Property News

[Sandra]

30 December 2009 - The Wall Street Journal and Wealth Bulletin:

Spanish Banks Start to Unload Property Portfolios
Spanish savings banks have begun selling off the large property portfolios they acquired as collateral from loan defaults, in an effort to improve solvency ratios, a move that risks further falls in property values that could impair the value of their asset books.

In Spain, the global financial crisis that erupted in 2007 ended a real-estate and construction-based asset boom, plunging the country into a recession that has yet to end, even as many other European economies have returned to growth.

As the unemployment rate has soared to more than 19%, residential-property buyers have defaulted on loans in massive numbers, as have property developers, overleveraged in a moribund market. As lenders have assumed the collateral on defaulted loans, local financial institutions—particularly unlisted savings banks—have collected properties valued at about €8.5 billion ($12.2 billion) over the past 12 months.

So far the banks have held on to the vast majority of these properties, hoping an eventual economic recovery will allow the disposal of these assets at acceptable prices—a strategy they successfully adopted during a recession in the early 1990s. Accumulating properties also stopped a sharp drop in prices, avoiding the painful write-downs banks are required to book when the value of their assets falls.

Until now the strategy has worked. Spanish property prices have been unusually resilient. Average prices have dropped by a modest 9% over the past 12 months. In the last five years of the housing bubble, average prices jumped 71%, according to Housing Ministry data.

But now banks are facing new demands for liquidity that will force them to sell more property. They are drawing up sales strategies, creating real-estate management divisions and offering discounts in an effort to lure buyers.

Solvency pressures on the banks come from several directions. First, the downturn has meant smaller inflows of cash held in deposits and bank accounts. Second, the Bank of Spain recently required local financial institutions to set aside more money to cushion potential losses from a drop in the value of repossessed properties. Banks must now set aside 20%--up from 10%--of the value of a property held on their books for more than one year. Finally, a big restructuring of the savings-bank sector is in the cards, for which banks need funds to clean up their loan books.

Such incentives to liquidate property portfolios have banks looking to sell. "Three of the five real-estate companies that have sold the most properties this year are controlled by financial institutions," says Manuel Romera, head of the Financial Sector Program at Spain's IE Business School.

Bank disclosure on property sales is limited. Unlisted savings bank Caja Madrid, Spain's fourth-largest financial institution by assets, said it has sold 600 properties from January to September for about €100 million and estimates it has €1 billion in real-estate assets. The bank launched a Web site, set up a call center and will have desks at some branches to sell properties.

Smaller rival Caixa Catalunya said it unloaded 800 properties from a total of 3,600 properties it reported owning as of May, while Banco Santander SA, the country's largest bank by assets, said it unloaded some 1,000 properties from January to October. In April it reported owning some €4 billion in real-estate assets.

However, banks "are realizing that unwinding real-estate assets is much more complicated than expected," says José Luis Suárez, financial management professor at IESE Business School. "The short-term outlook isn't positive."

In the absence of an active real-estate market, the process of price discovery could show market values of many properties are far lower than their book values.

Analysts say that some banks and saving banks, particularly small ones, could suffer losses in the first half of 2010. They say banks with high levels of expenditure to income may be in trouble.

"Growth and employment prospects for Spain are markedly more pessimistic and, together with falling support from immigration and foreign demand, it is difficult to argue in favor of any near-term housing market recovery, especially in the face of a massive supply overhang," HSBC said.

The research department of Spanish bank BBVA estimated in June that Spanish housing prices would fall by 10% in 2009 and by 12% in 2010. It envisioned a total 30% peak-to-trough drop. A new review in December didn't change that forecast.

According to the Bank of Spain, 70% of a total of €30 billion in real-estate assets owned by financial institutions is now in the hands of savings banks, many of which are comparatively small and regionally focused.

Were BBVA's estimate of the fall in house prices to prove accurate, the value of the €30 billion of real-estate assets held by banks could fall some €6.6 billion in the next two years.

