Spanish property prices continue the downward spiral

Posted on March 14th, 2012 in Real Estate in Spain by author

January’s house prices saw the worst depreciation since 2008 and, while this news was greeted cheerfully by potential foreign buyers, the Spanish press has expressed fears over a deepening of the crisis.

Spain’s new government, headed by the People’s Party, appreciated the “good” news, as lower prices mean greater affordability. Government officials are currently putting pressure on banks to cut prices for residential properties by launching higher capital requirements and making far greater provisions for bad debts and “undesirable” properties on their books, namely those properties that are unlikely to be sold., a Spanish online property expert, commented on January’s sales results as being “the worst month since the Spanish housing crisis started four years ago” and underpinned their statement with statistics that revealed a 9.4% decrease in a year-on-year comparison with 2011.

Traditionally, December and January are the worst months for selling property anyway, which means the average month on month decrease of 1.9% has to be seen in context. The average price per sq. meter is static at €2,000, meaning a typical 2-bedroomed holiday apartment still sells for just €130,000.

This is potentially good news, as low prices at desirable locations such as the costas have already caught the attention of international investors. Large numbers of self-catering tourists coming to Spain for their holidays have the potential to increase yields on rental income and Spain’s revenue from tourism was at a record high in 2011.

It is estimated that at least 36% of all bank-owned housing stock is in seaside locations. Such developments received generous funding during the housing boom years, when developers speculated on rising prices. Now such key-ready housing stock bargains are luring potential buyers from the Benelux countries, the UK, Germany and Scandinavia to Spain once more., a specialist in bank-owned housing stock, described the whole debacle best by saying “crisis, what crisis? Price reductions are good news for both international and Spanish buyers.”

Is Spain’s government right after all? Affordability can be measured in two ways: who can afford to buy in Spain at what price? Domestic buyers have far less money to spend on properties located at the costas than international investors, but this has prompted Spanish buyers to look for property bargains in cities and towns, leaving the seaside housing stock largely to foreign buyers.

The Bank of Spain has told off the country’s banking sector, suspecting that prime properties are being held back until better market conditions are starting to surface. Housing stock that nobody else wanted has instead been offered at rock bottom prices to bank employees, their families and friends, even to long standing customers. Despite such tactics, some 600,000 housing units remain unsold to-date, representing a year’s worth of housing stock during 2007 peak times.

Spain’s banks will come under increasing pressure to release quality properties in prime locations at the costas onto the market to achieve more sales. They will also be called upon by the government and the Bank of Spain to come up with better incentives, so that international buyers can take advantage of lower prices and improved finance options.


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People’s Party may take drastic measures to get Spanish banks back into line

Posted on March 1st, 2012 in Real Estate in Spain by author

Alvaro Nadal, economy secretary to the People’s Party (PP), warned that a PP-led government may wish to alter Spanish accounting rules to allow banks to sell assets, write off bad debt and make their dealings more transparent.

Currently polls predict that People’s Party will win the next election to be held on 20th November. In an interview conducted at the opposition party’s head-quarters, Mr Nadal said that his party was keen to get to grips with the thorny issue of what was actually sitting on banks’ balance sheets.

“Regulatory orders and changes in the way bookkeeping is done in the financial sector could be some help in the case of certain assets,” Mr Nadal explained. His party would tell the Bank of Spain and other regulatory agencies that “we have to push in this direction and we have to put assets on the market to show the real price of those assets.” In other words, the hundreds of thousands of repossessed properties sitting on balance sheets are only worth what an investor is prepared to pay for them under current market conditions.

The Bank of Spain has already forced banks to allow for larger reserves against the properties they repossessed in exchange for loan defaults. At present Spanish banks have made provisions for $146 billion (€105 billion), following the collapse of the property market in 2008. Now they are staring a huge increase in cost of borrowing in the face in the wake of the worsening sovereign debt crisis in the Eurozone and worries over real estate losses.

