At the end of March, Spanish banks had to submit plans showing how they would comply with a new government financial reform that is expected to have a strong impact on the country’s real estate market.
According to figures by law firm Uría Menéndez, Spanish banks hold €148bn of performing property loans as well as €175bn of non-performing real estate loans and foreclosed assets, for a total of €323bn.
The banks, which are considered increasingly as Spain’s most important real estate market players for the year to come, are now being asked to make write-downs of €50bn, which will add to the €66bn they already wrote down between 2008 and 2011.
While the number of commercial property transactions in the country fell by 41% last year compared with 2010 and forecasts are not positive for this year, portfolios of bank real estate assets and loans are expected to come to the market in the next months.
“Investors are looking at bank portfolios but a price balance between bid and offer remains to be found,” says Adolfo Ramírez-Escudero, executive managing director at CBRE in Madrid.
Despite banks’ resistance to giving large discounts, experts say that the legal reforms will force these discounts through, and that they will affect both real estate loans and assets acquired by the banks through foreclosures or debt-to-asset swaps before the end of last year.
Provisions for around €25m
Before 31 December this year, banks will have to make provisions for around €25bn. In addition, they will have to ensure a generic 7% provision estimated at around €10bn on non-distressed assets. They will also need to comply with new capital buffer requirements of 20% for their land and 15% for their uncompleted development schemes. The total amount required for the new buffers is estimated at around €15bn.
These commitments add up to the capital requirements introduced last year by Spain’s previous government, led by José Luis Zapatero, which imposed new capital ratios of 8% for commercial banks and 10% for the country’s troubled savings banks, or cajas de ahorro. The requirements came as the banks’ loans secured against real estate or the property assets they repossessed weighed heavily on their balance sheets.
The €50bn write-offs imposed by new prime minister Mariano Rajoy’s government, experts say, will not be enough to clean-up banks’ balance sheets from their toxic real estate assets.
Despite that, lenders are still reluctant to concede big discounts of up to 70%, which are now required by foreign investors looking at loan or distressed portfolios in the country.
Spain’s largest lender, and the eurozone’s biggest lender by asset size, Santander, started negotiations with Morgan Stanley Real Estate for the sale of a €3bn portfolio of repossessed properties and land at the end of 2011.
Earlier this year Morgan Stanley was in talks to buy not more than €700m of the bank’s portfolio, which is only a small part of Santander’s total €8.5bn of foreclosed real estate assets in Spain.
The discount applied by the seller is expected to be around 70%, while initial potential bidders for the portfolio, including foreign investors such as Cerberus and Apollo, were asking for 80%.
Although negotiations with MSRE were believed to be in their final stages as early as February, the deal has still not been completed.
Santander’s foreclosed real estate portfolio’s sale, market sources say, will be a benchmark for similar operations throughout this year.
“Competitors will put their portfolios in the market,” says Rafael Merry del Val, Savills’ general director in Madrid. “Discounts will probably be 50% to 60%.” Merry del Val said that smaller investors are also expected to be active in this market for deals between €1m and €6m.
Residential assets and non-performing loans are expected to be in demand, according to Savills’ Spain director, while it will be difficult for banks to sell single assets that are not new.
“They are difficult to sell,” Merry del Val says. “They have complex management structures and teams.”
Land, he says, will be sold only in a second phase and not easily. “Nobody wants to buy land,” he says.
The new law, though, requires the country’s banks to raise their capital requirements for exposure to their distressed land from 31% to as high as 80%. Actual provisions will account for 60%, while the remaining 20% will be required as a capital buffer. This, experts say, will force banks to offload their land lots at high discounts. Ongoing developments will also be subject to higher capital requirements, which will increase from 27% to 65%, including a 50% provision and a 15% capital buffer.
Completed residential assets will require an increase in coverage from 10% to 30% for secondhand residential assets and from 10% to 40% for new-build residences.
Some banks have already started to comply with the measures several months ahead of the 31 March deadline for the submission of their compliance plans, which are due to be approved by the bank of Spain within 15 working days. Some of them submitted their plans as early as last year.
They will have until the end of 2012 to implement the measures they committed to, unless they merge with other banks. In this case, they will have to submit their integration plans before the end of May. The merger application will include a plan for the disinvestment of the merging banks’ real estate assets within three years of the merger. The plans will have to be approved by Spain’s minister of the economy within one month.
Merging banks will then have a further year to comply with the measures introduced by the new bank reform.
Toxic real estate
As a result, the number of Spanish cajas de ahorro, or savings banks, whose balance sheets are the most affected by toxic real estate, is expected to decrease to less than 10. Spanish cajas totalled 45 at the beginning of 2010, falling to 17 in 2011.
One of Spain’s largest cajas, La Caixa, which was the only major savings bank that didn’t merge with other lenders in the past year, recently signed a preliminary agreement for its integration with the Banca Cívica group.
According to Danny Kinnoch, Savills’ international investment director in Madrid, banks will keep selling property portfolios as well as single assets throughout this year. “We will see more single products and some portfolios coming from banks,” he says.
According to market sources, five portfolios of foreclosed real estate assets are now on the Spanish market, and five are expected to be put on sale soon.
In such a challenging scenario, Spanish banks remain reluctant to give financing. “Leverage is expensive and difficult,” Merry del Val says. “Banks will not waste money on assets that don’t check all the boxes. If they don’t, they won’t get financed.”
According to Kinnoch, investors and their lenders look for “perfect” products. “Financing is not going to improve in 2012,” he says. “Only smaller deals where it is possible to buy with equity will increase.”
