After a slight initial mistrust and an incubation period, we can say that real estate securitization is gaining momentum in Italy. Until a few months ago, in sector conferences the completed issues were accounted for, now no more and this means that the market in question is maturing.
Real estate securitization was introduced and governed by the amendment of Law 130/99, in particular with the introduction of article 7.2 of Law Decree no. 34. The same provision introduced article 7.1, which regulated the so-called “Reoco” or Support Vehicle Companies (SVA).
The latter was quickly acknowledged by the reference market, because in fact the presence of a real estate company supporting a securitization vehicle is to be considered an ex post regulated practice. The first operations of enhancement / redevelopment of collateral properties of GMA date back to 2011, with all the operational difficulties deriving from the absence of regulation but also with the undoubted beneficial impacts of this activity on the recovery of mortgage loans.
For real estate securitization, on the other hand, this is an absolute novelty, which logically could not have developed ex ante. In fact, a new hybrid market is being created between structured finance and real estate, which will involve new investors accustomed to other forms of investment for the same asset class in the world of securitization and debt securities.
I was asked what are the differences between the two tools; thinking about it coldly, having acknowledged that in fact the only substantial difference concerns the presence or absence of a connected mortgage credit, it is easier to trace the related sides to each real estate sale that potentially extend the mechanisms of securitization:
- financial procurement derives from the issue of ABS securities. The novelty obviously does not lie in the possibility of issuing debt securities but in the type of securities themselves, potentially of interest to the whole private debt / family office world; this opens the door to new possibilities of intersection between the world of structured finance and real estate, which in the future will sublimate into joint ventures and partnerships with high added value in terms of skills;
- the flows deriving from the properties benefit from the asset segregation in favor of the bondholders;
- the profits deriving from real estate transactions are distributed as part of the securitization with all the relevant benefits, first of all the fiscal neutrality on direct taxes; they are therefore subjected to financial income profits obtained through the enhancement of real estate, net of the expenses necessary for the enhancement itself.
As in all the activities resulting from the new legislation, with the implementation doubts arose in terms of interpretation and aspects to be reviewed related to ordinary operations:
– the fiscal aspects related to instruments 7.1 and 7.2 are not yet fully understood; a definitive clarification on the part of the legislator would be desirable which takes into account primarily the ratio legis and which enables operators to have equal conditions of use in order not to create competitive advantages / disadvantages within the reference market;
– the intersection with the real estate context has led to the emergence of some operating practices that are not very compatible, repetitive or commercially poorly perceived; I am referring, for example, to the coexistence between publication in the Italian Official Gazette and the transcription to the Conservatory of Real Estate Registers (which perform the same function), or to the inclusion in notarial deeds of typical conditions of securitization such as limited recourse or non-petition agreement that in a recent case we have created some commercial problems with the counterpart, which, not knowing the subject, initially experienced the matter with suspicion. Even the majority of Notaries are not yet prepared on the subject, they need to be involved in order to create culture in this sense and arrive in a short time at accepted operational practices;
– even among insiders it is still not perfectly clear whether all types of real estate / land can coexist within real estate securitization. For the latter, for example, there is much discussion on the applicability of the concept of segregation of flows, even if in fact they are able to generate it in the same way as buildings; in other fora it was discussed how the Ex-Chapters (e.g., restructuring / construction costs) cannot be prevalent. In any case, these are subjective interpretations, which it is hoped can be aligned by the univocal interpretation of the Legislator.
To conclude, I would like to share with the reader the concept that the real estate securitization tool may in the future definitively supplant the obsolete scheme for disbursing real estate credit, which is still too anchored to the static valuation of the collateral. If it is true that traditional banks are evaluating more carefully the forecast of flows and the stability of the cash flow, it is also true that the difficulty in channeling them makes the perception of risk too high.
The use of an SPV, managed and monitored by a qualified financial intermediary and with a predefined and regulated waterfall, creates the conditions for greater serenity in the disbursement of loans, making the mortgage guarantee almost superfluous.
It is a truly innovative concept of project financing, applied to the real estate context, and perhaps in the future also to other business areas.
I would like to think that credit institutions, including the potential of the tool, are asking their customers to use it as a sine qua non for granting credit.
Emanuele Grassi
