The Bank of Spain is expected to increase the provisions it demands of Spanish lenders to cover property bought from struggling real estate developers. The central bank’s move would further dent bank profits already hit by economic recession, according to financial sources and bank analysts. In November, the central bank raised its provisioning requirement from 10 per cent of the property’s value to 20 per cent for real estate held more than a year, and is now expected to raise it to 30 per cent. However, it has yet to notify lenders formally. “No decision has been taken yet,” the Bank of Spain said on Monday. The probable change reflects a growing awareness among regulators and investors that Spanish banks and cajas, the unlisted savings and loan institutions, have massaged their bad loan ratios by refinancing property developers in exchange for Spanish property and equity in the companies, instead of allowing them to collapse. Iberian Equities, the broker, estimated on Monday that listed Spanish banks had property assets of more than €12.6bn ($17.1bn) at the end of last year, while the cajas held €33bn. Santander and BBVA, the two biggest banks, have taken impairments of about 30 per cent. But the proposed increase in provisioning requirements would amount to €1bn, or a fifth, of 2010 profits for smaller banks, and €5.3bn-€5.9bn, or a fifth, of profits for the cajas, Iberian Equities said. A flurry of recent debt-for-assets and debt-for-equity swaps – involving developers including Colonial, Reyal Urbis and Metrovacesa – has deepened the scepticism of analysts and investors about the true bad loan positions of Spanish lenders. Total exposure to developers is €324bn. “While banks’ doubtful domestic loans have risen quickly over the last two years, the recognition of impaired assets has been far slower than the severity of the recession might otherwise suggest,” wrote Jamie Dannhauser of Lombard Street Research. There are particular suspicions about the way the collective bad loan ratio of the cajas has reached a plateau and started to decline, down to 5.05 per cent of assets in December. That is only slightly higher than the 5.02 per cent figure for the banks, whose accounts are generally more transparent. If the numbers were correct, that would be the “best news on the Spanish economy I’ve heard for a long time”, said Luis Garicano, professor of economics and strategy at the London School of Economics, in a blog on Spain. “Personally, I don’t believe it. The alternative is that the bad loan numbers of the cajas don’t make a lot of sense.” Prof Garicano said it would not be possible to re-establish the credibility of the financial system if the regulator permitted “these accounting games”. The Bank of Spain’s expected tightening of its provisioning requirements could go some way towards defusing such criticism. Story from FT.com

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Spanish Banks Face Higher Provisions

The overseas homes market may have already entered recovery in some parts of Spain as one developer has started putting its prices up. Key Mare in Almeria has seen sales rise by 30% in the last three months and now has more international customers than Spanish ones. The company raised prices across its seven resorts in the area by €3000 per property at the start of January. “Almeria is one of the up-and-coming areas of Spain so it’s not as overbuilt as other parts of the coast,” said the company’s head of international sales, Stefan Kdist. “The Spanish have always known this area but now more British and Scandinavian buyers are finding out about it.” Until now, the company has been following the line of many Spanish developers and offering discounts of up to 25%. Developers and banks have been under pressure to lower prices further to help shift the large amount of unsold Spanish property accumulated during the boom. This tactic has worked to some degree, with companies such as Taylor Woodrow seeing sales improve in the last three months by offering discounts of up to 40%. Kdist said Key Mare’s sales increase represented an improvement in confidence but he also hoped the price rise would encourage buyers to feel better about the market. “We wanted to give a signal to people that things are getting better and they should have faith in the situation. Today, people don’t feel there’s such a risk of losing their jobs as they did a year ago. Most economies are recovering and prices and interest rates are low.” With many agents and developers in Spain still suffering the effects of the economic downturn badly, Key Mare’s success emphasises how diverse the market has become. The latest data on the Spanish housing market paints a generally negative picture. Prices continued a steady fall in the fourth quarter of 2009, dropping 6.2% year-on-year, according the country’s housing ministry. The number of transactions also fell 2.6% year-on-year in November, although this was down from a 21% fall in October and transactions rose 5.3% between the two months, according to the National Statistics Institute (INE). But there was some good news in that the number of mortgages rose 1.8% year-on-year in November 2009, the first increase since April 2007, according to the INE. Story from OPP (Registration required)

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Spanish Developer Increases Prices