“We haven’t been transparent enough,” said Alvaro Nadal. Liabilities that could be recovered, would be recovered, he stated, and liabilities that needed to be written down, would have to be written down. Write-offs would have to be faced and written off, he declared, but using public money as a bolster for capital was going to be the last resort, he promised.


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Price reductions for Spanish properties on the horizon

Posted on March 1st, 2012 in Real Estate in Spain by author

Anyone thinking of buying a property in Spain should wait and see if prices for properties will fall further – the Bank of Spain published its intention to force financial institutions to making greater provisions for losses on property for debt exchanges. This news is likely to have a negative impact on house values, if vendors are forced to reduce the asking price for their properties.

Apparently draft proposals for the Bank of Spain ruling are on the table for discussion. Forced to reduce their bad debt ratios, Spanish banks have been accepting properties and land in exchange for debt for the last two years from developers who got into financial difficulties.

This practice has resulted in Spanish banks now owning hundreds of thousands of unsold properties across Spain. Naturally, the Bank of Spain is keen to prevent Spanish banks from increasing their property portfolio even further.

The Spanish property market needs to undergo further price adjustments, despite the decline in prices over the last few years. A variety of reports and surveys published recently have stated that in view of the hundreds of thousands of distressed sales on the market, property prices are still far too high.

Some reports estimated that currently a record number of 1.5 million unsold residential properties stand empty across Spain. The estimate includes new builds on the market as off-plan properties and second-hand homes for resale.

A recovery of the Spanish property market has been hampered by the unwillingness of Spanish financial institutions to accept write offs and their property for debt swaps have actually helped to keep house prices at an artificial high, says Spanish Property Insight.

It is a buyers’ market right now, with vendors having to accept that there will be some considerable “haggling” over price from savvy investors.


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Investment in land no longer a safe bet

Posted on March 1st, 2012 in Real Estate in Spain by author

Once upon a time buying land was one of the soundest investments anyone could make. For a decade or more Spain’s housing boom fuelled the country’s economy to the envy of its European neighbours. Now everyone’s eyes are on Spain for an entirely different reason: how badly affected is the Spanish economy really? Will Spain’s economy falter like Greece, Portugal and Ireland, pulling the rest of Europe down into a financial abyss?

Greece and Ireland are far smaller economies and even there a bailout was hotly debated among European member states – but bailing out Spain? What happens next depends to a great extent on Spanish banks, which are currently seeking an additional €15 billion ($21.1 billion) to deal with further capital obligations foisted on them by the government. And how low things can really sink for Spanish banks depends to an even greater extent on the Spanish housing bubble, currently bursting left, right and centre.

During Spain’s property boom, land was the most sought after commodity everyone wanted. Gradually the extent to which land was sold, developed and often illegally built on is only now beginning to emerge, after the Bank of Spain asked lenders to confess to their exposures in detail.

It seems local councils gave out building permits for land development without asking too many questions, especially so, since they received a fee or a percentage of the land themselves. Carlos Ferrer-Bonsoms, a member of consultancy Jones Lang LaSalle, commented recently, “The main issue for the banks isn’t excess housing, it is land”.

Goldman Sachs estimated that nearly a quarter of banks’ €320 billion exposure in loans handed out to developers is underwritten by land. Almost half of the banks’ €70 billion assets held in real estate is made up of land. Indeed, Spanish financial institutions, banks and savings banks as both owners and lenders, are exposed to the tune of €100 billion worth of empty building plots.

It may take at least five years before the current oversupply of housing stock and plots is addressed. Currently there are some 1.5 million Spanish properties that remain unsold, according to industry expert Mr Fernando Rodriguez y Rodriguez de Acuña, a spokesperson for consultancy RR de Acuña. A million of these homes need to be sold, before the remaining plots can be developed. He estimated that some 2.7 million properties could still be built on existing land suitable for development.

