Tightened Lending Standards Put Drag on New Developments

8 November 2019 – Developers are complaining of a lack of financing in the sector due to tightened lending standards and the high cost of alternative financing. Spain’s banks are looking to reduce their exposure to the real estate market, at a time when many of them still have extensive amounts of NPLs and REO on their balance sheets. At the same time, alternative financing vehicles often have interest rates reaching up to 10%, making many potential developments economically unviable.

A conference on financing and alternative investment in the real estate sector, organised by the IE Real Estate Club and the Urbanitae real estate investment platform, saw market sources discuss the problems facing the sector.

Developers argued that banks should provide more financing to that they can build the 150,000 homes a year the country requires. Currently, sources say that banks will only extend financing to only the largest developers who can 30% to 40% of the financing using equity. Smaller firms with less access to capital are often unable to get 100% for new developments.

Original Story: Expansión – Carlos Lospitao

Adaptation/Translation: Richard D. K. Turner

Euribor Falls to New Record Low

20 August 2019

The 12-month Euribor benchmark interest rate, which is used as a reference to set Spanish mortgages rates, fell to a new low of -0.398% last week. The rate first fell into negative territory in February 2016, as the European Central Bank’s (ECB) policy of quantitative easing looked to boost the Eurozone economy.

Euribor seemed to have hit bottom in March 2018, at -0.191%, when analysts began predicts gradual increases in the rate until potentially hitting zero in 2019. However, after rising to -0.108% in February, Euribor began falling again due to fears that the growth in the Eurozone was once again faltering.

Original Story: El Confidencial

Adaptation/Translation: Richard D. K. Turner

Moody’s: The Average LTV on Residential Mortgages Amounted to 64.6% in Q1 2019

30 May 2019 – El Diario

According to the latest data from INE, more and more people are taking out a mortgage to buy a home in Spain. 30,716 mortgage contracts were signed in March, up by 15.8% YoY.

Many buyers are attracted by rising house prices (investment growth), which the ratings agency Moody’s considers is something “positive”. However, with personal savings rates in freefall, banks are having to lend more than ever to enable families to afford their homes.

Specifically, the percentage that the loan granted represents over the appraisal value of the property (LTV) amounted to 66.5% in Q4 2018, its highest figure ever. That figure moderated slightly to 64.6% in Q1 2019 but many families are now asking to borrow 65%-70% of the value of their homes, which means a greater risk for banks and a higher probability of defaulted payments.

According to Moody’s, whilst a portfolio with an average LTV of more than 80% has a default rate of more than 6%, a portfolio with an average LTV of less than 60% has a default rate of 1%.

Nevertheless, although some banks are now lending mortgages with LTVs of 100% in certain cases, the percentage of loans with LTVs of more than 80% is lower than it was before the crisis. Such mortgages currently account for 13.1% of the total compared with 17% in 2006.

Moreover, according to Moody’s, mortgage borrowers are better off today than they were at the outbreak of the crisis as they are in a better position to afford interest rate rises and other changes in the market thanks to the strict criteria that the financial entities have applied when granting loans in recent years.

Original story: El Diario (by Marina Estévez Torreblanca)

Translation/Summary: Carmel Drake

Bank of Spain: Real Estate Loans Account for 40% of All New Lending

3 May 2018 – El Confidencial

The Spanish economy is returning to its roots. New real estate loans granted to households, in other words, lending that does not include the renegotiation of existing loans, is now growing at an annual rate of 17.4%. In total, such lending amounted to €36.5 billion in 2017.

And this is not a one-off blip. So far this year, although the rate of growth has softened, it still rose by 11.1% during the first quarter compared to the same period last year. That explains how real estate loans now account for 37.4% of all lending that households requested in 2017, which amounted to €97.5 billion in total.

Those €36.5 billion that were used to buy properties exceeded the amount spent on the purchase of consumer goods (€29.1 billion) and the amount that was financed through credit cards (€13.3 billion), whose growth was very significant.

Paradoxically, the most expensive financing – financial institutions apply significantly higher interest rates when consumer acquire goods using credit cards – grew by 20.3%. Therefore, by five times more than the increase in nominal GDP (with inflation).