Spanish property developers’ debts with banks at the end of September were worth around a third of the country’s gross domestic product, the Spanish Mortgage Association said on Monday. A spokeswoman said data up to the end of the third quarter showed hard hit property developers owed 324 billion euros ($458 billion) as a property crisis continued to worsen. Property promoters have faced a torrid time since a property bubble burst in 2007. The mortgage association said many property developers could not pay back their debts and that, in turn, was affecting the credit rating of Spanish banks which have largely emerged unscathed from a severe recession and credit crisis. Spanish property prices fell just over six percent last year but many analysts still say the market has further to fall and data may underestimate the true scale of the slide so far. Story from XE.com

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Spanish Property Developer Debt Totals €324B

Risk measurement agency Moody’s said Spanish recession will continue until the second quarter of 2010. These forecasts are contained in a statement, arguing that the weakness of economic activity, coupled with rising unemployment and slower income, will “depress” the residential Spanish property market, which estimates that prices have fallen 9, 5% from their highs in 2008. Risk measurement agency Moody’s said the Spanish recession will continue until the second quarter of 2010. Spain as a country will take the longest to shed the shackles of the economic recession in the euro area. Furthermore, it believes that in this whole year, GDP will grow only 0.2 per cent while unemployment will exceed 19 percent of the workforce. These forecasts are contained in a statement, arguing that the weakness of economic activity, coupled with rising unemployment and slower income, will “depress” the residential property market, which estimates that prices have fallen 9, 5% from their highs in 2008. Oversupply of housing in Spain, with about 1.5 million vacant homes will lead to a “long process of adjustment” for the housing market, warns Moody’s. The agency also said that low interest rates have helped many of those with mortgages to cope with the economic “turbulence”, but warns that the faster recovery in the rest of the euro zone can make the price of housing rise later this year, which “may be premature” to Spain. Despite this outlook, the agency believes that the market for mortgage-backed securitizations (RMBS) has stabilized in November, although the outlook remains negative. Story from Barcelona Reporter

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Spanish Recession to Persist in 2010

Two more regional Spanish savings banks, Caja Duero and Caja Espana, agreed to merge on Monday, Spanish news reports said, as the pace of consolidation in the sector gathers pace amid the country’s recession. The two banks, both based in the northern region of Castilla y Leon, reached the deal late on Monday after months of negotiations. Spanish newspapers said the merger would be ratified by the boards of directors on Tuesday morning. Last month, two regional Spanish savings banks, Unicaja and Cajasur, based in the southwestern region of Andalusia, also agreed to merge, And in November two savings banks based in the northeastern region of Catalonia, Caixa Penedes and Caixa Laietana, announced that they had decided to join forces. Spanish banks got off relatively lightly from the subprime mortgage crisis in 2008, as the country’s strict rules meant they did not invest heavily in the high-risk loans that hurt financial institutions elsewhere. But many, especially smaller unlisted saving banks usually controlled by regional politicians, were badly hit by the collapse of the once-booming Spanish property market, both through loans to developers and mortgages. The Spanish economy, Europe’s fifth-largest, entered into recession at the end of 2008 as the international credit crunch hastened a correction which was already under way in the property sector. Spain’s GDP contracted 0.3 percent in the third quarter, its fifth straight quarterly decline. Story from Inquirer

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More Savings Bank Mergers in Spain

