Tag Archives: asset management

The role of the servicer and the new rule of the debt collection

The role of the servicer and the new rule of the debt collection 1

For several weeks, the fear of a legislative decree aimed at helping families and business in difficulties, has been on the table among professionals in the NPE world. Many colleagues and main player/institution have already expressed their thoughts, with which we can only align ourselves: as thought, it is certainly not feasible and the negative effects on the economy in general would be much more than the positive ones.
This dutifully clarified, it is our intension with this article to raise attention on other issues still pertaining to the debtor party, resulting from the development of this new industry. Not theoretical speaking, but practical and already present in our daily work.

There is a lot of talk (rightly, I would add) about sustainability and ESG criteria applied to all areas of business and production. So, it is maturing in worker and the consumer, the awareness, and the need to understand the impact of one’s choices about the environment, understood not only in the “green” sense.
Our young debt collection industry, few months now, has been facing a totally new situation. Most likely the reader is an insider, so I will avoid to going into the economical dynamic of the period (raw material, inflation, raising rates etc.); instead, I would like to focus on a growing dynamic that are having a strong  social and misalignment impact, on real economic.
In a forcibly simple way, this is the summery of what is happening: due to the increase in reference rates and due to the need to support audacious BP, the conditions of repayment for a debtor are becoming unsustainable.

The adjective it is used not by chance: what typically happens is that an instalment that takes into account, the prospects of realization of the servicer/noteholder is rarely compatible with the repayment capacity of the debtor. In these cases, the servicer offers a significant upfront payment to support the numbers, despite the obvious fact that in a situation of financial tension it is unlikely that the debtor has accumulated a significant savings.
However, this is just one side of the coin. The real issue is not represented by the worsening conditions of return, but by the clear and evident disparity/inhomogeneity between different debtors in the same situation. In essence, the debtor’s hope of redeeming his own position depend equally on his ability to restart producing income again and on the luck of having found the right creditor.

The rise in the rates and therefore in the expected returns for investors in this asset class has only highlighted and made extreme a phenomenon that had already begun with the massive sale of non-performing loans.  The consequences of this trend are different, all with transversal and evident social impact:

  • Differences of conditions between debtors of the same institution/originator according on the timing and the condition of the assignment (transfer) of credit.
  • Differences of conditions between debtors of different institution that have contracted the same type of loans.
  • Misalignment of interest and diversity of approach between the various creditors: those who can afford to “grow” the client and support a repayment plan, and those who have no interest to in nurturing the client because they don’t do banking and can do nothing but take legal action.

I am sure that whoever read can perfectly understand that the article doesn’t have moralist or do-gooder content. We and all our colleagues continue, and we will continue to carry out our duties with professionalism, to pursue the objectives of the BPs in compliance with the codes of ethics no more and no less than before. We are also certain that the reader have cleared that the dynamics here described are clearly disconnected from the topic “ Proposta Legge Congedo”, which is certainly not the solution.
Nonetheless, it doesn’t mean that we cannot highlight a significant trend, full of our social fabric, that are going to focus on some of our cultural characteristic traits, such as the property of the first house.

Also evident is that if exist a solution this is found outside of our industry and cannot be left to the autonomy of the player operating the free market.
In our point of view what is need to be initially done, as the bare minimum and quickly, is to spread the culture in this sense. There is a need for greater awareness for the consumer and for companies of how much the credit chain has changed, of what are the needs of the new players and their consequences, starting from the credit disbursement contract.

Quoting a dear friend, we are the country in which to make a PAC of 100 eur/month you need to profile your attitude to risk and families without any financial education freely take out five-figure mortgages. All of this are examples of the current situation, for a change of course it will be necessary to row hard and against the current.

