javier García del Río, the chief executive at Solvia, which manages more than €30bn in assets and is owned by Sabadell.
“We work to extinguish the portfolios that we manage,” says Mr Cabanillas, who adds that Servihabitat is now expanding into areas beyond servicing, including development of property, which was “completely destroyed” in the crisis.
“We are working for owners of the land in order to build and to sell the units of this land, we are converting in finished units in order to create value,” he adds.
Source: Financial Times