Autonomous Regions Responsible for Flood of Foreclosed Properties Set to Hit Spanish Market in 2011

Dec. 17, 2010 - PRLog -- There are now around 100,000 foreclosed homes on the market in Spain according to Madrid-based Pisos Embargados de Bancos, a company that lists a quarter of that amount on behalf of 25 Spanish banks.  They estimate this figure will triple to 300,000 in 2011.  But who is responsible for this unprecedented situation?  The answer may lie at sub-national level.

Whilst Spain’s Economics Minister, Elena Salgado, is bullishly telling CNN that Spain has “absolutely no need” for an Irish-style rescue and Prime Minister Zapatero continues to be confident that the Government is doing enough to avert a debt crisis, the real problems are going on at sub-national level.  Although central government spending has indeed been scaled back and national debt this year will ‘only’ be 60% of GDP compared with Ireland’s near 100%, it’s Spain’s 17 autonomous regions that account for over half of the public sector deficit making it difficult to impose reforms.  It’s also in the regions where the banking problems lie and the effects of the property crash have been felt the hardest.

Greg Butcher, Founder of Fairhomes Ltd, a cross-sector real estate company with assets in UK, Germany, Gibraltar, Singapore and the Netherlands, has been watching events unfold with interest.  “When the property bubble burst, the larger national banks such as Santander and BBVA were well capitalised but the regional savings banks, the cajas, found themselves vastly exposed to the ailing construction and development sectors.  Instead of emulating the national banks and putting the brakes on lending in 2006/07, the cajas did the reverse and tapped the wholesale debt markets to fund themselves.  This alone put them in jeopardy but add the fact that they supplied about half of the 318 million euros borrowed by Spanish property developers, loans which now represent about a fifth of the cajas assets, and you’ll see why the outlook is so grim - for them and for Spain.”

“The problem is,” Greg continues, “that the balance sheets of the cajas still look quite healthy as they routinely overvalue their foreclosed property stock.  In a bid to make their rapidly depreciating assets look attractive to buyers, cajas are offering 100% mortgages, non-payment windows, extended terms up to 50 years, interest-free options and rates as low as 0.3 to 0.5% above Euribor.  In order to do this, however, they’re inflating market prices by 25 to 40% which is not, realistically, going to help shift a glut of hundreds of thousands of homes.  Neither is it going to enable us to judge the real price of property in Spain today.”

The Bank of Spain may well put pay to this overvaluation technique as its new accounting rules force lenders to make provision for bad loans after just 12 months rather than the current 72.  This will give banks a huge incentive to lower prices and get rid of the foreclosed homes rather than prolonging the agony – especially mindful of the fact that foreclosures are likely to triple in 2011.  It’s hoped that the capital raised will prevent Spain from requiring an Irish-style bailout but, as prices are squeezed down, the caja’s balance sheets will look even more vulnerable making European aid an increasingly likely scenario.  

With experts predicting Spain’s banks and Government having to raise 73 billion euros in the first four months of 2011 and the Economist reckoning property to still be overvalued by 47.6%, it’s clear that Spain has a painful correction process ahead.  We may see Salgado and Zapatero having to eat their words.

Contact Greg Butcher of Fairhomes Ltd on gregory@gregorybutcher.org visit www.fairhomes.net or call 00 350 200 400 48.

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About Fairhomes Ltd - FAIRHOMES - REAL ESTATE INVESTMENT & DEVELOPMENT

Fairhomes and its associated companies are a privately held cross-sector real estate investment and development company with headquarters in Gibraltar.

For over twenty years our vastly experienced and well respected entrepreneurial team has invested in real estate across Europe and Asia with a focus on distressed, special and turn-around situations.

Our current portfolio is made up of assets across the UK, Germany, Gibraltar, Singapore and the Netherlands, with major plans to expand and invest into new markets from 2011.