To avoid these losses from becoming a bigger problem--perhaps necessitating state intervention—the Bank of Spain is encouraging banks to look for merger partners. The central bank believes that fewer, bigger banks would improve efficiency and strengthen solvency. More than a dozen of the country's 45 savings banks are now in tie-up talks.

So far, only one Spanish financial institution, savings bank Caja Castilla-La Mancha, has needed a state bailout. But two other banks—the Andalusian savings bank CajaSur and the Catalonian savings bank Caixa Catalunya—have already run into trouble after seeing default levels increase far above the industry average because of their high exposure to real-estate development.

As a result, both of the banks are now discussing mergers. Caixa Catalunya is talking with Caixa Tarragona and Caixa Manresa, which, if a deal goes ahead, would create the fourth-largest savings bank in Spain. CajaSur is talking with Unicaja and Caja Jaén, which would create the sixth-biggest savings bank in Spain by asset volume.

By LEIRE BARRERA

—Pablo Dominguez contributed to this article

[Hugh_man]

Another view.................



The Spanish Property Market, are we anywhere near the bottom?
Information provided by Mark Stucklin, see below.

THE BEARS
Real Estate Consultants Aguirre Newman say that Spanish property prices are still over-valued by 27%.


International investment bank Morgan Stanley say prices are still 10% over-valued, perhaps more considering that, by some measures, prices should fall by 58% from the peak. When you compare property prices to income and rents, Spanish property prices "should fall much more than in the US or the UK to return to adequate levels," they argue.


And this week BBVA, Spain's second largest bank, published a new report arguing that Spanish property prices will fall another 20% over the next couple of years.


THE BULLS
Spanish savings bank Caixa Catalunya argues that the market is at or near its inflection point, with prices already starting to rise in some areas. Caixa Catalunya has many reasons to wish prices to rise, having been caught out more than most lenders by Spain's property crash.


Global bank HSBC are also mildly optimistic that the worst is over. They point out that price falls are starting to decelerate (based on official figures that I would consider worthless) and that mortgage lending has picked up slightly. But they also note that other indicators like transactions are still highly negative, suggesting a shaky recovery at best.


Who's right? Only time will tell. I, for one, am still in the bear camp when it comes to the overall market. But if you are talking about prime and A grade property, I'm not so sure. 2010 might be the year to pick up prime and A grade Spanish property at a great price. But to do so you'll have to do your homework, and know your Spanish property segments.

 

 

So why hasn't the market fallen more?

 
Something's wrong with the Spanish property market, writes S. McCoy in a recent article at Cotizalia.com, a financial news website. His analysis points towards a big and desirable fall in house prices - up to 50% by 2011 says McCoy - but there is no sign of this in the "imaginary" official figures, nor in any of the reports produced by the sector. On top of which the government and some banks are already claiming that the market has touched bottom. So what is wrong with the market, and why haven't prices fallen more? asks McCoy.


Supply and demand
With a glut variously estimated between 800,000 and 2,000,000 unsold homes, and sales of around 200,000 homes a year, it's going to take 4 years to liquidate the glut, in the best case, points out McCoy for starters. You would expect prices to be tumbling

House prices to income
A good way to judge the level of property prices is the ratio of house prices over annual disposable income, which ignores mortgage financing issues. This rose to over 7 years at the height of the boom, and has now fallen back to 6.5 years because, although house prices have fallen somewhat, so have incomes. But that is a long way off the historical average of 4, suggesting price falls still have a long way to go.


Rental yields
Another way to judge property prices is the relationship between rental income and prices (rental yields), a type of inverted price earnings ratio. Higher yields mean better value.
Gross rental yields fell to 2% during the boom, below even interest rates. Now that house prices are falling rental yields should be going up, right? Wrong. The property glut is driving down yields, as more owners try to rent out property they can't sell. Yields tell us that, at present prices, property is a bad investment, so you would expect prices to fall more. But they aren't.


So why aren't prices falling more?

 
McCoy gives 3 reasons.

