In mid-October this year, the director-general of Spain’s fund for orderly bank restructuring, Antonoio Carrascosa, chose a real estate conference in Barcelona to unveil the details of the country’s newly launched “banco malo”, or bad bank.
SAREB, as the entity has been named, is due to become operative in December this year, and was created with the gargantuan task of helping Spanish lenders clean their balance sheets by offloading their toxic property assets and facilities.
Carrascosa attracted investors and agents from both Spain and abroad to an otherwise not exceptionally lively Barcelona Meeting Point. The reason, as Spanish business school IESE’s professor José Luis Suárez put it, was that “the bad bank is going to be Spain’s largest real estate investor in history”.
SAREB will acquire assets with a total value of €60bn and €70bn, over 50% less than their gross value of €150bn, Carrascosa said. The bad bank will have a maximum life of 15 years, but, Carrascosa said, it would be good for the market if it finished selling its assets long before then.
Some market operators, though, say the gap between offer price and investors’ requirements when they buy in Spain is still too wide. Speaking in Barcelona, RREEF’s managing director and head of Spain, Ismael Clemente, says that “there is still a mismatch between what investors are looking for and what Spain can offer”.
Clemente says the bad bank will have to apply discounts over the initially proposed level. “If you insist on transferring assets at 47% to a bad bank, you will eat them with potatoes for many years,” he says.
Carrascosa says that the value cuts applied by SAREB reflect a tendency that is already influencing the country’s property sector. “There may be a downward pressure but this is in line with what is happening now in the real estate market,” he says. “Prices will need to remain low, and lower than they were in other entities’ balance sheets. We are seeing some structural price adjustments.”
But according to FROB’s director, although the bad bank will need to operate in line with market trends, it will not be as purely profit-oriented as an entirely private business. “It was created with the aim of liquidating assets in an orderly way,” he says. “It does not have the vocation of a property company.”
The market conditions in which SAREB will have to operate will be the most challenging faced by Spain’s real estate sector in the past decade. Foreign investment funds are leaving the country and almost no high-volume deals are expected to be completed any time soon.
According to Clemente, foreign investors are not attracted to the country at present. “I believe there is not more than €5bn of allocation from foreign investors for Spain in the whole world,” he said.
According to Cushman & Wakefield capital market partner in Barcelona, Jason Clarke, it is still too early to tell whether the creation of a bad bank will encourage investors to go back to Spain.
“We need to be operational for people to see how it is going to work,” he told EuroProperty. “There could be some business after the first deal, when we know prices, procedures and processes. Until then, people will remain sceptical.”
According to other players, SAREB creates certainty and is a good sign for investors as well as for the entire sector.
“The bad bank will activate the sector,” says Juan Antonio Pérez-Rivares, a lawyer with international firm Urìa Menéndez in Barcelona. “No matter how it is done, it will have to promote and sell.” Pérez says that while foreign investors such as German funds are leaving Spain, other players are now looking at the country.
The lawyer says that family offices from Argentina are looking at sale-and-leasebacks. Retailers such as French sportswear seller Decathlon are putting small portfolios on the market in Spain and, while volumes are low, good leases and a reduced risk make their assets appealing.
Argentinians eye Spain
“Latin American investors see that Spain is not doing well, but it’s not as bad as Argentina was some time ago. Yet, Argentina is going ahead.” Based on these considerations, Latin American investors are more likely to look at Spain than their European counterparts. “An Argentinean investor is less scared to invest in Spain than a German one,” Pérez-Rivares says.
US opportunistic investors are also looking at Spain, mainly in the residential sector. “They look for half-finished schemes where they can come in with the bank and finish them off,” C&W’s Clarke said.
Nick Wride, senior capital market consultant in Barcelona with Jones Lang LaSalle, says that he expects next year to be even quieter than 2012 for the country’s property market, with some exceptions.
“US investors are looking into residential and the bad bank,” he says. “There is interest, but only at the right price and investors from the US are looking for huge discounts.” Wride said that opportunistic investors are targeting 10% yields and sale-and-leasebacks with long leases.
Urìa’s Pérez-Rivares says that property companies created by banks in order to manage their real estate portfolios will be the main market operators in Spain in the near future. “These new generation companies were created initially by banks as a place to park their assets,” he said. “Now they are acquiring expertise and they will be the property companies of the future.”
In times of crisis, Spain’s public administrations are also selling or planning to sell their real estate portfolios, mainly on a sale-and-leaseback basis. A first major attempt in this sense failed at the end of last year when Generalitat de Catalunya tried to offload two Barcelona portfolios valued at a total of around €450m. British investors Moor Park Capital Partners pulled out of the deal while it was already in due diligence. Generalitat is now selling the buildings separately and off the market.
“Public administrations need to privatise and what they have is real estate,” Pérez-Rivares says. Foreign investors have been reluctant to trust the Spanish state as a tenant, but, as Pérez-Rivares says, public bodies “may pay late, but they pay”.
Sale-and-leaseback operations launched by banks are becoming less appealing than they have been in the past years, as doubts arise over the future of Spanish lenders who put their branches on the market.
Things may be different when the seller is not a Spanish bank. Several domestic investors have presented offers, in October, for Deutsche Bank’s headquarters in central Madrid as well as for 16 branches the German lender is selling across Spain. Deutsche Bank owns only 85% of the building at Paseo de la Castellana 18, which, according to market sources, will be sold for below €50m, while the bank branches have a total value of €15m.
Some Spanish owners are also trying to offload their assets, but the gap between their price expectations and those of investors make it hard for deals to proceed.
At the BMP conference, the public Zona Franca consortium met international agents operating in Barcelona to promote a mandate for the sale of an office it owns in the city’s new business district 22@. The consortium is selling a concessionary interest in the Bank de Sang i Teixits, built in 2010 to host Catalonia’s hemoderivative bank headquarters, on which it spent €35m.
Only 9,900 m2 of the 16,600 m2 asset are covered by the 75-year concession for sale, but Zona Franca told agents that it would only accept a minimum price of €45m for the asset, which, according to several agents, is not realistic.
