Tuesday 15 December 2009

Positives and negatives of the Spanish banking system

Until a year ago Spanish banking was internationally extolled as one of the world’s soundest systems. The strict control of the Bank of Spain, which required higher provisions (deposits to cover certain risks) than other countries, together with a fast growing, dynamic economy such as Spain’s, enabled the system to grow solidly. Banco Santander and BBVA are the world’s largest banks, with investments in South America, USA and China. Year after year, almost all the financial institutions obtained record profits. But lately concerns have been raised regarding the solvency of the system and 2010 looks set to be an extremely difficult year for Spanish banks. Could these critics be right? What has happened?

The feeling was that the US sub-prime mortgage crisis would scarcely affect Spanish investors, who were more conservative than those in other countries. The so-called “toxic assets” did not represent a significant problem for the Spanish system. However, the credit expansion in Spain, which was the result of the housing boom, together with a negative balance of trade, meant that Spanish banks were forced to obtain the money required to finance this credit on the international market. When the sub-prime crisis exploded, the world financial system reduced loans to a minimum. Due to lack of confidence, all the banks wanted to recover their loans and would not consider renewing them, resulting in Spanish banks having to face numerous debt maturities with foreign banks in 2009 and 2010. This caused a reduction in availability of loans for companies and private individuals as the banks main concern was to repay their own loans to foreign banks. But unlike other countries the provision of public funds to rescue Spanish banks was minimum. Credit did not flow, but the system remained sound.

So why are there concerns regarding the solvency of Spanish banks in 2010? Payment defaults. With unemployment of around 20% and after a real estate crisis, both private individuals and developers are increasingly unable to meet loans. But once again we must thank the Bank of Spain for its supervisory work in previous years. The provisions made by Spanish banks against defaults are the highest in the world (much was learnt from the previous crisis at the beginning of the 90s), and there is a high percentage of real guarantees (properties) for most of the loans. The banks will have to hold on to many properties and sell them, and the smaller banks, and especially the Savings Banks, will have to merge. In 2010 some institutions will experience specific problems, but the solvency and security of deposits is guaranteed.

Thursday 1 October 2009

Have prices started to rise?

In recent months we have seen how some of the “star” promotions sold by QSD Group are on sale for higher prices than in the past. El Bosque, the spectacular apartment complex at Punta Prima, has seen starting sale prices increase from 97,000 euros to 115,000 euros. The Rocío complex of high quality town houses in Villamartín, has seen starting prices rise from 99,000 euros to 109,000 euros, and there are many more examples like these. Does this mean that prices have gone up?
Although it may appear so, this is not the case. The explanation is very simple. When house prices on the Spanish coasts crashed a year ago, there was a general fall in prices of, in some cases, as high as 30%. At the time a same promotion included some more expensive properties and other cheaper ones, depending on location, views or surface area. As prices in general fell, the value of all properties decreased by a particular percentage, which meant that there were still homes at different prices in each project. The first to sell were the cheaper ones, which means that when we look at the homes on offer in some promotions it seems as if prices are going up, because the “starting price”, that is the price of the cheapest property on the list is higher than at the beginning of the crisis. So when these projects are listed on the internet in a commercial file, it gives the impression that prices are rising when if fact what has happened is that the homes which cost less have already been sold.
What we can say is that, while prices are not going up, what is happening is that the cheaper properties are selling fairly fast, leaving the more expensive units pending sale for the moment. Also, these houses still pending sale are the best, not for nothing were they the most expensive, and they still represent a good buy as the reduction percentage in their price is the same as that of the cheaper properties.

Thursday 16 July 2009

Does the Banks’ Real Estate Offer represent a Great Opportunity or a Great Disappointment?

It has been reported in the newspapers, on the radio and on television: Due to the crisis Spanish banks are repossessing thousands of properties from developers and private individuals. Even that know-all cousin or brother-in law that every family has is telling us the same thing:

— Spanish banks have become genuine real estate companies and have the best offers, wait and see. —They tell us with undying conviction during a family lunch.

But some have already started to discover that this is not entirely true.