Data from the Bank of Spain leaves no doubt about the recovery in real estate lending boosted by low interest rates, which explains that the number of renegotiations is still very active, although it has decreased with respect to two years ago, when many households changed the conditions of their loans to benefit from the European Central Bank (ECB)’s ultra-expansive monetary policy.

Specifically, between 2015 and 2017, Spanish households renegotiated loans amounting to almost €18.0 billion, which allowed them to benefit from the extraordinary monetary conditions. In fact, 1-year Euribor remains at -0.1890%, which has encouraged increasingly more households to opt for fixed-rate mortgages over variable rate products.

The average interest rate on new operations for the acquisition of homes amounted to 2.21% in February, which represented a slight increase of 16 hundredths with respect to the previous month. In any case, these are tremendously favourable real interest rates (with respect to inflation), which boost property sales.

Property bubble

The credit map reflecting the Bank of Spain’s statistics reveals two very different realities. On the one hand, as described, new real estate lending has soared, but on the other hand, the amount granted before 2008, which is when the real estate bubble burst, is continuing to fall very significantly. In other words, families are continuing to repay their loans and, therefore, reduce their indebtedness, but, at the same time, new operations are growing strongly.

A couple of pieces of data reflect this clearly. In 2011, the outstanding loan balance dedicated to real estate activities amounted to €298.8 billion, but by the fourth quarter of 2017, that quantity had decreased to €110.0 billion (…).

The importance of the real estate sector in the Spanish economy is key. And, in fact, the double recession was very closely linked to demand for housing, which fell by no less than 60% between 2007 and 2013. In particular, due to the drag effect on the other components of private consumption (…).

The data on real estate lending are logically consistent with those offered by Spain’s National Institute of Statistics (INE) on the constitution of mortgages, which reflect an increase of 13.8% in February (the most recent month for which data is available) compared to a year earlier. In total, 27,945 mortgages, with an average loan value of €119,708, were granted (…).

Original story: El Confidencial (by Carlos Sánchez)

Translation: Carmel Drake

Mapfre Sold Non-Strategic Properties for €130M in 2017

1 March 2018 – Expansión

In 2017, Mapfre focused the management of its properties on the sale of non-strategic assets for a total of €130 million, of which €124.5 million corresponded to assets located mainly in Spain. That activity generated a profit of €65 million for the insurance company.

The entity sold the building it had occupied on the Madrilenian street Calle Luchana (pictured above) for €72 million, plus two plots of land in Palma de Mallorca for €22.5 million and other smaller assets for €30 million in total.

At the end of 2017, the market value of Mapfre’s real estate investments amounted to €2.9 billion, with latent gains of €750 million. That figure would offset a decrease in the price of its properties amounting to approximately 26.28% of the market value of the portfolio.

Of that total, €1.0 billion relates to properties that the insurance company uses in its normal activity, whilst the remainder, €1.3 billion comprise group investments.

Mapfre’s real estate portfolio accounts for 4.4% of the insurance company’s total investments, which amount to €49.6 billion.

Its government-backed fixed-income securities account for most of its portfolio (55%) at €27.4 billion, although they have reduced their weighting by 2.3 percentage points, given that previously they accounted for 57.3%. Corporate fixed-income securities accounted for 19% of the total, at €9.6 billion, compared to 20.2% a year earlier.

Insurance companies are natural investors in these types of assets, but in light of the decrease in interest rates, most entities are reducing the weight of their investments in those portfolios and increasing their presence in others that may offer higher returns, although also higher risk.

Equities are the caption that is growing the most within Mapfre’s portfolio, up by 44.2% in one year to reach €2.4 billion. Their weight amounted to 4.8% at the end of 2017, compared with 3.4% a year earlier.

Spanish fixed-income assets, both public and corporate, amounted to €18.2 billion at the end of last year, almost half the total amount, which reached €37.0 billion. The United States of America, with €3.7 billion and Brazil, with €3.4 billion, were placed in second and third position in that ranking.

