Banks in Spain may take bigger losses than they hoped this year on real estate repossessed from borrowers, as they compete for buyers with Sareb, the agency tasked with clearing up the weaker banks after a property crash.
Banks were left holding hundreds of thousands of houses, half-built commercial and residential developments and plots of land after borrowers and developers ran into trouble when the property boom turned to bust in 2008.
Property-related losses eventually forced the government to secure a 40 billion euro ($53 billion) bailout for its banks from Europe.
Last year, the banks wrote down foreclosed property on their books by around 40-50 percent after government decrees forced them to make provision for losses and reflect lower market values. The clean-up helped them start selling housing at discounts, mainly to individuals, but with the country in a deep recession and unemployment at 26 percent, demand for property is weak even at knockdown prices.
But now lenders face competition for buyers from Sareb, the “bad bank” set up to manage up to 60 billion euros’ worth of assets from bailed-out lenders, which put its first lot of 13,000 properties up for sale at the end of January.
Since Sareb, set up at the request of Brussels, is taking over assets from rescued banks at discounts that are steeper than those forced on the sector by the government, the fear is that its disposals will push down prices and clog up the market.
Yet if Spain’s healthier banks turn to private equity firms and hedge funds to help shift their assets, they might have to swallow more losses too. Four investment bankers in Madrid said funds typically demanded discounts of 60-80 percent.
“The sale of secured assets to investors would likely be done at prices below those of the Royal Decrees (the government-enforced clean-up), with big discounts,” said Fernando Acuna of Taurus Iberica, which markets banks’ properties and advises them on portfolio sales.
“The discounts from the decrees were more in line with the prices seen in the normal consumer market.”
But what is normal once Sareb is selling in volume? Early estimates had put the properties Sareb would house at 89,000, though Sareb said that could change.
There are about 200,000 repossessed properties in Spain, on top of 1 million newly built homes for sale, rating agency Fitch estimated in December, adding that banks had on average been selling properties last year at half the price they were originally valued at.
Property prices have already slumped 35 percent from a 2007 peak, according to real estate valuations group Tinsa, and Fitch forecast recently they had another 15-20 percent to fall.
Banks able to take another hit could now start selling portfolios to investors to move quickly with disposals, bankers said.
Santander, which has said it wants to aggressively shed property assets this year, is setting aside 1 billion euros in its 2013 budget to cover possible portfolio sales at a “significant discount”.
“If we can get in there before the Sareb starts achieving cruising speed, so much the better,” Chief Executive Alfredo Saenz said in January during a results presentation. Capital gains from sales of other items would offset the hit, he said.
U.S. funds Centerbridge, Apollo, Fortress, Lone Star and Cerberus are among those actively circling the Spanish market for property assets, investment bankers said.
FORECLOSURES ON THE RISE
Not all Spanish banks will want to take more immediate pain from their property problems, with Santander and rival BBVA , the country’s top two banks with large overseas operations, better able to weather writedowns than most.
Selling to individuals is slower than shifting portfolios but typically costs less, because individuals are not necessarily looking to turn a profit like funds are.
BBVA for example said it had sold 12,000 foreclosed properties last year at an average 40 percent discount, mainly by selling them piecemeal.
But asset values risk dropping the longer properties sit on banks’ books, and lenders may struggle to sell anything beyond their better assets to individuals at attractive prices.
House prices have fallen more sharply on the Mediterranean coast, where developers erected kilometres of resorts that now stand empty, than in city areas, according to Tinsa.
Funds are also interested in the best real estate, such as commercial developments or upscale flats in the centre of big cities, but they might also help banks shift less attractive ones at heavily discounted rates, bankers said.
Foreclosures are also still rising – up over 18 percent in the first nine months of 2012, court data shows – adding to the pressure to sell existing stock. And developers are still collapsing, with major real estate firm Reyal Urbis filing for insolvency on Tuesday.
While banks have no firm timelines to rid themselves of properties, keeping big exposures could also hinder their funding prospects as they try to cut their reliance on central banks and turn to bond markets instead.
“Spanish banks seeking to target international investors as a source of funding must now reduce their exposure to real estate assets to help regain investor confidence,” Fitch analysts Carlos Massip and Juan David Garcia said in a December report.