This is a website for buyers, owners, and sellers of property in Spain, offering reliable information and resources to help you get things done with confidence. It is run by Mark Stücklin, author of the Spanish Property Doctor Column in The Sunday Times (2005-2008), and the book ‘Need to Know: Buying Property in Spain’ published by Collins.
Mark StücklinUnder pressure from the EU Spain is setting up a so-called “Bad Bank” to relieve Spanish banks of their toxic assets. This is likely to have a big impact on house prices.
Thanks to reckless lending in the boom, many Spanish banks are now so overwhelmed with bad debts and toxic real estate assets that the Government is having to bail them out with public money and create a “Bad Bank” to take over their problem assets. The Bad Bank (Banco Malo in Spanish) will be a Government- backed agency like the NAMA (National Asset Management Agency) in Ireland, responsible for managing and liquidating the assets taken over from banks.
There is a tussle going on over who will foot the bill – bank shareholders or the taxpayer – the outcome of which will determine the transfer price of assets between the banks and the Bad Bank: The higher the transfer price, the more we taxpayers will be on the hook for impaired assets, which means bigger losses for us down the road. The Bad Bank is being set up by the FROB fund for bank restructuring.
Once set up, the Bad Bank will be the biggest property company in Spain, with some 100 Billion Euros in assets (by some estimates), including thousands of holiday homes, not to mention some golf developments in places like Murcia.
What this means for house prices depends on the strategy of the Bad Bank, which we don’t yet know (or at least I am not aware of it). The Bad Bank is still being set up, so there is no Board of Directors yet to set the strategy, nor has the Government made clear what it thinks the strategy should be.
Strategic choices
Looking ahead, the Bad Bank will have three strategic choices: 1) Liquidate as quickly as possible at any price, flooding the market 2) Wait until the market recovers, keeping prices high and limiting supply, and 3) Segment the market, and liquidate or wait depending on the segment (hybrid strategy). Each strategy will have a different impact on prices.
Prices will also depend on the quality of assets the Bad Bank ends up with. If it ends up with a lot of rubbish, it might not have much influence over prices in the middle and upper markets, where the supply is more limited.
Financing will be another big issue. Will the Bad Bank offer financing for the homes it sells? If not, will other banks step in? If there is no financing to be had, prices in the mass-market will have to fall a long way to find buyers. These are questions to which we don’t yet have answers.
All I can say with any confidence at this stage is that the Bad Bank will have a significant impact on the market. Overall I expect it to create downward pressure on prices, but not necessarily to the same extent in all market segments, and certainly not at the high end. But it all depends on the strategy the Bad Bank adopts, which should become clear over the next few months. I will be following this topic closely, and keeping you informed.
Bernie says:
The bad bank has been given 15 years to sell these toxic assets. As most of them are either valueless land or quickly dilapidating empty/half built properties in the wrong place, but with substantial holding costs, then it only really can adopt one stategy – sell as quickly as possible at any price! But, as I’m sure you know, it won’t do this. It will pretend that the value will be higher in the future…..Just one more financial disaster waiting to happen.
Mike says:
Having apoken to numerous non-Spanish friends & acquaintances about their Spanish banking experiences, and based on them and what I personally see, formed a totally dispassionate opinion about virtually every bank involved in financing property development & mortgages in Spain. It is my opinion that ALL banks in Spain coud be regarded as a Banco Malo – so why the need to set up an additional one?
The net results are going to be the same – abject misery for hundrds of thousands of innocent home buyers, so why not simply rename every struggling (ie. ALL of them)as Banco Malo, and let Nature take its course?
jeannie lumb says:
The banking system in Spain is inflexible, over bureaucratised, unwieldly – and disorganised, so do we really need a ‘super bank’ in the same mould? I think not! There are many individual home owners – Spanish and non-Spanish – wanting to negotiate with their bank over difficulties with their mortgages. The banks will not engage with them to find solutions which could save many repossessions – and hugely reduce the toxic debt arising from repossession of properties, many of which are now in negative equity and many which no-one will buy. The government needs to give banks a much stronger, more flexible remit to get on and make whatever arrangements will work for individual home owners. This way they keep their property, the banks don’t take on the expense of repossessions and the market holds out until the economy stabilises – as it will, one day! This might not be a total solution but it would help many people – and the banks – result!!
John Leahy says:
The Spanish people should be very slow to allow their government to base the Bad Bank on NAMA, the Irish quango set up in haste by a discredited and incompetent Irish government to deal with toxic bank assets.
The facts are that NAMA is a secretive, non-transparent bureaucratic body and is essentially another gravy train for lawyers, accountants, developers and estate agents, not to mention advisors, many of whom were involved in the destruction of the Irish economy before the bust. NAMA’s staff are also hugely paid and are mainly made up of ex bankers and financiers.
NAMA spends over 40 million euro a year on so called professional fees alone and is constantly in the High and Supreme courts trying to get dodgy developers to cooperate with the process. In their desire to be seen to be doing something, they have foreclosed on many genuine businesses with performing assets, forcing them into liquidation.
NAMA took 70 billion of mainly toxic property loans from Irish banks at a 50% haircut and pledge to recover the 35 billion, leaving the taxpayer to pay for the other 35 billion. It states that it will make a profit of 1 billion within a 10 year period, but nobody believes this. The likelihood is that they will lose billions over the same period. Many of the properties they bought even at a 50% haircut are worth far less now. NAMA also owns hundreds of so called ‘Ghost Estates’ all over the country, many again built again in obscure places during the boom and are virtually worthless.
Incredibly NAMA is paying some of the larger bankrupt developers on its books €250,000 a year to manage their own toxic portfolios. Developers get a 10% slice of the action at the end of the process if successful! Also NAMA has delegated the responsibility of managing the banking loans to the same toxic banks that created the dud loans in the first place. The banks, of course, are being paid handsomely for managing their own toxic loans.
NAMA has a huge property portfolio, consisting of a lot of hotels built in obscure places during the boom, and now, to generate cash flow are charging ridiculously low rates thus putting many genuine hotels under severe financial pressure. Crucially it has the potential to negatively influence any recovery in the property market by flooding the market if it suits its own purposes.
The public have no access to what’s going on as NAMA is outside Freedom of Information legislation, often quoting commercial sensitivity to side-line any inquiries
The moral for Spain is to ‘Beware’ and don’t use NAMA as a template.
admin says:
Very interesting comment John.
Anne says:
Why not demolish the lot ???