The likelihood of a defeat for Labour is positive for the pound. Euro zone economic data are uninspiring but not harmful to the euro. Monday’s €1.1250 opening proved to be too rich for sterling’s blood and it quickly began to retreat. It traded below €1.11 on Tuesday, rebounded to €1.12 on Wednesday, fell back below €1.11 on Thursday and bounced yet again to €1.12 on Friday before retracing its steps downwards to open at €1.11 in London this morning. The UK economy delivered some decently positive data. Two purchasing managers’ indices, one for the manufacturing sector, the other for services, extended their progress into the ‘expansion zone’ above 50. The manufacturing PMI came in at 54.6, taking second place to the equivalent US measure. Services, with a score of 56.8, led the international field. The Halifax house price index added 1% in December, putting it 1.1% higher than it was at the end of 2008. Factory gate prices went up by 3.5% last year, squeezing manufacturers who had to cope with costs rising twice as quickly over the same period. But it was not the economic data that shaped sterling’s performance, it was politics. News of an attempt to oust prime minister Brown sent the pound lower; confirmation that the coup had failed sent it back up again. Investors believe that a solution to Britain’s spending gap requires a change of government. As long as it looks as though Labour will be out of office by June they are inclined to be patient with sterling. And as long as Gordon Brown is leading his party into the general election they are confident that will happen. The euro zone economy did not have much to shout about. Inflation ticked higher again, rising to +0.9% but still leaving it at less than half the target rate. Unemployment was up too, reaching double figures at 10% in November, its highest level for a dozen years. Spain was one of the biggest culprits on the unemployment front with one in five out of work and 40% of young people looking for a job. Euro zone retail sales fell by a disappointing -1.2% in November after a less than inspiring +0.2% increase the previous month. Sales were down by -4% compared with a year earlier. The second and final revision to third quarter gross domestic product confirmed that Euroland’s economy grew by +0.4% in the third quarter of last year. Investors will be keen, as ever, to hear what the European Central Bank has to say after its first meeting of the year on Thursday. No change is expected to its 1.0% Refinancing Rate but ECB President Jean-Claude Trichet will doubtless vouch an opinion about what might lie ahead for the euro zone economy. Although he never predicts where monetary policy is going he frequently drops hints. The pound has spent most of the last three months between €1.09 and €1.13. It starts this week comfortably within that range and showing no sign of wanting to escape. We therefore stick to the existing risk management strategy: Buyers of the euro should stick to a hedged position, locking into a rate for half the money they will need. Get the best foreign exchange rates with no bank fees or commission charges using your Moneycorp Privilege Card

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Politics Drives Sterling

The latest services PMI data suggests that the Spanish economy remains on a downward trajectory. The fact that variables such as activity, new orders and employment all fell at sharper rates during November is real cause for concern, with the prospects for 2010 becoming increasingly gloomy According to Spanish Prime Minister José Luis Rodriguez Zapatero Spain’s government is firmly committed to reducing its fiscal deficit, and is intent on lowering it as requested by the EU Commission by 1.5% of GDP annually, until it finally brings it within the EU 3 per cent of gross domestic product limit by 2013 at the latest. What’s more he is quite explicit about how this is going to be possible: Spain is right now, and even as I write, on the verge of emerging from the long night of recession in whose grip it has been for the last several quarters. As such it will soon resume its old and normal path onwards down the highway of high speed growth. There is only one snag here: few external observers are prepared to share Mr Zapatero’s optimism. “The return to growth and the expected fiscal consolidation will allow us to reach the stability pact objectives by 2013,” Mr Zapatero said in a speech last week, using a rhetoric by which few outside Spain are now convinced, and indeed only the day before the credit rating agency Standard & Poor’s had revised its outlook for Kingdom of Spain sovereign debt to negative from stable. The decision followed their earlier move last January to downgrade Spanish debt by revising their long term rating from AAA to AA+. S&Ps justified their latest decision by stating that they now believe Spain will experience a more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers than looked probable at the start of the year. So things have been getting worse and not better, and indeed, the EU Commission themsleves seem to take a similar view, since while they have lifted their immediate excess deficit procedure in the short term their longer term worries have only grown. Standard and Poor’s feel that reducing Spain’s sizable fiscal and economic imbalances requires strong policy actions, actions which have yet to materialize, and the EU Commission and just about everyone else agree, and the only people who seem to take the view that the current policy mix is “just fine” are José Luis Zapatero, and the political party that maintains him in office. As Standard and Poor’s stressed, their decision to revise the Spanish sovereign outlook to negative reflected the perceived risk of a further downgrade within the next two years in the absence of more aggressive actions by the authorities to tackle fiscal and external imbalances. It is the continuing silence which surrounds this absence which is so ominous, and makes the concerns of the EU Commission and the various ratings agencies at this point more than understandable. Story from Spain Economy Watch

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Standard & Poor’s Worry About Spanish Finances