Emanuele Grassi

Coronavirus, a year later: 3 things we didn’t expect

Coronavirus, a year later: 3 things we didn't expect 2

Published on 17/05/2021 on Creditvillage.news

Coming back with memories a year ago, I often think that we have entered this new condition absolutely unprepared. In all respects. We used to say to each other all the time “who would have expected it”, catapulted into a sci-fi movie condition with deserted streets, hospitals in disarray and social isolation. Perhaps all this could have been predicted, or rather made to find us more prepared, but this is another film that finds no space in this article.
In those first few weeks our thoughts were not entirely rational. We didn’t know how long the lockdown would last – let alone what we could sense about the housing market and the NPLs. I remember my phone ringing all the time: the instrument already used and abused before the pandemic had become the only way to talk to the outside world and I spent the day talking to people about the most diverse topics, seasoned with unthinkable questions like “are you alive?”, “what about my real estate?”, “what do we buy in the bag?” and similar things. It’s been about a year; a lot has changed.

From before, of course, but also since the beginning of the pandemic, many things have become different. The most important is undoubtedly the possibility of thinking about tomorrow in a more rational, logical and clear way. Net of all the outstanding issues for which I do not feel able to make a judgment, we are on the eve of the summer season with a vaccination programme started and a fair amount of optimism that next winter the virus will not affect us with the same force.

I would like to focus on the situations that we are currently experiencing and which we could not have foreseen a year ago. I believe that understanding this dystonia can really help us to find the compass and to live the present as clearly as possible.
I counted three:

  1. Nonlinearity of impact:

At the beginning of the pandemic, we all realized that some sectors would be hit more than others; I am thinking, for example, of tourism in the negative sense and logistics/delivery in a positive sense. What determines the current situation is not, however, such a clear split: it is an intersection of direct and indirect impacts, determined by the related and in some cases also by purely psychological aspects. When we talk about mortgage NPLs, we are witnessing absolutely unpredictable events: the number of auctions beaten has plummeted, dragged down by the effects of the infamous 54ter on main dwelling properties. The downside is that we are seeing unpredictable side-effects such as large participation in auctions that are beaten, perhaps determined by the increased concentration of buyers. On the real estate sector, on the other hand, we observe the unexpected dynamism of the market of the management of large cities and tourist properties that paradoxically should be the sectors most affected by Covid by use. Even in the residential market we find some unexpected or unpredictable situations: the prices of large cities are stable, no escape to the countryside as you might have thought at first. The desire to change the air (literally) and to regain freedom finds its sublimation in the second house, which lives a flourishing moment in sales and prices as not seen in 10 years now.

2. A new everyday life

Perhaps even for a bias of our brain, in these situations we are led to think that the problem would be solved at the same rate as it was created. What is unfortunately happening is that after a year we enjoy limited freedoms and variable over time, this creates a context of non-linear (see previous point) and mobile economic uncertainty, creating difficulties of all kinds. What is likely to happen in the near future is that we will return to a new normal, that is to say, a daily life that will absorb the negative and positive consequences of what has happened. We will work more in smart-working and live longer in tourist resorts, but we can hardly cram a closed space or use public transport in the same way. Once again, all this will also affect the NPLs and the real estate market in an unexpected and difficult to predict way: the moratoriums have not yet expired and certainly will not all expire at the same time; it is not yet clear the fate of the management and properties for
retail use, from shops to shopping centers. Probably after a long time we would have expected to have much clearer ideas on how to act in certain situations for debt recovery or how to enhance a certain type of asset; that is not the case and probably will not be the case for several more months.

3. The restart:

The common trait is the desire to start again and get out of this unpleasant situation. It seems natural to think of an end pandemic of great enthusiasm, with record sales for everyone and rampant revenge spending. The reality is that this situation is leaving a heavy mark on someone (see still non-linearity) and this restart will not be the same for everyone. Health, economics, psychology: the virus has not only attacked the respiratory tract. How many hotels or restaurants will leave? How many people will have lost their jobs? The answers to these questions are very important for the housing market and reference for the NPLs market but the truth is that we do not know them today. The data collected at the moment are influenced by too many trending dynamics and cannot represent a long-term trend. We can rightly note that real estate sales are the impact and that the market in general is sparkling and optimistic; they are probably the effects of the liquidity wave that we have received, which if it is not translated into real production/economy will soon become inflation. We are therefore in a transitional phase: we are too close to the turning point to be completely in the dark, but in the next few steps there is still too much uncertainty to get a clear picture of the situation. It is important right now not to totally trust irrational trends and drives, which can be fake friends. The historic moment is new for all generations and we cannot afford to approach tomorrow’s activities lightly.

