Portugal 
Spain 
Greece 
Npls and real estate, 63 billion at stake
In Italy there are 357 thousand auctioned houses: they have an appraisal value of 88 billion, but they risk to be devalued at 25
In Italy there are 357 thousand auctioned properties, coming from impaired mortgages or loans. The nominal value is about 88 billion euro, but after each deserted auction the initial price goes down and now the official value in total is the half, 44 billion. But, most likely, the earnings from the sale will not be over 25 billion after the long process, with a value loss of 63 billion which contributes deflating the real estate market. Improving the mechanism of auctions could help avoiding to sell off.
If the manual of economic harakiri existed, the real estate auctions would be definitely in the first chapter. In Italy there are currently 357 thousand auctioned properties, coming from impaired mortgages or loans, for an appraisal value around 88 billion euro. The problem is that this huge number of houses, apartments, villas and industrial depots will never be sold at that value: considering that in Italy an auction goes deserted many times, and that each time the judge is forced to drop the initial value, today these properties have an official auction value of 44 billion and most likely they won’t be sold at a value above 25 billion. Therefore, 63 potential billion risks to be lost forever.
These evaluations, showing in black and white the giant value loss, are based on the figures of the Ministry of Justice by the Group Sistemia, a company active in the management of impaired loans on behalf of banks and specialized in real estate auctions. They highlight one of the biggest problems connected with bad loans: till the mechanism of auctions will not be more efficient, In Italy, it will be difficult to stop this destruction of wealth. The auctions game nowadays represents a defeat for everybody: it depresses the real estate market, it weights on the banks’ statements which cannot collect the right amount from the bad loans and it penalizes the defaulting debtors which, by selling the properties at ridiculous prices- they’re exposed at the end towards the banks for significant amounts. A real economic harakiri.
A vicious cycle
This is the most tragic aspect of bad loans. Because it hugely impacts families, besides banks. When a debtor doesn’t pay his mortgage or loan, the banks are often obliged to enforce the guarantee, namely by putting the property on auction. But, as already said, when this happens, it’s a defeat for everybody. In fact, in Italy the auctions last too long: on average, estimates Il Sole 24 Ore, a property remains on auction for 1,514 days before finding a buyer. That means about 4 years. But in some regions, they go beyond 4 thousand days. The reason is obvious: few investors and few auctions, which remain a prerogative of few players interested in buying at very low prices. This creates a vicious cycle causing auctions to go deserted until the price of the property reaches very low levels.
“The auctions are empty because of the real estate agencies, to which the people willing to buy a house usually turn to, prefer the traditional market which is for them more convenient and more simple“, notes Paolo Sgritta, General Director of Gruppo Sistemia which manages a Npl portfolio of 5 billion. “Auctions remain, in many cases, surrounded by opaqueness – adds Giovanni Gilli, Head of Capital Light Bank of Intesa Sanpaolo-. Sometimes the properties carry with them technical issues that need to be solved and, moreover, there may be outstanding controversies”. “Buying at an auction is more complex – adds another operator – For instance, it’s more difficult selling the property”. For all these reasons the auctions world has been for years in the hands of few players.
The auction facilitators
This is why many banks and operators from the Npl world are working on growing the number of participations of the investors at auctions: only in this way, by creating competition for the single properties, selling off can be avoided. For instance, some banks have created “Reoco”. The biggest initiative in this field is from Intesa Sanpaolo: its Reoco has hired 30 professionals of the real estate industry to analyze one by one the many properties of the group originating by Npls. Just like a real investor. This allows them to assess the real market value of a property. At this point, the Reoco shows up at the auction, with the target of buying the property if its initial price falls below a given level. The point is that only its presence has the beneficial effect to repopulate the auctions and to make the prices go up again. If this doesn’t happen, however, the same Reoco buys at discounted prices to appreciate the property in a later moment. “Our activity is beneficial also for the defaulting debtors – notes Gilli – because the higher the price the property is sold at, the more their outstanding debts shrink”.
Also Gruppo Sistemia has developed a system to increase the participations of investors at auctions. “We have created a platform on the internet where we publish the real estate appraisals simplified and accessible to everybody – explains Sgritta -. We have created a task force to help the people participating in auctions. We have also collaborated with real estate agencies, proposing them a very precise agreement: if they bring their clients at the auctions, their provision will be paid directly by the same bank that has the bad loan”. This has brought some results: compared to the prices at which the properties were previously sold, Sistemia states that it can increase the price up to 65%”. And there are many more initiatives: Frontis Npl, a company that manages bad loans on behalf of Algebris, has created for example a website where it adverts the auctions. And so on.
The double face of the Government
This is some progress on the matter, but the auctions world is still a vicious cycle. Also because the initiatives of the last Governments haven’t always helped. For instance, in June the tax incentive granted to whom would buy a property on auction expired, but the Government decided to not renew it. According to the operators, this may hold back many investors. On the contrary, the possibility granted to whom takes part at the auction to offer a price already lower by 25% to the initial price set by the judge could be helpful: “This has helped to shorten the auction times, but it has brought no benefit to the appreciation of the property”, observes Sgritta. Besides, everybody’s waiting for the unified website where all the real estate auctions will be posted. Only by breaking the cycle that bonfire of money for over 60 billion will be avoided. For everybody’s good: banks, debtors, market.
The key word
Reoco: with this term, we mean a “Real Estate Owned Company” constituted within a bank. It’s a company that participates in an auction and buys the property that was originally put as a guarantee for the bank in order to avoid the same guarantee to lose its value. The Reoco has the main target to ensure the collection flows as forecasted by the business plan.