Will the Spanish real estate sector become Spain’s growth engine again?

14 September, 2011 No Comments

If we compare the current market situation with the last real estate crisis to see whether the outcome is going to be similar to that of years ago, they only resemble in the drop on sales.

* The crisis that I mentioned in the paragraph above is the one that we experienced in 1990 prompted by a mere increase in home prices. The direct consequence of price increases and speculation was a housing bubble. The situation the market reflected was a big supply of finished homes that investors were buying only to speculate, hoping for prices to increase to then sell a few months later. Since the market could not keep up with this rhythm, the market shut down;  sales went down BUT, banks did not stop financing as it happened in the 2008 crisis.
** In the current situation, the market problem has its origins both in the financial sector as well as in the real estate sector, and we see that:

1- Promoters built in places where there was no demand prior to construction, and hoped that demand would rise only because there were properties for sale. It was never taken into account that a family home must be close to the workplace, with services, equipment, communications network …. which are crucial aspects in the decision process. The result was nothing else than ghost towns and overpriced land. Now, land is what weights more in the bank’s balance sheets rather than homes of defaulted customers.

2 – Reference has been made about the quantity of unsold homes within the banks’ portfolios. Perhaps this is not the primary concern because homes will eventually be sold since the need to buy homes still exists. This need is not reflected in the market (demand) because financial institutions are not lending money. Banks are granting mortgages only to clients that are interested in assets within the bank’s real estate portfolio, but other assets such as land remain stuck in their portfolios. The reason is that nobody is going to build any time soon until banks get rid of all their stock, then demand for construction will rise and thus the value of land.

Following the pressure from the Bank of Spain 6 months ago, “Cajas de ahorro” presented the data regarding their real estate properties, highlighting the amount of soil that they had to take, which part of it corresponded to undevelopable land.

3-In regards to particular investors interested in purchasing a home, I can tell you that many visits to properties take place, although in most cases do not go further. This is a consequence of the high percentage of customers that their bank has denied the mortgage.

This has transformed the rental market into a safe haven. In a country where in recent years the purchase of a home was THE common transaction (justified on the notion that it was better to make a payment to the bank, which in the long run created wealth, rather than paying a monthly rent to a landlord), we have found ourselves in a larger and more expensive rental market. It is important to mention that rental prices have somewhat stabilized. A monthly rent is similar to paying a mortgage payment, and those who bought a property with a mortgage found themselves that their only option was to rent. In the meantime, however, the possibility to rent a property with a purchase option has become quite popular and gives more incentive to people.

In the normal course of free market, the supply of a product suits to the demand, but the current situation has forced demand to fit supply, changing the concept of seller by landlord.

4 – We should not forget that being part of a global economy, could mean that a simple cold in America or Asia, may translate into a pneumonia in Europe.

Given this situation we can arrive to the conclusion that the Spanish economy will not reactivate until the real estate market reactivates ….. because this sector, with all its ups and downs, has been the growth engine in the last couple of decades (along with tourism and services). I believe the necessary measures need to focus on generating liquidity to the financial system to speed up the recovery process, although it is most likely that we will not go back to the figures of recent years …… at least not in the short term.

(I) Empty neighborhoods, sad homes…

17 August, 2011 No Comments

…are what we have inherited from the crisis. They are located in the peripheries of some of the cities in Spain, Ireland, or in the US such as California….. and for other reasons, specialists also have estimated millions of empty homes in China. For example, in California, since homes are built of wood, and therefore their deterioration is faster, public officials proposed the demolition of homes, and reclassify the land as undevelopable land. Talks in Spanish and Irish markets have shared the same idea, although until now, only buildings that are clearly illegal have been demolished.

The remaining homes are considered to be slowly absorbed by the market, because the number of dwellings per thousand inhabitants in both countries is lower than the European average.

Analyzing the problems that raise ghost neighborhoods we see that:

* The majority are groups of homes, either for one or various households, with or without gardens and communal areas, where few people or almost no one live in them.
* Some buildings are near completion while others are under construction, where cranes and building materials are still untouched giving the impression that workers are gone for the weekend and that they will come back on Monday.
* to the small number of buyers that moved there, they were sold the house with the idea that they would get public transportation, shopping centers would be opened, etc …  in the best cases they only have minimal water services, electricity and gas…. and often, streets are unfinished.
* The question is, what to do with these empty neighborhoods?…. Because empty homes or unfinished buildings suffer damage; after 6 years plants start to grow, cracks start to appear, concrete begins to break and eventually become inhabitable. The more time passes the more likely it is for them to get destroyed. And, who takes responsibility for the costs that they can generate?
* In Spain, from the coast to the outskirts of big cities, one can see these remains, silent witnesses of the housing bubble that wait for a recovery that does not seem to appear.