The real challenge today is to keep the focus high. This long period of twilight has clouded our ability to react to stimuli and opportunities a little; each of us must make an important effort in this regard. It is now very difficult to be able to analyse an NPL portfolio, decide on the change of use of a property or land; it is easy to be tempted by the activity by inertia but we must accept the doubt, adopt the criterion of prudence and approach work with professionalism.

Time is always gallant man and full of rewards for those who approach work in this way.

Emanuele Grassi

Real estate and debt collection: two different worlds, a possible partnership

Real estate and debt collection: two different worlds, a possible partnership 3

Published on 11/12/2020 on Creditvillage.news

The world of debt collection and the world of real estate have always been very connected to each other, in Italy in particular. In our banking history, the real estate guarantee is considered the most traditional and comfortable guarantee for the lender. The provision of mortgage credit is directly functional to our entire economy: buying a property is the easiest way to obtain a loan. Sometimes even in a pretext way: often the notary bank does not take into account some side effects such as the precariousness of income (private), the instrumentality of the asset (companies) and the fluctuation of the real estate market (all); in this way, the risk of default goes beyond the certainty with which the credit was granted, in the name of a guarantee that often betrays expectations.

It goes without saying that in cases of default of positions, the enforcement of the real estate guarantee becomes the first thing to do, and it is therefore clear that although the NPL issue is relatively young, the management of mortgaged properties should be consolidated practice for credit institutions.
Yet this is not the case. Up until 10-15 years ago, the requalification of real estate collateral was an almost unknown subject within the credit recovery/bad loans departments and left to the initiative of the most enterprising operators. With the current vision it seems obvious, but until then there was no widespread awareness of the enhancement of properties in order to optimize recoveries.


The current scenario of credit recovery has changed and evolved to such an extent that the previous one is unrecognizable. Today the actors are highly specialized, often saying “mortgage” or “unsecured” is not enough to describe the activity of a servicer. There are a number of clusters such as asset class, borrower category, size and business model that make the activity of a specialized operator highly recognizable (sometimes unique) and determine its recognition on the market.If before the NPL market was similar to a wholesale market, now it looks more like an agglomeration of craft shops where different approaches to work can be seen inside. In short, a mature market.
A market so mature that it can open itself with awareness to the outside, to investors and operators of the same asset class. In the case of Real Estate, this is a great opportunity. There are many traditional operators looking for opportunities that the NPL/UTP world can convey. The servicer therefore acts as a business originator towards the market and through its specific skills is able to support the partner if necessary in all those activities that for the traditional real estate developer are not considered central: the combination is often a winner for both.

The traditional case is that of real estate development from scratch: the involvement of a specialized actor can optimize internal resources and outsource most of the risks associated with a non-central activity. There is a big difference between saying and doing: everyone talks about bad loans, even outside our market, but few are able to handle them and understand the dynamics of these positions.
For example, many real estate developers, even experienced ones, confuse ownership of a mortgage loan with ownership of a property. How important is the expertise of a specialized servicer? Conversely, how many opportunities can a mortgage servicer lose just because they lack the time, structure and funds to value a collateral?
It should always be remembered, in spite of a common belief, that the activity of debt collection and the requalification of the underlying guarantees are by no means counter-cyclical activities; they simply place themselves immediately after the traditional economic cycle, with the same aims and the same actors. To understand this, the main objective of a property developer is the realization of their activities by selling them to the end user (the best possible payer); this goal is perfectly aligned with that of the NPL/UTP market, in which the operator finds his economic satisfaction. In this context of aligned objectives, players in the real estate and debt collection markets can forge profitable alliances.

