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.


  • Comments Off