Worthless land could prolong Spanish banks’ property woes

Worthless land could prolong Spanish banks’ property woes

4:26am EDT

By Jose Elías Rodríguez and Tomás Cobos

MADRID (Reuters) – Spanish banks may have to swallow more losses to shake off the legacy of a property crash, real estate experts warn, as they struggle to sell plots of land that have ended up on their books and which are now worth less than many have accounted for.

Lenders were forced by the government to take billions of euros in provisions against losses last year after property values collapsed in 2008, with the steepest writedowns destined to cover land they were saddled with as developers went bust.The weakest lenders were bailed out with European money and others posted steep losses as the result of the clean-up, which was supposed to draw a line under the property problem, as banks try and cope with a deep recession also dragging on earnings.

But much of the old farm land and fields on city outskirts snapped up by construction firms during a decade-long building boom are failing to find buyers even at big discounts, real estate advisers and bank insiders said.

Banks may even be forced to spend money building saleable properties on land, they said, while plots in remote areas may never recover any value, pushing lenders to write them off or sell them at steeper losses than they had provisioned for.

“There are assets which will practically have to be turned back into the farm land they once were, to grow onions,” said Alvaro Martin-Ropero from real estate valuation firm Tinsa.

“Just because they had a ‘for sale’ sign put up on them does not mean they can be turned into an urban development,” he said, adding that central regions, far from the Spanish coastlines that still attract buyers, were some of the most problematic.

Further losses on land assets would be an unwelcome extra hit for Spanish banks as bad debts to households and companies keep growing and as they try to shore up capital bases depleted by earlier property provisions against losses.

New rules on how banks treat refinanced loans may already create a fresh 2 billion euro ($2.6 billion) capital gap in the system, Economy Minister Luis de Guindos has warned, after banks were found to need 60 billion euros in extra capital last year.

Spain’s main lenders post earning this week and next that are expected to show pressure on profits.

Regulatory changes, including Bank of Spain instructions that lenders should scrap minimum rates charged to customers for residential mortgages, could hurt earnings in the future. The regulator has capped cash dividends at 25 percent of profits to keep banks healthy.

MORE PROBLEMS

Spanish banks had 97 billion euros worth of exposure to land assets at the end of 2012, according to property consultancy RR de Acuna, roughly half of which were loans to developers. Real estate advisers and banking sources could not quantify how big extra losses would be, in part because that market is so illiquid that pricing projections are hard to make.

While official data shows land prices have fallen 43 percent since their peak in 2007, some real estate experts believe they dropped at least 70 percent.

That would be in line with projections by consultancy Oliver Wyman in a stress test of Spain’s banking sector last year, of a 63 percent fall from 2010 to 2014 in an adverse scenario.

In that adverse scenario, banks would suffer 80 percent losses on foreclosed land assets, Oliver Wyman said, more than the 60 percent loss they were asked to provision for last year.

“Though capital requirements and provisions seem to be very high, most of this land does not have and will not have any value over the very long term, and in these cases, coverage may not be enough,” said Luis Rodriguez de Acuna, financial director at RR de Acuna.

Spain’s government-backed “bad bank” will likely be in the firing line as it holds around 7 billion euros of land assets which were transferred by Spain’s rescued lenders. But the bulk of the problem still lays within the country’s healthier banks.

Mid-sized Spanish lender Sabadell had the biggest exposure at the end of last year, of 11 billion euros including loans to land developers, though it benefits from a government-funded protection scheme against losses.

Other big exposures are concentrated at top banks Santander and BBVA, Caixabank and mid-sized player Popular, which had over 7.3 billion euros of land-linked assets at the end of December 2012.

As more developers default, lenders will have to take on even more plots that served as collateral on loans. These carry maintenance and tax costs and banks would have to raise provisions against losses on the assets.

Another option banks are looking at is to build developments on some of the land, rather than let it go for several years in the hope prices might pick up, although that may be a risky strategy in a falling property market. ($1 = 0.7639 euros)

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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