I really wish I could close 2009 on a brighter note regarding Spanish property - but no amount of positive thinking can make the current situation look bright. Spanish Banks Prefer ‘No Sale’ Above Paper Loss gives us a first-hand account of why repossessed properties via Spanish banks are almost always such poor deals. We also found this out the hard way - and I’m now hopeful that key-ready Spanish properties are currently the best route to finding realistically priced properties. The difference is that these properties are available direct from the developer - who need sales to prevent the banks from taking possession. Unlike the banks, developers can act more quickly and negotiate from a more realistic property valuation. Remember I told you about a Spanish property auction organised by A Place In The Sun? Unfortunately, that met with little interest. A report in Overseas Property Professional magazine concluded: .. Bidders were only interested in the two ‘no-reserve’ properties, which received offers of around €100,000, said auctioneer Jonathan Ross of Barnet Ross. It suggests that to offer Spanish property to a UK audience they need to be ‘no-reserve’ or at a substantially lower price than the market perceives it to be worth. Thankfully, Peter Christian has something a little more cheery in Drink To A Happy Holiday . Finally, I was recently asked by the International Property Journal for my 2010 predictions for the overseas property market. Here’s what I said: The differing pace of economic recovery between nations will create activity between buyers and sellers. In Europe, the stronger German, French and Dutch economies will allow buyers from those nations to seek and aggressively negotiate property deals in the slower-to-recover European countries - Portugal, Italy, Ireland, Greece and Spain. Even though there is no currency exchange advantage for these buyers, one Euro is worth a lot more property in these PIIGS countries in 2010 compared to 2009. If the US economy continues to improve and the US dollar increases in strength against the Euro, we could also see opportunistic US buyers sniffing out deals in those slower-to-recover countries. This buyer activity is already happening at the top end of the market in the UK where foreign buyers are taking advantage of the devalued pound, a slow moving property market (tipped to get slower in 2010) and a stalled economy. Expect more of the same for the UK and the phenomenon to extend to more countries in 2010. I hope you have a great holiday break and that you’ll join me again in January to see how the Spanish property market starts shaping up in 2010. Martin Dell, Kyero.com

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Optimism for Spanish Property in 2010?

Recently an influential annual report was published by Acuna & Asociados who are highly regarded Madrid real estate analysts. Their report makes depressing reading given that they do not think the Spanish property market will recover for several years. Indeed, at current rates of demand (around 200,000 properties per year) it may take some six to seven years to clear just the existing housing stock for sale. Certainly, there is an inordinate amount of property for sale on the Spanish marketplace. According to Acuna & Asociados there are some 1.67 million properties for sale in Spain. These comprise some 500,000 new builds, some 470,000 new builds yet to be completed and around 500,000 re-sales. It is quite likely that the estimated number of resales is very conservative given the amount of properties privately for sale that will not be registered formally anywhere. Meanwhile the Spanish economy is in meltdown. Unemployment is currently somewhere around 19% with Citibank predicting that it will rise to 22% and Acuna & Asociados to 25%. The collapse of the Spanish construction industry has impacted not just on its associated industries but on the population at large who have been caught in a lethal vortex. As more people lose their jobs so more properties come onto the market - often with distress sale prices. Unfortunately, there are no apparent ‘quick fixes’ for the Spanish economy which is also being hurt by the world credit crunch. Socialist Prime Minister Zapatero has tried to stimulate the economy with his much publicised Plan E. However, this is due to cease soon due to lack of further funds and has done little other than reduce the very short term unemployment figures. These will, obviously, rise once Plan E stops and as Spain goes into the winter period when any tourist related employment reduces radically. So, what does all this mean for Spanish property buyers and sellers? Well, as a seller of Spanish property, it is obviously bad news – particularly if you bought within two years or so of the boom. In this case, it is unlikely that you will recover your money for some considerable time to come. Worse still, the sheer quantity of other properties for sale (including many genuine distress sales) means that you will be entering a savagely unforgiving market place. Indeed, the only consolation (for British sellers) will be the strength of the Euro over Sterling which may mitigate any drop in their Euro sale price. As a buyer, of course, matters are very different. Virtually everything is for sale and you can now pick up bargains throughout Spain almost everywhere you look. However, this does not mean that you can be careless. Far from it. Indeed, uppermost in your mind, at all times, should be the adage that ‘not everything that is cheap is a good buy’. In fact, you should not even think of buying unless you know intimately how to tell whether a property is fully legal or not. Furthermore, you must be able to assess objectively what will make a long term sound investment. As always, the key to a sound investment is its ease of resaleability. However, establishing resaleability is often less easy than it sounds when you are in a foreign country with a particularly complex marketplace involving not just native buyers but also a very significant proportion of foreigners from an array of different countries. Without doubt, the Spanish property crash has produced some excellent bargain buys. These exist now and are well worth exploiting. However, the question is whether property prices in Spain have now reached their bottom? My own feeling is that prices still have around 10% further to drop. This will be an unpopular ‘call’ but the sheer numbers of property currently for sale together with an economy in freefall means that any optimism at the moment is hard to justify objectively. At the end of the day property, like any other commodity, is subject to supply and demand and at the moment, there is far more supply than demand. Until this readjusts, prices will continue to drop and the Spanish property market will remain very weak for the forseeable future. Of course, if you are thinking of buying a Spanish property then your next question may be ‘when will it be a good time to buy?’ Well, I cannot help feeling that the desire to make untold money on property is somewhat distasteful. Surely, the primary aim of moving (particularly to a foreign country) and buying a property is about obtaining a better quality of life than you have currently - preferably as soon as possible? To place life ‘on hold’ whilst waiting for a market to guarantee a ‘profitable’ investment seems somewhat short sighted given life’s brevity and uncertainty. This is not say that you should not be very careful. However, now I think the emphasis should be on buying a property that will retain its value long term – as opposed to being purely focussed on the profit that it will, or could, make. Those days, in Spain, are, for the time being, largely over. That does not, in any way, diminish the valid reasons for coming to Spain which should be about delighting in the genuinely superb quality of life still on offer. Little has changed in that regard – it is just that combining this with a guaranteed short term profitable property investment is less valid. In short, I suspect, that the prices of Spanish property will hit their low point probably in the spring of 2010. However, that is not to say that you cannot now pick up a heavily discounted property - and one that will prove to be a good purchase for the future. If you are planning to move to Spain then, give or take, this is about as good a time as any. However, be prepared to drive a hard bargain - as I believe that the market has some time to go before it stabalises… From Nick Snelling’s latest book: How to Move Safely to Spain