Firstly, because interest rates are so low. That gives borrowers some breathing space, and allows developers to limp along as zombies for longer. Low financing costs mean banks can avoid selling at a loss, by not selling at all.


Secondly, because borrowers in Spain are liable for negative equity, which gives them a big incentive to do everything they can to avoid foreclosure. Borrowers may be in a lot of financial distress, but this keeps some of it from reaching the market.


And finally, because unemployment benefits and the black economy mean that many of the unemployed have managed to keep paying the mortgage, until now at least.


If the economic recession continues for much longer, and if interest rates rise, the distress in the system will reach breaking point, then prices will tumble, warns McCoy. But the sooner the better, he says. "That's the only way to bring about Schumpeter's creative destruction, so necessary for this country."


I should point out, however, that McCoy is talking about the wider market, including all that speculative primary housing built around cities like Madrid and Barcelona. The situation may be even worse for speculative holiday homes in subprime locations, but it's probably a lot better for prime and A grade property in the best holiday home locations. The market for A+ property in the best locations is international, and not so exposed to the economic situation in Spain. When reading articles like this it is important to realise that segments are the key to understanding the Spanish property market today. It's not good expecting prices to fall if they are actually going up in the segment that interests you.

 

 

 Information written and provided by Mark Stucklin. To read his regular Property bulletins, sign up for free  on www.spanishpropertyinsight.com

[Dave]

In property news, the European Commission's quarterly report revealed that property prices in Spain rose by 155% between 1995 and 2007, falling by 22% in the past 3 years.

This fall in property prices is a component of the government's marketing to United Kingdom real estate investors, who are still the leading foreign purchasers of property in Spain.

Led by the Spanish Housing Secretary, Beatriz Corredor, a delegation of Spanish property developers attended the Property Investor Show in London last week. The event was part of the government's 'property road-show', aimed at highlighting the opportunities available in the Spanish property market to foreigners.

Citing the availability of cut price properties, with drops of up to 50% in some cases, Corredor said that 687,000 properties remain unsold – 61% of which are located in primary holiday destinations around coastal areas and on the Spanish islands.

However, in a PR nightmare, this leg of the road show was the scene of protest from a group of UK buyers. Taking full advantage of the high profile Housing Secretary's appearance in London, the Finca Parcs Action Group were able to put the spotlight on their campaign to have deposits returned for an aborted property development.

We reported on the plight of the group earlier this year. Their campaign involves a severe breach by CAM bank to guarantee deposits paid on a new development in Albacete – money which should have been held by the bank and returned in case of non-completion.

Heated discussions took place between members of the campaign and senior staff on Corredor's team, while a frank and passionate conversation ensued between the Spanish Housing Secretary and UK Independence Party MEP, Marta Andreasen. Afterwards, Andreasen declared that Corredor had "refused to acknowledge the problems there have been and continue to be with people who have invested in Spain."

It's an unfortunate set of circumstances and a real shame that, as well as publicising the opportunities available in Spain, Corredor failed to take her opportunity to directly assist the exact type of individuals she is currently trying to attract.

With just one month until the general election, her successor will do well to accept that mistakes have happened and can happen – it's how they deal with them that will count. ( Kyero.com )

[Dave]

More bargains expected as house prices expected to fall further:

Due to the excess of properties on bank portfolios, house prices in Spain are expected to fall even further. According to a recent study by FINCASA, banks will need 45 years to clear their portfolios of land and houses that they have embargoed.

This is expected to cause an impact on the housing market by further lowering prices. Real Estate promoters and developers have accused banks of forcing prices down even further, as they appear too willing to reduce the prices of property on their books and are undercutting the current price of properties on the market.

The Association of Real Estate and Promoters are saying that banks are making it even more difficult for them to sell their stock of flats, as they now have to compete with the extremely low prices that the banks are offering in order to clear their huge portfolios.

The size of the banks´ property portfolios is due to an increase in repossessions as mortgage rates have increased and people have been unable to keep up with their repayments. ( The Costa Calida Informer )