Original story: Expansión (by E. del Pozo)

Translation: Carmel Drake

S&P Warns of Deceleration in Catalan Housing Market

7 February 2018 – El País

The Spanish real estate market is going to continue growing, but the Catalan crisis may have a negative effect on the housing market in the region. “Although Barcelona has recorded some of the highest property prices since the start of the recovery, in 2018, Cataluña could see a recession in its real estate market”. That is what the ratings agency Standard and Poor’s (S&P) thinks, according to its report about the real estate market in Europe, which indicates that “economic growth should continue to be strong this year and next, but the political uncertainty may have a more negative impact on companies and consumers. The main risk is the impact of the Catalan crisis, given that it is the largest economic centre in Spain, accounting for 20% of the country’s nominal GDP”.

Leaving aside Cataluña, the agency indicates that the strong economic conditions in Spain will continue to drive up the volume of house sales and will help to reduce the stock of homes. In fact, it forecasts that the volume of transactions in Spain will grow by around 8% this year.

Moreover, although interest rates bottomed out at the end of last year, they will continue at very attractive levels for house purchases. Nevertheless, the agency points out that accessibility ratios continue to be high, even though the number of years of salary needed to buy a home has decreased from 7.7 years at the height of the boom to 6.6. years in 2016. And it adds that second-hand house prices are going to continue to increase, although to a lesser extent that over the last two years.

The S&P agency considers that the Spanish economy will exceed the figures recorded in 2017, when average prices increased by 4.2% YoY in the last quarter, according to data from Tinsa. The city of Madrid exceeded Barcelona with an annual increase of 17% compared to 14.8% in the Catalan capital, where prices fell by 1.7% during the last three months of 2017. The volume of transactions amounted to 455,000 during the first 11 months of the year, compared with 375,000 in the previous year. Purchases by foreigners accounted for 17% of the total.

Original story: El País (by S. L. L.)

Translation: Carmel Drake

Servihabitat: House Prices Return to Pre-Crisis Levels in Madrid & Barcelona

13 December 2017 – ABC

The real estate market has definitively overcome the crisis in certain parts of Madrid and Barcelona. According to figures from Servihabitat, house prices in some of those cities’ neighbourhoods are now above the levels seen just before the burst of the property bubble. And according to the real estate servicer, this growth is forecast to continue for the next few quarters at least. House sales will rise by 18% next year to exceed 550,000 operations, thanks to a boost from the sale of second-hand homes. Meanwhile, the price of transactions will rise by 4.7%.

Those are some of the forecasts reflected in the fifth edition of Servihabitat’s report about the “Residential Market in Spain”. The report highlights that house sales will close this year up by 17% and will grow by another 18% next year. The real estate company argues that this improvement is due to factors such as the “increase in solvent demand, policies for granting more credit, the increase in investor interest and the progress in the construction of new homes”.

This recovery will be more homogeneous than in previous years. The improvements in Andalucía, Cataluña and Madrid will be accompanied by increases in other regions such as Castilla-La Mancha and La Rioja, which are expected to record increases of 23.8% and 23.1%, respectively. “The differences between the regions are being mitigated. All towns with more than 100,000 residents are recording strong performances”, explains Julián Cabanillas, CEO of Servihabiat. In his opinion, in 2018, “the trends seen in previous years will be consolidated”.

Nevertheless, the great challenge of this recovery is still how to build enough new homes. Cabanillas acknowledges the fact that “some regions suffer from a lack of stock” for reasons such as a shortage of land, which is pushing up house prices in regions such as Madrid and Cataluña (…).

The impact of tourist housing

It is not only house sales that are expected to continue to rise next year, rental prices are also forecast to increase. Servihabitat highlights the “positive trend” in the rental sector, which according to its calculations will see an average increase of 2% during the second half of 2017.

“Rental has become an increasingly more attractive alternative in Spain, taking into account phenomena such as labour mobility and the upturn in house prices”, explains Cabanillas.

According to Servihabitat, the average yield on rental housing is 5.5%. In certain regions, such as Cataluña, the figure exceeds 6%. In this segment, the real estate company highlights the impact that tourist apartments are having on the market since they are leading to two-digit rises in rental prices in certain cities.

“It is a practice that is developing fast and that needs to be controlled somehow”, explains the CEO of Servihabiat, who points out that the rise in the rental market in recent months has not only been caused by the impact of tourist apartments, but rather by a “combination of factors”.