People who bought properties in these areas face an uncertain future, where their main concern will not only be to sell or rent the house at some point, but to inhabit it. If we take a look at this picture we see this mega urban development, located in a desert between two highways in the middle of nowhere…

There is a great article published in the WALL STREET JOURNAL, Real Estate, 16/09/10, in regards to this topic. To learn more about the WSJ article: http://online.wsj.com/article/SB10001424052748704476104575439783253733728.html

This article is a research of the Spanish Real Estate market and of the consequences for that will face for the economic recovery.

And in particular, discusses mistakes like the one of the Lugano Tower in Benidorm, which was supposed to be one of the tallest towers in Spain, attracting national and international investors with the promise to build a luxury tower, with glass elevators and magnificent views to the Mediterranean sea. The article gives details about the current state of the building: the windows do not close, there are no glass elevators, and toilets do not work. The serious construction problems have led buyers to make a claim against the developer. This is really the end of the party and period in which us, Spanish people,  “thought we were rich”.

Emirates Funds for property investment in Spain

12 July, 2010 No Comments

After the bursting of the housing bubble, this is perhaps the best time for investing in property in Spain, as the next Arabs investments, who have come to our country to fill the gap left by the German and British investors.

In particular, Arab Union for Real Estate Development (AURD), through S. Al Fahim, are looking to invest in Spain, prime real estate assets of such offices and residential properties located in the best areas of Madrid and Costa del Sol, with prices starting at € 5 million.

This investor, called the “Donald Trump” of Abu Dhabi, is also behind the purchase of English soccer club Manchester City (purchased € 270 million), while supporting the Academy of Italian football club Inter Milan in Abu Dhabi.

It is also the visible face of a holding company in the Middle East, called Royal Group of Companies, formed by 50 companies (which also has been one of the promoters of projects such as building “The Palm” in Dubai). Due to the current saturation of the real estate market in Dubai, they consider it is the right time to buy in the Spanish market, since Spain is a market they know.

Following this break in Dubai, the sovereign funds need continued investment. In Spain they invest in real estate market and in renewable energy.

(III) Will go on Sacresa’s Caufec Plan in Barcelona?

5 July, 2010 No Comments

Currently, the group Sacresa is negotiating with banks for their Caufec company (which owns the Porta Barcelona project) not become part of the package in bankruptcy, with assets of the other four companies.

The debt of the group, a probably amount of € 1,600 million are loans with fifteen banks and savings banks, with the Institut Català de Fianances and foreign banks, among others.

International banking prefers to assume losses than exchange actives for debt, and did not accept the terms of Sacresa to allow much of its assets. For instance, Caufec Plan valued at 1,000 million €, which the company would be able to pull forward with the problem. This pool of banks considered that the refinancing would not prevent a future collapse of the group.

The viability plan that the company has presented to the bank transfer assets valued at over € 1,000 million, a rebate of 30% of the debt, which has no mortgage and a grace period of five years for all payments to the bank giving almost all its real estate assets, including Porta Barcelona development, retaining the bare ownership of the mall Magic Badalona, some land to promote housing near Finestrelles and patrimonial society owner of the Illa Diagonal.

The next step of the society was trying to bring the debt to the current market situation to engage in housing development in the area of Barcelona. In fact, in 2009 and began to give way to Metrovacesa real estate assets to redeem debt, and among them was Les Arenes de Barcelona.

According Expansion (06.2010) Caufec society owes nearly € 200 milion with Bancaja, La Caixa, CAM and Banco Popular, but its assets are also around 200 million €, and therefore the company expects that this society can save itself from the concourse. But even thinking that saved the concourse, the bank has refused to grant more credit to the society. As I said before, banking, given the few opportunities open to him to pay the debt and, seeing that if he did not has concourse now it would probably happens in two years, sales of assets that had been made would now be likely to be challenged or reversed (in a future post will discuss this).