While building plots in urban areas like Barcelona or Madrid or at the most desirable locations at the Costas stand a good chance of seeing development in the future, many plots have no hope whatsoever to get developed, indeed Mr Fernando Rodriguez y Rodriguez de Acuña calculates that 1.45 million developments won’t go ahead until 2021, since they are in such poor locations and a great number will probably never be constructed at all.

To address this over exposure Spanish banks are resorting to forming consortia with those developers, who are still financially sound. In some cases banks have formed cooperatives to construct homes on the more desirable plots of land in their possession, hoping that a portion of the development will recoup their losses. In order for a bank to advance financing though, the developer must shift a high percentage of the properties off-plan and upfront, which is not exactly an easy task in the current economic climate.

There are other alternatives and La Caixa, one of the largest Spanish savings banks around, exchanged loans for land with bankrupt developers. The bank uses the land to build affordable, low-rent homes for young families and old people. The construction of 1,100 new homes is being funded by La Caixa’s charitable foundation. Once tenants have occupied their home for ten years or more, they have an option to buy their home from Obra Social la Caixa.

As lenders are beginning to brace themselves for huge losses, the doom and gloom is spreading across Europe, which may require Spanish banks to set aside even greater provisions. The largest Spanish bank, Banco Santander, has currently allowed for 35% to 40% of losses, but this figure may well have to be increased soon.

Spanish banks, which are left with a lot of building plots on their books, are reluctant to let their land go for less than the original value. There’s a limited choice of how to get land holdings off a bank’s balance sheet. While in 2004 land transactions were worth €23 billion, in 2010 this figure fell to a mere €4 billion, reflecting the current situation that distressed funds may be willing to buy at a hefty discount, but banks are not willing to part with land assets for a fraction of the asset’s value.

Just where all this land and housing misery is going to end, nobody knows. Meanwhile, Spain’s left with thousands of empty plots that may never be built on.


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Bank of Spain warns – ‘House prices continue to fall’

Posted on March 1st, 2012 in Real Estate in Spain by author

The Bank of Spain confirmed what many feared: house prices have continued to decline in the second quarter, even more so than in the first. Seen between April and June the figure equates to a 5.2% downturn annually.

A spokesperson for the Bank of Spain said that seen cumulatively, the property market has declined by almost 17% since the boom peaked in 2007, which equates to a 22% decline in real terms.

The Bank of Spain blamed the end of tax relief for people with an annual income of more than €24,100 and the difficulty in obtaining finance for property purchases for this sharp decline of the housing market. Tax changes and the reluctance of banks to grant mortgages had a major impact on purchases at the end of 2010, which explains the poor result compared to the previous year.

Not only have prices continued to fall, but this downward trend has increased somewhat, declining by 5.2% between April and June, while in the first quarter the fall equated to 4.7%. An oversupply of housing stock in some areas and the increased cost of mortgage financing has been directly responsible for this trend.

Getting a mortgage application through these days has become even more difficult, although according to the Bank of Spain the criteria for awarding loans to prospective property buyers has not changed in any significant way. The difficulty in getting finance has more to do with an increase in interest rates which has set financial markets into turmoil and has pushed up the cost of borrowing in both the private and the commercial sector.

The Bank of Spain’s annual Economic Bulletin made further gloomy predictions, saying the Spanish GDP increased by a mere 2.0% quarter-on-quarter and only 0.7% year-on-year, representing a one-tenth loss in both cases for the first quarter, when Spain’s GDP increased by 0.3% from the end of the year 2010 and by 0.8% seen year-on-year.

Trying to soften the blow somewhat, the Bank of Spain stated that on the expenditure side of their report the decline of the property market is largely due to a decrease in domestic demand, which declined by 1.9% seen year-on-year and was even worse in the second quarter. Foreign demand on the other hand increased its positive affect by rising from 1.4% points in the first quarter to an encouraging 2.6%, showing that foreign demand remains healthy.

However, Cinco Dias stated that the Bank Lending Survey published figures in July, which suggested that in the coming months the property market’s outlook and consumers’ shattered confidence may have a further negative affect on the demand for finance for the purchase of property.


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