Original story: ABC (by Guillermo Ginés)

Translation: Carmel Drake

Fitch Warns Of RE Bubble In The Centres Of Spain’s Large Cities

25 October 2017 – El Mundo

The ratings agency Fitch is warning that a real estate bubble is now visible in the centre of Spain’s large cities, although it does not anticipate a widespread bubble in house prices across the country as a whole in the short term, due to the high volume of stock that still needs to be absorbed and the restrictions facing people wanting to access a home.

Those were the findings of analysis performed for the Housing Sector in Spain report published by the entity, which explains that bubbles involving these types of localised assets are now very evident: the strong demand and limited supply of housing in the country’s main cities are leading to extreme price increases that are becoming increasingly “unsustainable”.

According to the agency, in the central neighbourhoods of Madrid and Barcelona alone, prices have recorded an annual increase of between 15% and 35%.

For Fitch, this demand is being influenced by quantitative easing, purchases by foreigners and investment decisions, given that investors are looking to benefit from the appreciation in asset prices and rental yields. Nevertheless, the agency forecasts that these “ingredients” will not influence the overall real estate market in the short term.

Similarly, the ratings agency asserts that it is “highly unlikely” that the problems in the real estate market are correlated with the economic recovery in general and it forecasts that the average discounts being applied to sell foreclosed homes are going to continue to be very high and stable over the next few years.

This situation will continue for as long as the banking sector continues to have an excess stock of housing and for as long as buyers insist on significant discounts to acquire foreclosed homes, said the ratings agency.

According to data from the company, the discount on the sale of foreclosed homes is still “high”, up to 60% on average, compared to the initial valuation, whilst discounts can range from between 50% to 75%.

In this sense, the dispersion of the discounts on the sale of foreclosed properties is decreasing. In fact, the gap between the range of discounts decreased to 25 percentage points at the end of 2016 from 35 percentage points during the period comprising 2010 and 2011. Nevertheless, it says that this reduction is not widespread.

Problems accessing housing

On the other hand, Fitch explains that access to housing will continue to be complicated because the velocity of the house price index is exceeding wage variations.

In this way, the families’ capacity to save is increasingly reduced, also due to the labour market that favours temporary contracts over permanent ones, which makes it hard for would-be buyers to save enough to make the initial down payment of 20% necessary to buy a home.

The report also underlines that access to housing over the long-term may be limited by the gradual elimination of monetary stimuli in the market and the likely scenario of higher interest rates.

Original story: El Mundo

Translation: Carmel Drake

Interview With Arcano Bosses: Álvaro De Remedios & Jaime Carvajal

19 September 2017 – Expansión

Interview with Álvaro de Remedios (pictured above, left) and Jaime Carvajal (pictured above, right), President and CEO of Arcano / The executives are committed to backing the Spanish economy and do not believe that Cataluña will break the rule of law.

In 2003, after a lifetime as an investment banker, Álvaro de Remedios (Madrid, 1968) decided to found Arcano and he was soon joined by Jaime Carvajal (Madrid, 1964). Both shared the vision of accompanying their clients throughout the transaction process and of placing the knowledge of senior executives at their disposal. Fourteen years later, Arcano has 15 partners, a workforce of more than 140 people, offices in Madrid, Barcelona and New York, and it has added the management of alternative assets and real estate advice to its core investment banking business.

Q: The boutique advisors have completed quite a few high-profile operations in recent months.

Jaime Carvajal: It is a world that is growing. The bankers at boutique firms have a lot of experience and the teams are more senior than in the large investment banks, in general. But sometimes, it is good to have both profiles involved in an operation. For this reason, Jefferies makes so much sense for us.

– What fruits are being born from the alliance with Jefferies?

Álvaro de Remedios: We are Jefferies’ partners in Spain. We benefit from its status as a global bank with an international presence and a great sectoral specialisation, and they benefit from our local presence and closeness to the market. Apart from the fact that we have business cards with different logos on them, we act as a single firm. We signed the alliance more than two years ago. The first year was spent understanding each other’s businesses, and during this second year, we have participated in several operations together (…).

Q: Do you expect to see an upturn in corporate operations?

Á.R: Yes, we think so, although that could just be our perception and not the view shared by the sector. We have closed around 30 advisory operations in the last 18 months. We are all very busy.