Finally, it must be emphasized that in a cyclical context of profitable activities, a positive economic flywheel is created for many other subjects: suppliers, technicians, agencies, operators in the real estate sector generally find the possibility of producing work and income generating induced activities for community of reference. There is also an indirect beneficial effect typical of the enhancement of NPL/UTP guarantees:
often the stalemate resulting from the failure of the debtors involved creates a situation of degradation which in some striking cases has an impact on entire areas, neighborhoods, cities. Consequently, the restoration of these situations produces indirect effects that are often not calculable a priori but no less important.
As an example, let’s think what the restoration of a decaying building could mean for a residential area, perhaps in the meantime also occupied or become a center of opaque activities, or even simply for a condominium, the arrival of a good payer who goes to restore a situation of arrears typically borne jointly by all condominiums.

The indispensable condition for forming alliances and collaborations between the real estate world and the debt collection world is that both actors work in watertight compartments and that their activities do not interfere. Respect for reciprocal roles will prevent overlaps in the distribution of tasks and profits, resulting in greater efficiency in the work performed and a better result for the benefit of all.

Emanuele Grassi

Coronavirus and NPL: 3 certainties to start from

Coronavirus and NPL: 3 certainties to start from 4

We are experiencing a completely new historical moment.

Any comparison on other experiences of the past does not fit: it is not a war, otherwise we would not be at home in the heat with all the comforts it is not even a normal influence, otherwise we would not have hospitals to the limit of their intervention skills.
We do not know exactly when all this will end, when we will be able to leave the house and how different our daily lives will be in the near future.

Therefore, every forecast reasoning made today has no certain foundation.

Often people are led to think that NPLs are an anti-cyclical economic area; in reality they are only a part of it, because each NPL at the end of its path returns to being a real economy and responding to all the logics connected to it.

Let me explain better: if, for example, we bought a NPL guaranteed by a hotel at a good price and then to recover the investment we had to sell the hotel at auction or on a free market, we would be faced with a zero-sum game.
We believe that at this point it is appropriate to start from the certainties, we have identified three:

  1. The NPL market is a mature market:
    in 2009 following the financial crisis, the banks were overwhelmed by a wave of NPL and were absolutely unprepared to face it. Today the situation is completely different: the NPL market is mature, many players with different specializations and sizes have been born over the years. We are certainly more ready to face the situation and the restart will be faster.
  2. The Legislator understood the centrality of the NPL theme:
    in the last 2/3 years the legislator has made important steps forward by institutionalizing and facilitating some virtuous practices of specialists, such as corporate restructuring and repossess of real estate guarantees (SVA – Reoco). Sometimes it has been argued that there have been many interventions that are close together and not always consistent with each other, but there is the fact that the topic has been fully addressed. In the coming months it will be particularly important to revive this dialogue; It is also important that the servicers represent their experiences and that they consolidate the virtuous practices already adopted, respecting debtors in difficulty and creditors entitled to recover their money.
  3. The specialized servicers are more performing:
    the NPL market has now reached full maturity and as in any mature market, the winning card for performance is specialization. Over the years it has become clear that focusing on specific asset classes has brought positive results both in terms of assessment capacity in purchasing and in terms of maximizing recovery in the sales phase. The difference between the results of the specialists and that of the generalists will be increasingly evident; in two different phases we will need both results to move the market and bring NPLs back to the real economy, that of families and entrepreneurs, as soon as possible.

I wish you to spend these days with serenity and health.

Emanuele Grassi

Reoco: instructions for use

Reoco: instructions for use 5

The Growth Decree dated 30/04/2019, recently converted into Law, will improve the real estate activity relating to the world of NPLs.

A simplified description of the major changes submitted by the legislator is provided below:

  • possibility of establishing a special purpose vehicle (SPV) focusing on the real estate activity necessary for the recovery of the credits of a specific securitization vehicle;
  • transfer to SPVs of the benefits of the asset segregation as well as of the cascade payments, typical of SPVs;
  • possibility of securitising properties instead of credits;

GMA a specific Reoco company, following the principles of the Growth Decree and explicitly connected to our MB Finance securitization vehicle.

What impact will the Growth Decree have once it is enforced? It will be very strong. Especially if the operators are adequately competent.

