UK retail NPL sale seen as market blueprint

NatWest’s expected sale of a £536 million ($731 million) portfolio of non-performing loans backed by UK shopping centers, to a joint venture between UK private equity firm Attestor Capital and retail property specialist Ellandi, is expected to provide a blueprint, and pricing floor, for future transactions of this kind.

Attestor and Ellandi, React News first reported, are the front-runners for the Project Mercatus portfolio. Although additional details are still emerging, it is understood that the winning bid represented a discount of less than 60 percent of book value. It was also reported that the face value of the portfolio fell from an original gross book value of £536 million to around £375 million due to sales of underlying assets during the process, which would translate to a sales price around £150 million.

The sale is important for two main reasons: it is the first significant UK NPL sale to appear in the wake of the pandemic, and, no less relevant, because it has the potential to set pricing for future retail NPL portfolio sales in the UK, market participants tell Real Estate Capital USA.

Gifford West, managing director of international operations and business development at the global full-service loan sale adviser The Debt Exchange, says the deal, when completed, will create a blueprint for other lender sales of troubled loans, collateralized against UK shopping malls. “[The transaction] does set a benchmark for pricing and will become the general neighborhood that these loans are going to trade at,” he tells REC USA.

What comes next for the assets is another factor to consider. According to West, in addition to providing a benchmark pricing, the sale could also have an impact in the future of the troubled British shopping center market. “The fact that these buyers have stepped in means that there is an entire industry now looking at how they repurpose these assets. The day after this deal closes, many private equity firms will start going after shopping centers across the country with the aim to convert them into something else.”

It was a long road to a deal for the Project Mercatus’ portfolio, which went up for sale in February 2021. Future sales likely won’t take as long as this transaction, West says, outlining that this sale’s duration was probably due to a lack of clarity around the portfolio’s initial sale price, which was also linked to its size and broad composition.

A benchmark price would also shorten the duration of future sales by at least three to four months per sale going forward, West said.

Richard Roberts, head of origination at NPL investor and asset manager Arrow Global Group, believes that pricing for portfolios like this could rise over time if market conditions improve. “When the price comes out, it will provide a benchmark but, as the economy and the real estate sector recover, pricing levels could well go up from there,” he says.

Looking ahead

Sources expect the NatWest loan sale to be followed by other loan sales linked to the industries most affected by the pandemic, as lenders aim to reduce their exposure to sub-performing property sectors including retail, hospitality and even offices. However, they believe there is still a way off until a new wave of NPL sales emerges in the country.

Alok Gahrotra, partner in Deloitte’s portfolio lead advisory services team, says portfolio sales prompted by pandemic-linked distress are unlikely to be seen at least until government loans and grant schemes unwind. “We have to wait and see for at least three to six months as to what comes out of it before banks start putting additional books in the market,” he says.

As a result, UK real estate loan sale activity will remain subdued for the rest of the year, Gahrotra adds. “I do not expect much more activity for the rest of this year. And what we will start seeing will be the sale of legacy loans that were in distress pre-pandemic.”