Q: Are the prices of operations rising due to the high degree of liquidity?

Á.R: There is a lot of liquidity and prices are clearly rising, but there is one key element that is different to before the crisis and that is the fact that financings are much more prudent than before. Prices are higher, but they are not off the scale, and financing is more conservative because investors are being cautious. The scars from the crisis are still there and that is a lesson.

Q: Are investors willing to earn less in this environment?

J.C: The very low interest rates have forced a change in expectations and has resulted in the arrival of new investors, such as infrastructure and pension funds, which are willing to forgo profitability in exchange for assuming lower risk. That is what is driving up prices.

Q: Is the real estate market at its peak in Spain?

Á.R: We are not betting on a rise in interest rates or an increase in prices; we bet on our own added value: we buy a building, we do it up and that is how we generate returns. Our expectation is that prices are not going to grow by much more in the real estate market, but, with our strategy, we are still generating returns (…).

Q: Is the economic outlook bright?

J.C: At Arcano, we started to back the Spanish economy in 2012 and we continue to do so. There are no significant risks threatening the economy: the banking system is robust and the problem of Popular has been resolved. The only clear problem is the inevitable increase in interest rates, but that is not going to happen in the short term, at least in Europe (…).

Original story: Expansión (by S. Arancibia, I. Abril and A. Stumpf.)

Translation: Carmel Drake

House Prices: How Much Upwards Wiggle Room Is There?

13 June 2017 – El Mundo

In many respects, the housing sector has been restored to its former glory: house sales are rising at an increasingly faster rate, the development of new homes has resumed and the granting of mortgages is growing apace. However, the jubilation in the residential market can be felt, above all, in the significant increase that prices are experiencing in the new real estate cycle.

House prices rose by 7.7% in YoY terms during the first quarter of 2017, according to Real Estate Statistics from the College of Property Registrars. In the historical series published by that body, that figure represents the highest increase in house prices since 2007, in what is now the third consecutive year of increases in the market after seven years of severe decreases. (…).

The Registrars highlight the favourable behaviour of the real estate and mortgage markets, but warn that this strong dynamism “does not justify any intensification of growth towards double digits anytime soon”.

The registrars reiterate in their analysis that “From a global perspective, the market is debating between sustainable growth and an intensification towards forgotten figures”. They attribute the significant increase in house prices to the consolidation of economic growth, creation of employment, low interest rates, activity in the mortgage market and overseas demand.

The main consequence of the variables listed by the registrars, which work in favour of rising prices is, clearly, the increase in the number of potential buyers of homes, as highlighted by Julio Gil, Managing Partner at Horizone Consulting Inmobiliario. “The factors that are driving the appreciation in house prices nowadays are demand-driven, with three very clear facets: pent-up demand from previous years, which is now coming into play, demand to reposition and demand to invest”, reflects Gil. (…).

Moreover, all indications are that prices will continue to rise, at least, in the medium term (…). What is not so clear is the intensity of that increase. (…).

According to the registrars “Our predictions are based on forecasts of moderate growth rates, defined to be YoY rates of around 5%-6%, although there may be cyclical periods of more intensive QoQ rates. It would seem that “the social and economic reality does not justify an intensification much greater than these amounts”. And they highlight: “The evolution in terms of the number of inhabitants, wage levels, the outlook in terms of interest rates etc. ought to put the brakes on the upwards trend, to a certain extent”.

That prediction is not shared by Gonzalo Bernardos, Economist and Director of the Masters in Real Estate Management and Development at the University of Barcelona. “House prices will rise by around 8% in 2017 if the net credit available to purchase a home does not increase; and will soar by around 13%, if lending rises by 5%”. For the time being, this expert does not see an obvious risk of a bubble and recalls that that only happened a decade ago after net credit had been increasing for 10 years by almost 20%. (…).

Looking ahead, Bernardos takes it for granted that the steep rise in house prices will be contained when the price of money increases (it currently stands at 0% in Europe). He calculates that, provided nothing changes in the international environment, this turning point in interest rates will happen at the end of 2018, which means that by 2019, the average YoY increase in house prices will be sustained at around 3%-4%-5%. (…).

Original story: El Mundo (by Jorge Salido Cobo)

Translation: Carmel Drake