Initially, it may seem that the Reoco system brings only advantages in this historical context. For example:

  • almost total reduction of repossess tax costs;
  • tax relief extended to the final purchaser resulting in greater price competitiveness compared to the free market supply;
  • greater improvement of the auctions thanks to the lower cost of the properties;

This is true. However, it should be pointed out that the real estate activity connected to mortgage loans is a real estate activity; moreover, Reoco company cannot be managed without a specific department.

Ownership of a property entails honours and obligations on the part of the owner: for example, combined municipal property tax, condominium fees, maintenance costs and use-related depreciation.

This instrument is useful, especially for those who manage credits, and must be used sparingly and smartly. It is necessary to carefully identify the credits able to actually increase their value if they are “converted” into properties and adequately valued.

In GMA we have been managing Reoco for over 10 years. We have developed different strategies to offset the initial legislative vacuum and then to adapt to the regulatory changes introduced by Legislative Decree no. 18 of 14 February 2016, converted into Law no. 49 of 08/04/2016; in particular, the tax benefits referred to in art. 16 paragraph I were applied only until 30 June 2017.

Now we are launching to one of the first (perhaps the first) Special Purpose Vehicle established according to the provisions of the new Growth Decree, hoping that the changes suggested by the legislator will be long-lasting and will allow operators to efficiently work in the long term.

Emanuele Grassi

Guide to the Italian NPL market for foreign investors

Guide to the Italian NPL market for foreign investors 6

Those who attend meetings on NPLs surely know that one of the most common topics is the foreign investors’ opinion on the Italian NPL market.

In line with the stereotypes involving our Country, a special emphasis is given to the fact that the regulatory framework is unstable, the assets are difficult to be assessed, the recovery times are uncertain, etc. Genius and intemperance.

It is commonly believed that this situation is likely to discourage foreign investors, while actually the capital increases every year and the Italian servicers are sold to foreign companies or funds at high prices. Clearly, the capital to be invested is greater than the assets to be purchased, and an apartment in the Italian countryside is not worse than an apartment in the English or German countryside.

Therefore the foreign investors or servicers willing to purchase some Italian NPLs should take into account the 5 following aspects:

– The worst way of calculating the value of an NPL mortgage guarantee is the open market value (OMV) to which a flat-rate percentage is subtracted. In Italy, in fact, the open market and the judicial auction market are completely different.

Distrust the reports which calculate the value through the application of this method: the uncertain property release time and the poor access to the actual situation are too decisive.

The only element comparable to an auctioned property is another auctioned property under the same conditions;

– It is true that the land loans are collected faster than the mortgage ones, but do not consider this to be truthful: law, in fact, is implemented in different ways depending on the competent court; someone will send 90% of the money to your account directly from the contractor, while others will not apply Article 41 of the Consolidated Banking Act (relevant legislation), in addition to various intermediate scenarios;

– If you invest in collective procedures, make sure that the servicer to whom you are entrusting your money is aware of the fact that one or more people should be appointed exclusively to call the professionals and ask for urgent replies;

– If you do not want to wait far too long for the court decision at each stage and want to avoid any annoyance, enter 30% higher data into the algorithm. In Italy challenges, postponements and new hearings are very common. It averagely works after 100 loans;

– Invest only in one asset class at a time and apply to a servicer who specifically manages that asset class.

Note: Recently we have created a Twitter account: @GMAsrl1

Emanuele Grassi

The management of NPLs as a Reoco

The management of NPLs as a Reoco 7

We have welcomed the provisions issued by the Bank of Italy on 16 March. When we started our activity 10 years ago, we suggested a business model which was unusual then, since it included a special purpose vehicle (SPV) for the purchase of secured loans backed up by an active real estate company. Till then (except for some cases), most of the market players followed an unbalanced model: either real estate companies that purchased targeted mortgage loans or financial companies relying on a Reoco established for a specific purpose and managed in the spare time.

These provisions establish a model as a common practice and submit it to the originators. Then we were right, weren’t we?

Yes, we were right on the buyers’ side, while as for the originators/banks, everything is yet to be proven. The buyers’ side, in fact, offers some advantages: it is possible to focus on some asset classes, select the best, or implement the structure according to the task to be performed as well to the loan type.