Sacresa is a promoter who has made investments or long-term bets, including the purchase would be in Finestrelles Fecsa, one of Australia’s largest tertiary Catalonia. But today, international banking, which has massive investments in Spanish real estate, does not rely on the outlook for the Spanish economy and prefer not to refinance but devote itself to developers to contest … making projects viable as it would be great in this If not funded.

But… How is Caufec Plan situation nowadays? Well, if there is no news, still belongs to Caufec society, from Sacresa realtor. As of today have become works of infrastructure and urbanization of the main part, which was agreed with the council. Also in its final stages the burial of Fecsa electricity towers, in addition to finishing the garden areas, walking areas and bicing, street furniture and three playgrounds. But that is nearing completion does not mean that is actually delivered and is currently fenced all means (but is allowed to pass) and the finished park, but you can not use them. There are very few operators working … If a project is not working heavily, is an indicator that the developer has problems, which generally tend to be financial.

It is assumed that the project should be going on, because it has already built a sales office. But there is no indication that the building of houses or flats will start soon, nor the construction of the hotel and shopping center … perhaps we should expect to improve the housing market.

For now, assume that the idea would be to sell the homes by planes, or at least make a waiting list, as it has being done years ago at the Barcelona Meeting Point, when it began to publish the project.

From my point of view, this is a great project for the area, if it is to make as it is currently planned, always aiming to make it solved the issue of vehicle entrances and exits to the Diagonal and Ronda de Dalt.

Sources: La Vanguardia, Expansión and Cinco Días newspapers.

(II) The Caufec Plan of Sacresa in Barcelona

2 July, 2010 No Comments

The large land plot between Esplugues de Llobregat and Barcelona city is disappearing. After 23 year of negotiations, this 40ha in which only had power a line, bushes and a makeshift motocross track is already a developed area to which only lacks the buildings.

Historically, Caufec society led the urban reform in this area in the early 90s, owned by FECSA and the French group CAUVAL, who sold this land plot to the real estate developer Sacresa.

The problem this project had to be urbanized were the power lines, which should be dismantled and buried by FECSA, so the transaction cost should be offset by an increase in the heights of the floor area permitted initially. The future planning 234.000m2 roof will be built on.

In 2002, the Legal Adviser of the Government decided to finally give the “green light” to the Porta Barcelona project, the urban plan promoted by Caufec society, one of the companies that make the real estate company Sacresa.

The Porta Barcelona project will be built to either side of the B-23:

• In the northern part, Finestrelles area, there will be 67 detached houses and 90.000m2 of offices and premises, located in two towers of about 80m (23 floors), designed by architect Bofill. In this part, they have also created a large green area on Jacint Esteve Avenue, with bike areas, cross and trekking in Collserola Park.
• In the south part, near Hospitalet, will be built 120 housing units, a shopping center, a 25.000m2 of entertainment and a 6.200m2 luxury hotel.

This real estate development, nearby Collserola Natural Park, is next to Ciudad Diagonal and Pedralbes, both areas of luxury houses, together with Sarrià, Bonavista and Sant Gervasi.

In the next post we will discuss how Caufec Plan will possibly finish after the insolvency in which the company Sacresa is immersed.

(I) SACRESA competition: refinancing problems

29 June, 2010 No Comments

All the media are reporting that the bank has refused to refinance the debt and has not accepted the plan submitted by SACRESA, which in its attempt to become one of the largest Spain real estate entered into an excessive debt (with the purchase of Metrovacesa), which has led it in an economic collapse situation.

To undertand how this could happen in 3 years, to be on the top of the top ten ranking real estate companies to fall into insolvency, it is necessary a bit of company history and the evolution of its growth.

Like other real estate developers, Sanahuja’s family company began building homes in Barcelona due to the high emigration suffered by this city and its industrial belt during the 60s. From building blocks of flats in popular neighbourhoods went to make bigger real estate developments. In recent years, they have been present in large transformation projects of Barcelona, like Illa Diagonal, Basketball City Badalona, the shopping center Les Arenes and the underway project Porta Barcelona, next to residential area of Barcelona. After that, their expansion covered the rest of Sapin to go ahead in the foreign market.

