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Spain’s Bad Bank – the speculation continues

As more details become available about Spain’s new “Bad Bank” the speculation about how it will work, and the effect that it will have on the country’s property market, continues. At Barcelona Prime we are working hard to stay abreast of the developments. Here’s an update on some of the factors that are most likely to effect our customers.
  • How will the bad bank effect property prices in Barcelona and Madrid?
  • When will Spain’s bad bank be operational?
  • Is that a realistic timescale?

How will the bad bank effect property prices in Barcelona and Madrid?

The debate is raging online about how the creation of the bad bank will effect property prices in Spain. Opinions vary; some believe that the effect will be drastic, others that it will hardly be noticeable. At Barcelona Prime we consider it most likely that the results will vary from one area to another. Spain is a big country and the situation regarding the property available is not homogeneous.

Several banks have already begun to feed property onto the open market with big discounts. It’s circumstantial evidence, but at Barcelona Prime we have kept a keen eye on the units that are appearing in these sales and we are yet to see a single one in prime central areas of Barcelona and Madrid. The few properties that have appeared in these two cities have been located in the more marginal or suburban areas. By far the greatest proportion are to be found in Spain’s hinterland and along the Mediterranean coast.

The banks need to balance their books but passing assets to the bad bank will require that they accept discounted prices. Whilst they will be keen to shed toxic assets, they will want to hold onto anything that they may yet be able to sell. In the simplest of terms, there is still a demand for quality property (at the right price) in these cities, and unless there are radical changes to our entire way of life, there always will be.

Javier Kindelan, President of Appraisals and Valuations at CB Richard Ellis takes a similar stance “[The bad bank] will not cause large falls in the price of homes in urban centers such as Madrid or Barcelona, but could accelerate the decline in coastal areas” (quoted in Europa Press). ”Banks are not going to move the units that they are able to sell to the bad bank. They will move those that do not generate an income and have no potential to be sold.” Like us, Kindelan believes that the most problematic assets are concentrated in coastal areas.

When will Spain’s bad bank be operational?

The Spanish bad bank, officially known as the Sociedad de Gestión de Activos (SoGA), isn’t really a bank at all. It is actually a management company that will bring together the toxic assets of Spain’s most troubled banks (Bankia, Novagalicia Banco, Catalunya Caixa, Banco de Valencia…). According to Luis de Guinos, the Minister for Economy, the new entity should be in place within three months, by the end of November.

Is that a realistic timescale?

The decree approved by the Government last Friday states that no more than 50% of the funding for the bad bank may come from the public purse. This means that the remaining 50% must be sourced from private investors. If the bank is to be operational in three months then that leaves precious little time to find sufficient investment for a project that, as yet, seems to be failing to inspire.

Javier Kindelan again, this time from an interview with Spanish paper Cinco Días. “I have serious doubts that it can be done. CB Richard Ellis has spent years selling property and in recent years we have seen that raising capital for any project takes forever to get final approval. A sale that took two months now takes six or nine months. And that is for operations of a few hundred million. [The bad bank needs] to capture about 15 billion in three months.”

Apart from the difficulty in finding investment is the lack of detail regarding the structure of the entity provided by the decree. It is not yet known what kind of assets will be taken into the bad bank or how they will be valued (you can read more about the proposed structure in our previous post “The Spanish ‘Bad Bank’”). Signs point to a bumpy start for the bad bank and a considerable delay in it’s launch.

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