The difference lies in the core business: the management of assets and loans is our core business, it does not rest with banks. Not yet, at least.

In order to meet the provisions of the Bank of Italy and seize the opportunity resulting from authorisations and derogations, the Credit Institutes will have to adapt themselves or assign this task to experts. Otherwise, it will have a boomerang effect.

After 10 years, we have realised that there are 3 main aspects governing the management of mortgage loans through a Reoco, which we constantly take into account:

– different approaches according to the asset classes: the enhancement of a villa or of an industrial complex are not the same thing. Sometimes, even within the same asset class, it is necessary to enact different approaches (for ex. apartments/villas, or hotels/tourist accommodations.) The business model varies at the business plan and design stage (software) as well as upon the following application and territorial management (hardware);

– dedicated structure: those who manage properties cannot deal with loans at the same time, and vice versa. It is necessary to create a flexible and osmotic organization, with well-defined tasks and responsibilities. Asking an asset manager expert on legal and out-of-court issues to develop the marketing plan for the sale of a property may be the simplest solution, but not the most effective;

– cash flow and tax planning: actually, they are two distinct business branches which closely cooperate with each other, each with its own liquidity and tax rules. Therefore the development of a business plan, including all the variables and ways out, is crucial.
Eventually, let us consider two examples: the planning of participations in auctions and the definition of the limit price; the calculation of the property management costs as well as of the expenses, with reference to the pro rata basis and the fiscal impact.

Emanuele Grassi

 

 

NPLs in Milan

NPLs in Milan 8

When it comes to non-performing mortgage loans, we tend to mix the good with the bad, with reference not only to the different types of mortgaged assets (see also “Very special servicing”, this issue will be deepened detail in the next posts), but also – and especially – to the position of these properties.

Those who consider the so-called “special situations” and examine individual operations instead of large areas are inevitably looking for opportunities. Considering 100 NPLs 50 are granted by properties located in the provincial territory, 40 in the hinterland, 10 in the centre of Milan: well, all (or almost all) bet on the latter.

This results is a “professional synecdoche”, which means that in the long run the players will identify the NPL market with residential properties situated in the centre of Milan, which represent, for example, all the properties located in dynamic and attractive locations.

Then, what happens to the remaining 90%?

Based on the updated data (source: BKIT) 75% of the gross distress is associated with companies, 75% of which is linked to non-residential properties.

In short and simple terms, about 60% of NPLs comes from sheds and shopping centres. Evidently, this problem is far from the centre of Milan.

The remaining 90% of non-performing mortgage loans will probably take one of these paths:

– it will be included in a multi-billion securitisation and will be recovered through judicial action at 30% – 40% (on average) of its nominal value;
– it will be redeemed by the owner or the user of the property;
-it will be purchased or transferred by virtuous companies looking for opportunities in places not explored yet;
– it will be refurbished or converted by credit managers, with the purpose of enhancing and selling it more quickly at a higher price, although in Italy the earnings capacity is not recovering yet.

Emanuele Grassi

 

The mortgage credit markets

The mortgage credit markets 9

Generally speaking, the Italian mortgage market is finding it difficult to get moving again.

In fact, a mismatch between supply and demand has been observed for various reasons (see also the “Non-performing loans: the opinion of the subjects directly involved/1”.article.) This may be due to the decisions of the institutions to avoid any excessive depreciation of their assets, while others emphasise the fact that real estate loans have been put aside in the budgets only to a very small extent, and now the creation of provisions is even harder due to lower earnings; moreover, some believe that the offerings of the major acquiring funds/companies are too low. Probably, there is some truth in all these assumptions.

However, the number of the servicers dealing with these loans is increasing.

Maybe they are arranging the future massive sale or introducing some diversifications. Actually, many servicers of unsecured loans have focused on the IPO system, always applying the same business model.

The same applies to lawyers, real estate appraisal companies, appraisers, real estate funds and the like are all pursuing their profits.