Sanahuja entered the capital of Metrovacesa, a company owned by Joaquin Rivero and, to gain control of the company displacing Rivero, winning the presidency and control 80% stake in the compoany. It had to assume a debt of close to  € 6.000 million. This project went wrong when the bank not allowed the fusion of Metrovacesa and Sacresa; this union would hace made more affordable the debt incurred by Sacresa, all further aggravated by market crisis and the current slowdown in sales.

After having take Metrovacesa’s control, with 80% of capital (which he lost a year later), began buying important product based on debt, and do went to buy the headquerters of HSBC bank, one of most expensive buildings in Europe by € 1.600 million, competinfçg with a major Saudi group.

Perhaps one of their mistakes was not looking at the value of what they bought, and so again Metrovacesa resell HSBC bank tower a year later by € 1.000 million. But there have been billions of euros that became an unsustainable debt that has led to this situation.

Sources: La Vanguardia, Expansión and Cinco Días newspapers.

Passeig de Gràcia 36 (Barcelona), from Sabadell Bank to Mango

25 June, 2010 No Comments

A few months ago was considering the sale of the Sabadell Bank building, in Passeig de Gracia 36, Barcelona (Spain).

The receipt of offers was carried out by the consultancy C & W, the sale conductor. According to articles published in business and local journals (as La Vanguardia), there have been formal offers for this property by MANGO and APPLE. After a quick sale process, the media confirmed that building was eventually acquired by Mango.

The building has a total of 4.600m2 constructed, distributed on 1.100m2 ground floor and 4 floors of 600m2 each, all with a front line of 20m. Located in one of the best areas of Barcelona, right in the center of business, at the confluence of streets Consell de Cent and Diputació.

The main value of the property is the shop, which consists of 2290m2, well above the value of the offices. Inf act, in 2004 the Reig family bought the top of this building to the Sabadell Bank for € 15 million, with the idea of luxury flats, but this plan was paralyzed due to the housing bubble.

A few months ago, the Sabadell Bank repurchased the top of the building for € 20 million, thus selling the entire building, what would bring greater benefits. The amount of the sale would be € 50 million, assuming a gain of € 30 million.

The buyer, Isak Andic, who made the offer through one of this holding companies, is president of textile group Mango, besides being one of the private shareholders of Sabadell Bank, with a 5.7% stake. In October, he was named president of the Instituto de Empresa Familiar (IEF), relieving the position of S. Pedro Barceló.

Turn to assess the marketing strategy of this transaction, we see a clear reflection of the idea of the fashion leading companies, looking to have a greater presence, occuping key places in the main streets of big cities, in detriment of competence. At number 16 of Passeig de Gràcia is a Zara store located in an excellent strategic place, in the very corner of Gran Via… really we must also recognize their real estate success throughout the world.

A question still in the air is: Why Apple has not been imposed in the bid? As the company has not commented in any way, guess who has decided to leave because he has found another place better or perhaps, after the negotiations process, it has not been as profitable purchase, or its planned investment to open shop Barcelona was only for the value of the premiser and was not interested in the whole building… Whatever reason, we must wait to see where the new Apple Store will be located in Barcelona, which will have wide acceptance (currently there is only one small Apple in FNAC).

Increased taxation on housing = Catalonia, the most expensive

14 June, 2010 No Comments

Following the Spanish Government announcement of increase the reduced IVA (7% to 8%), which taxes the sale of new homes in Spain, the answer of the autonomous communities has been increase, in turn, the ITP (Transfer Tax) applicable to the purchase of second hand homes.

Cantabria, Andalucía, Asturias, Balearic Islands, Catalonia and Extremadura are the Autonomous Communities which have announced that the ITP will rise from 7% to 8% more expensive home purchases for tax purposes, compared to the rest of Spain.

As always, there are exceptions to the rule:

• Rate applied by Canary Islands is 6.5%, because here the IVA does not apply and instead, there is an excise tax at a lower rate.
• Cantabria and Andalusia only taxed at 8%, the sale of houses from € 300,000 and € 400,000 respectively. Here we can guess that could appear rogue …

If we assume a home purchase of 300,000 €, Catalonia, Asturias, Baleares, Cantabria and Extremadura would pay € 24,000 in taxes, while the rest of the country would pay € 3,000 less.

In Catalonia, in addition to this, we must add the payment of stamp duty (which so far was 0.1% of the total loan) and that the Government has announced a 0.2% rise, which no other Autonomous does it.