If prices had not fallen as they have, it would be true that the banks’ offer would be excellent, as they are generally awarded properties for an amount similar to the sum owed (which ranges from between 70% and 80% of the appraisal value). That is, they could offer properties at prices 20% or 30% cheaper than the market value. It is a pity that in any case this market value has fallen by 30%. The people who have lost their homes or have not been able to sell them are those who owed large amounts to the bank, as otherwise they would have sold at any price before losing the property instead of getting nothing. This means that the banks have to recover the loan, late payment interests, legal expenses, etc. when they sell. In short, the prices at which they offer their properties are no bargain.

— Bah!, the banks are bound to sell at a loss. That is where the opportunities will be. —That’s what our clever brother-in-law tells us, in an attempt to settle the matter.

Sure, but the bank’s main concern is not to sell the property quickly, but rather not to allow their profit and loss account to deteriorate, not to show losses to their shareholders. That means that banks prefer to keep the property as part of their assets, without showing an immediate loss due to its sale. Each year they will make a provision for part of the value of the property, and so distribute the potential loss over time, and then yes, in the 4th or 5th year they may sell the property at a large discount without showing great losses in that financial year. This is a logical strategy for diluting the fierce impact of the crisis over a number of years, and it is also possible that the real estate market may recover meaning they could sell at a better price.

That is why we can sit back and wait for the banks’ fabulous offers, because they are not going to come. Generally speaking, the best offers will be those available before the bank is awarded the property as the high expenses involved in a legal repossession process will not yet have been incurred. I suggest that you check for yourselves on their webpages.

Friday 29 May 2009

When Will We See a Recovery in Spain?

It is clear that we are facing a world crisis. That this crisis is affecting different countries to different degrees is also clear. No-one can ignore the fact that the impact on Spain has been tremendous. The fall in GDP is similar to that of Britain or Germany, but unemployment is increasing much faster. A number of analysts forecast that Spain will find it much harder to recover than other neighbouring countries. Are they right?

Nobody can say, but if I were to make a prediction, which is why I am writing this post, I would say they are wrong. Spain will recover at a good rate. There are two key factors which some experts resort to with regards to the Spanish model to support the argument that Spain will experience more problems than other countries:

1. High unemployment, which can drag down domestic consumption.


2. The excessive stock of unsold properties.

With regards to real estate, if you have followed my previous posts you will know that thanks to the fall in prices the stock will quickly be reduced. This month QSD Group is heading towards record sales, and our company is not alone.

As for unemployment, while this is a tragedy for many families, it represents a means of rapid adjustment for increasing the country’s productivity, less people to do the same work. For many years it has been said that Spain’s greatest problem was low productivity in comparison with other similar economies. Clearly, this way of increasing productivity is the most painful of all. But Spain has something which other countries have lost: family, a powerful social network which helps and protects those people looking for a new job right now. That is why social conflict is so low in our country. If France had our level of unemployment the Champs-Élysées would already have been burned down.

The great challenge will be to create jobs for all these new unemployed. But the Spanish economy, and in particular its small and medium businesses, have always shown an admirable entrepreneurial capacity.

Let’s hope I am not wrong...

Wednesday 4 March 2009

It Seems Hard to Believe

I was surprised when I saw the date on which I was starting to write this new post. It has taken me almost three months to find time for the new Newsletter. Have we been so busy at QSD Group? The answer is yes, although it may seem hard to believe.We sincerely expected December and January to be poor in terms of sales and contacts, but they have not been bad months. And February has been an extremely good month. Aren’t we supposed to be experiencing the worst financial crisis since the Second World War with no one in Spain selling a single apartment? Well it seems that this is not the case.

These are hard times for property developers, but now that they have all accepted that prices must necessarily fall, more and more sales operations are beginning to be carried out. This is good for the agencies which managed to survive the extremely tough year of 2008.

Talking to our product manager the other day, we reached the conclusion that in 3 or 4 months we might have a problem of a shortage of interesting properties for sale, as the great bargains are selling very fast. We must all make an effort to include other developments in our product portfolio.

Keep an eye on the contents of our web page and the newsletters, because if I am not mistaken we will soon see extremely interesting new properties.