Many appraisers are becoming familiar with the problems of valuing real estate assets in a turbulent market with few actual sales taking place. Increasingly, however, appraisers are being asked to step into the murky waters of loan valuation. Ernst & Young LLP recently conducted a survey on the distressed debt market. The survey included real estate investment and opportunity funds, private equity, institutional investors and real estate developers. The results may shed some light on current real estate loan valuation issues. For instance, more than half of investor respondents to the survey bid on or priced US nonperforming loan portfolios in the last year, but fewer than 20% completed the transaction. The survey portrays a US nonperforming loan market in which investors last year were eager to buy, but sellers were unwilling or unable to sell.
Mark Grinis, the leader of Ernst & Young's Real Estate Distress Services Group, said, "The question on everyone's mind today is whether the US distressed loan market in 2010 and 2011 will be the same as 2009, characterized chiefly by buyers waiting for sellers to turn up and transact." He added, "The continued development of an efficient market for nonperforming loans here in the US will depend on sellers being prepared to enter the process over the next six months."
Still, investors remain bullish about the opportunity to put out significant sums into NPL purchases in 2010 and 2011. More than half of the investors surveyed believe that conditions in the NPL market will be favorable enough for them to enter this year, with almost 40% focusing on the second half. Behind this projection may be a feeling that by the second half of the year, the country's economic recovery may be apparent and a bottoming of the commercial real estate market may be under way. What are these investors most interested in buying? In terms of loan type, 73% preferred distressed whole loans backed by office, retail, industrial and multifamily properties. About 30% favored distressed residential loans such as single family and condo loans as well as construction loans. More than 25% of respondents preferred loans backed by hotel properties, nearly 21% would seek out distressed CMBS loans and almost 16% would choose land loans. None favored residential MBS loans. The capital is clearly there for a market to develop quickly. When asked how much they had allocated to invest in NPL portfolios, more than two-thirds of respondents said they would have up to $500 million each available for purchases. Almost 5% of respondents allocated $500 million or more for such investments. However, the critical piece of the puzzle for a robust market in distressed loans in 2010 is still absent, according to the report. Despite an increase in troubled loans and growing Congressional scrutiny of financial institutions' loan exposure, banks generally have been slow to deal with their problem loan portfolios, most likely due to a fear of incurring losses from loan write-offs, reductions in earnings or erosion of capital. According to recent FDIC data, US banks' provisions for loan loss reserves totaled $61.1 billion in the fourth quarter 2009. The survey suggests that respondents believe regional banks and thrifts are the most likely active sellers of commercial real estate loans in 2010.
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