05 Apr 2023John Macdonald

SmithNovak NPL Europe – What’s Happening in Europe Now?

Europe 2023 What’s In Store – Technology adoption was a key theme for the conference with data quality being on the table as a major topic - yet again!

Generally speaking, reforms and regulations as a result of the Global Financial Crisis (GFC) have left financial institutions in good shape as NPLs and loans that are unlikely to be paid have been significantly reduced throughout financial institutions within the European continent. At the same time, while sources and quality of data about NPL assets have begun to improve, gaps still exist in what firms have access to vs what is needed for strategic decision making. 

The need is partially accentuated now in the current macro-economic environment as inflation and higher interest rates have disrupted what has been normal in the real estate world for over a decade now, as lower interest rates fuelled aggressive investment activity. The destabilisation and new normal may result in an increase of NPLs, but experts have been hesitant to define the extent of the increase since conditions are nothing like the systemic collapse of the GFC. A higher cost of living, mild recessionary conditions and the end of government programs and moratoriums are expected to have some impact on the numbers of NPLs that come to light, but we don’t expect the results to be outsized, at least not in the foreseeable future.

The growing concern now is around how to view and use the data that has become more of a focus after not having had access to rich data in previous years. Originally, the wave of NPLs from the past were more difficult to assess with precision since the data available was scarce and incomplete. Today, the tracking of new assets due to new central banking regulations has been more thorough and provides more adequate information for decision makers. 

Specifically, there is an expectation that Stage 2 loans will become non-performing and while the progression has been slower than normal, we will expect to see more of this activity later in 2023-2024.

Other topics coming up in the various discussion panels included the emergence of greater activity in secondary markets, as was the potential for M&A amongst the many service providers. There was a general feeling that there are many loan servicers, and that the smaller specialised companies may be the targets for acquisition from larger players seeking to extend their footprint.

In conclusion, conference attendees were encouraged by the level of regulation being applied to the industry in terms of its ability to stave off and prevent the extremes we saw during and subsequent to the GFC. However, technology adoption will continue to be key in a time of heightened activity,  increased competition and lower margins. The importance of understanding liquidity is ever true in this time of rapid change. Efficiency, good data and processes will be key, but the human element cannot be overlooked in its importance to successful real estate investing.