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Fitch: Banks Will Continue To Discount Their Foreclosed Assets For 2+ Years

24 October 2017 – Expansión

Fitch report / Financial institutions are selling their real estate portfolios at discounts of between 50% and 70%; those levels are expected to be maintained for at least the next two years.

“We do not expect to see a close correlation between the improvement in the macroeconomic situation and lower discounts on the sale of portfolios of foreclosed real estate assets by the banks. In fact, we expect those discounts to remain at their current levels for at least the next two years”, said Alberto Faraco and Juan David García, analysts at the ratings agency Fitch.

Spain’s banks still hold significant volumes of real estate, inherited from the crisis, which they must get rid of by order of the supervisor. To accelerate the process, entities are selling portfolios of foreclosed real estate assets to international funds and, in exchange, they are demanding significant discounts with respect to the initial value of the properties.

According to Fitch, these discounts amount to between 50% and 70% of their value and the probability that they will continue for a while yet is high. “It is likely that not even the better tone of the Spanish real estate sector will lead to an increase in the prices at which the banks are selling their portfolios of foreclosed assets, given that there is a significant over-supply, which is exercising considerable pressure”, said Faraco and García, authors of the most recent report published by Fitch.

“The foreclosed properties are competing against a stock of around 500,000 recently built homes, which are ready for sale. Moreover, they are suffering from downwards pressure in terms of prices due to the profitability premiums that buyers require of the banks to cover uncertainties in the process”, said the analysts. The entities’ real estate portfolios carry a series of risks that can detract from the profitability obtained by a potential buyer, such as the fact that the dwelling cannot be accessed until the inhabitant is evicted.

Homes that the banks are responsible for placing directly with end buyers are treated differently. Such properties are sold with lower discounts but require much more time and resources go shift, something that the entities, under pressure from the supervisor to decrease their share of non-performing assets, cannot afford.

What Fitch does expect is a reduction in the number of new assets being foreclosed by the banks, in line with the improvement in the macroeconomic situation in Spain. “In this environment, it is also fundamental that the banks adopt a new strategy that favours handling doubtful loans through debt restructurings rather than as foreclosures”, said the experts.

Localised bubbles

Besides the banks’ assets, Fitch is observing an overall improvement in the fundamentals of the Spanish real estate market, with prices on the rise. “Despite the recovery, we do not see the risk of a new real estate bubble in Spain arising anytime soon. There is a large supply of homes that still needs to be absorbed. Nevertheless, we are seeing very localised bubbles in premium areas of certain neighbourhoods of Madrid, Barcelona and the Balearic Islands”, they explained.

Original story: Expansión (by Andrés Stumpf)

Translation: Carmel Drake