Banking, Lending and Real Estate
By Claudio Scardovi and Alessia Bezzecchi
Contents
List of figures vii
List of tables xi
1 Banking and real estate: a difficult relationship 1
Claudio Scardovi and Alessia Bezzecchi
2 Real estate strategy for banks: not an oxymoron 15
Claudio Scardovi and Alessia Bezzecchi
3 Credit workout and real estate management – in the digital age 35
Claudio Scardovi
4 Data management: NPL assessment in a digital world 49
Claudio Scardovi
5 Optimal value management: strategy, governance and organisation 71
Claudio Scardovi
6 Case study in credit workout: Urbi et Orbi Bank 102
Claudio Scardovi
7 Real estate: market analysis, international evidence and strategic planning 123
Alessia Bezzecchi
8 Real estate appraisal: fundamentals, appraisal process and valuation 137
Alessia Bezzecchi
9 Stress testing a real estate portfolio through value at risk 154
Andrea Beltratti and Alessia Bezzecchi
Index 171
List of figures
1.1 Valuation approach is driven by the potential buyer counterpart and final use of the asset 6
1.2 Valuation and productivity of real estate assets 8
1.3 Valuation and productivity of real estate assets in the distribution value chain and at point of sales, across sectors 11
1.4 Real estate repossession strategies 13
2.1 A Rubik’s cube for banking and real estate 16
2.2 Active real estate management based on the three key pillars 17
2.3 Real estate agency and related services 18
2.4 REOCO can help sustain real estate sales and exit values 18
2.5 Asset, property and facility management capabilities 19
2.6 Best corrective actions driven by assets’ features 20
2.7 Active space management increases the yield per square meter 20
2.8 Real estate risk/return optimal portfolio allocation 21
2.9 Real estate cycle analysis: backward and forward 22
2.10 Backward-looking analysis based on structured data 22
2.11 Forward-looking analysis based on unstructured data 23
2.12 Key objective for the set-up of an REIS company 24
2.13 Real estate value chain: development 25
2.14 Real estate value chain: owning and renting 26
2.15 Setting up an integrated real estate unit as a service centre 31
2.16 A business unit (REIS) supported by a service centre (CREO) 33
2.17 BNP Paribas Real Estate has a full range of REIS 34
3.1 Capturing big data to get to a mark-to-market price 43
3.2 Market information on interactive, real-time dashboard 44
3.3 Potential impacts across the real estate value chain 48
4.1 Segmentational approach to NPL 52
4.2 Approach to pressure testing and sensitivity analysis 57
4.3 Re-underwriting process for collaterals and real estate 57
4.4 Portfolio tiering: top-up versus bottom-up 58
4.5 Digital template for loan and real estate analysis 59
4.6 Bulk control model for review and pressure test 59
4.7 Digital templates for real estate valuation 60
4.8 Sampling is driven by target statistical confidence 61
4.9 Digitization opportunities in valuation and recovery strategy 66
4.10 Valuation and recovery strategy with ML/AI 67
4.11 Valuation process using ML/AI 68
5.1 ECB NPL guidelines on strategy: a summary 72
5.2 Alpha and beta strategies in credit workout 75
5.3 Alpha generation key pillars 77
5.4 Internal versus external credit workout 80
5.5 Joint venture case studies in credit workout (1/2) 89
5.6 Joint venture case studies in credit workout (2/2) 90
5.7 Digitalisation in credit workout management 93
5.8 Credit workout ecosystem 94
5.9 Advanced software and semantic engine apps 97
5.10 Dossier targeting and prioritisation 98
5.11 Top-down approach to real estate active management 101
6.1 Italian gross bad loans and non-performing exposure trend 103
6.2 Italian net bad loans trend 104
6.3 Net bad loans for top 10 Italian banks (Bn) 104
6.4 Transition principles from IAS39 to IFRS9 108
6.5 Weighted average price of transacted portfolios in 2017 (%) 111
6.6 Prudential backstop for NPEs: new prudential
provisioning rules 113
6.7 ECB principles on credit workout: endogenous factors assessment 114
6.8 ECB principles on credit workout: exogenous factors assessment 115
6.9 Recent transactions in the Italian servicing sector 120
7.1 Real estate market variables 124
7.2 Real estate correlation of risk/return by intended use 127
7.3 Correlation between risk and return in the real estate sector 128
7.4 Opportunity to invest in the asset life cycle: conceptual exemplification 128
7.5 Global prices. Quarterly data, 2000–2017 129
7.6 US housing prices 130
7.7 US commercial real estate prices. All property Constant
Proportion Portfolio Insurance (CPPI) weights: retail (20%),
office (17.5%), apartment (15%), healthcare (15%), industrial
(10%), lodging (7.5%), net lease (5%), self-storage (5%),
manufactured home park (2.5%) and student housing (2.5%) 130
7.8 International residential prices 131
7.9 International commercial property prices: Brazil (March
2000 to December 2017), Germany (March 2008 to
December 2017), Denmark (March 1992 to June 2018),
Indonesia (March 2002 to March 2017), Iceland (March
1995 to June 2018), Japan (June 2008 to June 2018),
Singapore (March 1998 to September 2018), the USA
(December 1945 to September 2018) Euro area (March 2000
to June 2018) 132
7.10 The process of analysis, strategic planning and management
of real estate 133
7.11 Activities and investments in risk management carried out
by real estate operators 134
7.12 Economic risks and portfolio analysis 134
7.13 Financial risks and portfolio analysis 135
7.14 Risk management in the asset life cycle 135
List of tables
2.1 Strategic approach and objectives of REIS 27
2.2 Key real estate management activities: two main categories 30
3.1 Captured “big data” should include unstructured data 45
3.2 Key risks of the real estate development value chain 47
4.1 Valuation process to ensure robustness/consistency 62
6.1 IFRS9 impacts and FTA 108
6.2 Basle IV versus Basle III and impacts on RWA 112
7.1 Real estate sectors characteristics 125
8.1 Evaluation of real estate approaches 138
8.2 Market approach: examples of multiple market principles 141
8.3 Cost approach: extraction criteria 145
8.4 Augustus Luxury Resort: mix accommodation 149
8.5 Augustus Luxury Resort: terms 150
8.6 Augustus Luxury Resort: performance over years 150
8.7 Augustus Luxury Resort: forecasted operating performance 152
8.8 Augustus Luxury Resort: cap rate 153
9.1 Portfolio summary statistics and resistance range 167
9.2 VaR analysis for single assets and portfolio 168