Sometimes, we bump into these professionals/companies coming from other areas, and we understand their intentions straight away, because of their different business models and points of view or lack of experience. The mortgage credit market is extremely multi-faceted and requires a specific training.

Far from extending this judgment to the entire categories, a list of the indispensable requirements for mortgage servicers is provided below:

– ability to properly identify the credits: “mortgage credits” are different from the other kinds of “credits.” Mortgage security, in fact, once combined with executive and/or collective procedures, implies certain calculation and assessment rules. However, in spite of the applicable regulations, every court follows different calculation criteria.

– ability to identify third-party expenses: it is quite easy to assess the internal costs to be borne, while it is hard to anticipate the external ones. For example, within a collective procedure, this ability can exert a significant impact on the outcome of the deal. The development of the exit strategies should also consider this aspect: a suitable planning of the expenses and predeductions provides a more accurate numerical analysis. In this case, too, each court applies its own customs and rules.

– local connections/ networks: through the performance of advanced analyses and works, the local verification acts as a confirmation. In some cases, it plays a crucial role, since the real estates in Italy are extremely various, even the adjoining one, just like the Italians.

– right approach to real estates: mortgage credits which are destined to remain credits represent an opportunity lost; the valuation results to a large extent from the interventions on the property covered by a guarantee. This implies a dramatic change, since the real estate mechanisms are different and must coexist with the financial ones. The establishment of a Reoco is not enough; in order to be successful, the Reoco must be an actual and independent company.

 

Emanuele Grassi

 

 

 

 

The (odd) run to real estate auctions: 3 reasons to doubt.

The (odd) run to real estate auctions: 3 reasons to doubt. 10Indeed, the insiders will have noticed an increase of the participation to real estate auctions in the last 12 months. Probably, the vision of the most farsighted experts of the field is taking place. For some years now, they have worked to bring private citizens to the auctions and to try to equalize the judicial sales to the sales in the free market.

The times where auctions were considered a thing for few, and the existence of murky deals behind the curtain was taken for granted.

The recent regulatory adjustments (LD 83/2015 and LD 59/2016) did the rest, accelerating the times of the process and proposing more desirable prices for the assets.

But is it really all in sloping? It is possible that this is a positive trend in the long run?

We have some doubts. Our opinion is that real estate auctions is “odd” for at least three reasons:

1. The number of sold assets is essentially unaltered:

those who thing that a larger participation to the auctions will be the panacea for all evils are wrong. If it is true that people determine higher prices and (perhaps) higher speed in sales, the fact that on the 25% increase of the deposited envelopes there was a 5% increase of the sold assets with regard to the total of the sales encourages a reflection. It means that there are a lot of dogs looking for the same bone, which does not mean many bones are sold…

2. The selling price, in some cases, are higher that the values of the free market:

some weeks ago a realtor told us: “Right now, it makes more sense to sell a property in an auction than putting it in my window”.

The “trend” of auctions and the irrational mechanism that characterizes them (casino effect) induces the selling price of some assets to be higher than the selling price on the free market. This phenomenon is not logical nor can it be considered a trend: actions selling implies risks and compromises that physiologically have to reduce a price, compared to free sales. Sooner or later this effect is going to burn out, it is clear.

3. We don’t have signals of recovery of the economy:

the real estate market has followed, since always and with direct proportionality, the economy of the country. It tows and it is towed. In the last 12 months there were no signals nor evidence of data that anticipated a growth of real estate prices. The salaries have been unaltered and the credit-worthiness per capita has decreased. In this scenario, an increase of the prices has to be considered as merely episodic and connected to the niche market.

For these and other related reasons, we maintain that this trend should be interpreted as a relocation of liquidity and not as a long-lasting trend. Our evaluation of the asset will continue to focus on longer and more foreseeable assumptions.

Regardless to this, it is still undeniable that the growing attention towards the NPLs market brought more liquidity in this microcosm; on the other hand, the risk is, this way, to create a paradoxical situation where half the market is productive and the other half is in crisis.

Let us not be blinded, or our NPLs will become NPLs again!

 

Emanuele Grassi