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Spanish Property: What Now?

Residential property in Spain is still 27% over-valued, despite the property market crash, claims a new report from Aguirre Newman, a real estate consultancy. A big part of the problem is Spain’s glut of unsold homes, argues the report. Aguirre Newman estimate there are 1.5 million homes on the market today, including resale properties and homes that have been newly built or are close to completion. According to BBVA, Spain’s second largest bank, Spanish property prices were 30% over-valued, but have only fallen 10% so far. Ergo they have to fall another 20% before the correction is over. But prices won’t lurch down by 20% in one go, which would be the best thing for the market. Nope, the pain will be dragged out over the next 2 to 3 years. Prices will fall by 7% this year, 8% next year, and 5% the year after that. Prices won’t stabilise until 2012. Even by historical standards today’s correction in prices is less than half way through, points out BBVA. After the last property crash in the early 90s, property prices fell in real terms for 21 consecutive quarters. This time around prices have only been falling for 6 quarters. If the past is any guide then we still have some way to go, at least another 8 quarters according to BBVA. BBVA mentions another key reason why the fall in prices is far from over, namely the high level of house prices to annual disposable income (something I wrote about here last week). This ratio (house prices / annual disposable income) rose to 7.7 years at the height of the boom, and has now fallen back to 6.6 years. But that is a long way off the historical average of 4, not to mention the 3.5 it has fallen to in the US. The biggest price falls will come where they built the most, where there are lots of unsold homes. That means around Madrid and Mediterranean provinces like Malaga (Costa del Sol), Castellon (Costa Azahar), and Tarragona (Costa Dorada). In contrast prices will fall the least in Orense (Galicia), Navarra, and The Balearics. Meanwhile, and new report from BNP Paribas Real Estate, the real estate arm of French bank BNP Paribas, argues that banks in Spain will start having to offer discounts of 50% in 2010 to shift some of their stock of property. Banks are now Spain’s biggest property companies, having repossessed property as loans went bad. They claim to be offering discounts to buyers but BNP Paribas Real Estate says not big enough to make sales. Story from Mark Stucklin Find key-ready Spanish properties at 40% off 2007 peak prices

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Spanish Property Still Overpriced