Since the GFC, Spain has seen a dramatic change in the commercial real estate debt market. Not only has the consolidation of banks helped the sector to deal with non-performing loans more effectively and restore confidence in the banking market, regulation has also influenced how each lender takes risks and prices loans, consequently changing bank’s business behavior for good. These changes have since created opportunities for new lenders to enter the market, such as insurance companies, pension funds and private debt funds.  

So far Spain has become known for its large non-performing loan transactions. NPLs and REOs have continued to be the focus of many private debt funds throughout 2018/19, as Spain has been the most active seller in the European market, accounting for 37% of the European sales transactions. Private debt funds have been acquiring large portions of this market obtaining discounts up to 70% of the nominal value. Nevertheless, even though these opportunities remain of interest to investors, they are becoming narrower due to the high competition and the fact that most banks have managed to dispose of most of their NPLs and REOs they had on their balance sheets. However, Sareb still accounts for a large portion of these portfolios and it may continue to be a key player in this market.

Figure 1: European Distressed RE Loan and REO Sales (as per June 2018 in Eur million)

It is time for private debt funds to focus on new strategies. In search for yield, investors in private debt funds are seeking higher return strategies and our research has identified at least four key areas for private real estate debt funds looking to invest in Spain. Whilst traditional banks (domestic and international) are usually dominating the lower risk senior debt space, private debt funds can find opportunities in mezzanine lending, development lending and the purchase of non- or sub performing loans. 

Figure 2: New opportunities for Debt Funds