In summary, Catalonia has the highest personal income tax and it is also the territory where to buy a new house or second-hand is more expensive.

Avatars of the crisis on emblematic buildings of Barcelona

4 June, 2010 No Comments

Walking in frotn of the old building BANESTO in Plaça Catalunya of Barcelona, 10-11, corner of Passeig de Gracia, you wonder what fate awaits it and who will be the next owner …

Maybe back in the hands of banks or funds that were in Spain and it seems to slowly come back, or perhaps some FO … Of course, the building’s location is unbeatable.

It is another building in Barcelona that seems to always been there, and it becomes uncommon to see the state of neglect in which it is now, pending a settlement of the bankruptcy that is immersed in the present owners, Monteverde Group Ballester and real estate from Valencia.

Still have hung posters where it began to advertise the future promotion. Projected starting any building project in the short term this is not feasible, therefore, what happens is most likely decline over time which gives a bad image to the thousands of tourists who visit Barcelona in general daily.

This unique building was acquired in 2006, worth approximately € 100 million for the Monteverde Real Estate. This Valencian real estate gruop, together with the group Ballester, formed the partnership society Andybal for the rehabilitation of buildings in privileged enclaves, with the acquisition of buildings in Madrid and Barcelona, for the promotion of exclusive homes. In this case it was a construction project of 52 exclusive apartments with parking, but the resulting paralysis of the real estate market led the project, like many others, would slow down at first, then stopped altogether.

Currently the building is already in the market for a potential buyer.

Another building also for sale is a former hospital dated from s.XV, in Barcelona city center, which is at an advanced stage of rehabilitation, respecting the old structure which has a central cloister surrounded by arches. The project was to make a small hotel, even luxurious, but the owner’s heirs decided to sell it.

However, due to the evolution of the current economic situation, the few aid given by banks on credit or mortgage, plus the uncertainty in the price of current market value of the property, make purchase transactions be difficult to be reached.

Why + who + what + how to invest in real estate today?

2 June, 2010 No Comments

We have been seeing for several months, studying, analyzing past, present and future problems of housing market.

Rarely could be made an optimistic forecast about it. But maybe today I would at least contribute something more positive after having reflected on past crisis.

… And considering some of the ideas of Warren Buffett, the Oracle of Omaha, which broadcasts to their customers / shareholders, where:

• It makes the anticipation that the U.S. housing market in 2011 will be out of the crisis, although prices are not still the ones of 2005.
• Advises that people always has to have a good cash position to take advantage of investment opportunities when they arise.
• Indicates that it is much better to invest in business models, which are easy to understand. 

ABOUT HOUSING, if we make a historical note that after previous downturns, people in general turned to buying a house or brick, whether to make a safe investment, have wealth in their old age, leave a legacy or make a donation their children.

For any reason whatsoever, prices are now falling. The problem is not to know if we bought an appartment or brick which is purchased from a market price today and is well bought, or bought only half right, since it is difficult to set prices in today’s market, in recession, because today taxation prices for sure in a month or two are no longer valid, and in most cases should be aware of the offer that makes you a potential purchaser to come to negotiate.

The good idea is to have purchased at the time the market price was low, so that in time, as happened after the other crises, we may see that real estate property will be worth double or triple.

I’m just speaking from the point of view of the experiences had during the time and that is expected to be repeated within + / – long time, as the housing market is cyclical, plus being one of the engines of our economy.

But always thinking in case that a real estate purchase has been made with an accouracy study, for example, in a city like Barcelona, buying in any of the areas that usually have been easy to sell, foreseeing that in future there will still be enough demand (in streets such as Passeig de Gracia, Diagonal, etc.).

ABOUT CONSTRUCTION OF HOUSES, reflecting the thinking that makes Garcia-Montalvo, economics professor at 23.05 Vanguardia, whether it is right to build in a place where there are many houses to sell, the immediate response that comes to the head is not.

But he believes it, and the example is Las Vegas, where despite having a large portfolio of empty houses, and prices suffered a decline of 60%, construction has doubled. And the trick? since the fall of the price of land and construction costs of the new homes are very competitive against surplus product already on the market.

This is a warning to Spanish developers who have not reduced prices below the mortgage value.

… Let no one take it as a council to follow, since it is only my view … a feeling + the history of past crises + the pulse of the street + how to invest today for wealthy + opportunities market price + Euribor down + …