Published November 01, 2012
LONDON – Spain's "bad bank" will struggle to find buyers for swathes of empty land, unfinished housing projects and doubtful loans left over from a property crash, hindering Madrid's attempts to overcome the wider economic crisis.
Real estate consultants predict that almost two-thirds of assets that the government's newly-created bad bank is due to take over from commercial banks will fail to attract investors, at least in the short term and possibly ever.
Spain is setting up the bad bank, known by the acronym SAREB, under a plan to cleanse the banking system of toxic property assets. SAREB aims eventually to buy up to 90 billion euros ($117 billion) of the assets at deep discounts and then sell them to investors over 15 years.
Buyers are likely to snap up the likes of prime holiday homes and completed properties, commercial and residential, which already have tenants. But that leaves a majority of assets that will be much harder to shift.
Between 60 and 65 percent of the foreclosed property and bad loans to be hived off by the banks will relate to undeveloped land and half-built projects, according to forecasts compiled for Reuters by real estate consultants Jones Lang LaSalle and CBRE.
CBRE gave the higher figure for this category which investors will probably shun, put off by high risks and costs such as having to rip down abandoned shells of buildings that no one would ever want to occupy.
Together with Ireland, Spain has suffered Europe's biggest property crash, leaving the banks with 184 billion euros of bad real estate debt and incomplete developments around the country.
This has brought much of Spain's property market to a halt.
"In the last five years there has been virtually no value for land," said Rafael Powley, a Madrid-based director of strategic consulting at JLL. "There are no buyers and if you want to sell it right now, there is no price for it."
CBRE and JLL are the world's biggest property advisers and helped consultant Oliver Wyman prepare a report this year that examined how exposed Spain's banks were to souring property loans after the bubble burst.
The crash has put Spain centre-stage in the euro zone debt crisis, now in its third year, as investors believe a high budget deficit, soaring state debts, and a deepening economic contraction will force Madrid to seek more external help.
Spain has already secured up to 100 billion euros of European aid to rescue the banks worst hit by the property collapse. Madrid may now have to take a full sovereign bailout, with the state assuming the bad real estate assets unless it can find private sector investors to buy stakes in SAREB itself.
HOPING FOR INVESTORS
On Monday the Bank of Spain said property loans would be moved into the bad bank at an average discount of 45.6 percent in the hope of attracting investors. The figure would be 63.1 percent for foreclosed assets and 79.5 percent for empty land.
The central bank declined to comment on the CBRE and JLL forecasts.
Madrid hopes private investors will own at least 55 percent of SAREB, which was created as a condition of the European aid for the banks and is due to start operating by the end of November. About two-thirds of the assets transferred in an initial wave of 44 billion euros will be loans and the rest foreclosed properties.
Investing in land or half-built developments means spending money to start, demolish or complete schemes without any guarantee of selling them or finding tenants. Investors are reluctant to do this due to the Spanish recession and excessive supplies of property built up during the boom years.
"The money you need to spend upfront takes you backwards," said Justin O'Connor, chief executive of property fund manager Cordea Savills, which has about 7 billion euros of assets under management in Europe.
"With land you need to take a long-term view beyond the five to seven year horizon of most institutional investors," said O'Connor. However, his fund will look at shops and offices in Madrid and Barcelona which have already been rented out. "The only assets of value in Spain are ones with an income stream attached," he said.
Investors are particularly wary of sites where incomplete developments will have to be torn down and rebuilt from scratch.
"Land and unfinished developments are about the same thing right now," said Joe Valente, a managing director at JP Morgan Asset Management, who helps manage 7 billion euros of real estate in Europe. "Land is probably more valuable as it doesn't have any demolition costs."
Buying loans secured against land or unfinished schemes is as unattractive as buying the assets themselves in the short-term, particularly given the lower discounts offered by the bad bank, Powley said.
"A large majority will be bad loans and a discount closer to the foreclosed asset price would have been more realistic. I wouldn't expect more than 20 percent of the loans to survive."
Like Cordea Savills, JP Morgan is looking for income-producing bargains in the bigger Spanish cities. Valente is raising equity to buy assets outside of safe markets such as London and Paris, which he believes to be overpriced, but the CBRE and JLL figures show there will be slim pickings.
Only 10 percent of SAREB's assets will relate to commercial property while housing will account for the rest, both real estate advisers said. The commercial property that goes in will be "medium to poor quality" and not what investors are looking for, Powley said.
Morgan Stanley and private equity groups Lone Star, Cerberus and Apollo are also hunting for Spanish bargains.
They will be attracted to large portfolios of completed housing in areas such as Malaga and Alicante, boosted by Russian, British and German tourists and their proximity to major airports, Powley said.
Areas to avoid due to "a huge oversupply" of housing include Valencia, Murcia and Almeria in southeast Spain, said Patricio Palomar, head of research at CBRE in Spain, who made the bad bank forecast for Reuters.
Loans backed by rented-out commercial real estate will be the other bright spot but the fact that the good is so outweighed by the bad renders the 15-year disposal time meaningless, property experts said.
"About 40 percent of the land that goes into the bad bank will never come out," Powley said. "They may have to eventually get rid of it for a tenth of the price as farmland."