Will Spain’s bad bank work?

As I mentioned not too long ago in article, the Spanish Government would be setting up a ‘bad bank’ with the aim of buying up ‘toxic’ properties and land assets in the country in an attempt to clean up Spanish banks finances.

When it does become operational from the 1st of December  the new bank ‘Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria’, thankfully knowns by the acronym SAREB, intends to buy 60 billion euros worth of assets at lower prices and then intend to sell them to investors both domestic and international over a 15 year period, offering a minimum return of 14 percent.

SAREB, which is part of the 100 billion euro bailout plan for the Spanish banking sector which was agreed with euro zone leaders in June, is expected to apply an average 63 percent discount on land and properties and an average of 46 percent on real estate loans, according to Spain’s bailout fund. The logic being that these toxic assets will be transferred to SAREB at a price low enough to lure foreign investors into the real estate sector. And at the same time the prices will not be too low so as to cause any further damage to the banks which are trying to off-load them.

This idea has been tried recently in Ireland, which created a bad bank (NAMA) in 2010 which paid out 32 billion euros to 5 ailing lenders for 74 billion euros worth of assets.

Although I am all for anything that helps kick start Spain real estate sector and economy, I do not see much of the assets that SAREB will control attracting high levels of foreign investment. From the information I have found, over 50% of the assets that will be available will be land and unfinished construction projects in locations with muted demand. In the future, when Spain’s economy starts to grow again and confidence returns, several of the projects may attract local investment, but only at rock bottom prices. Of course there are always ‘vulture funds’, but this has been attempted before with little success.

But, the benefit that this fund will have is that it will help clear up several banks books. Once this has happened, the theory is that Spanish banks can start lending again to the benefit of buyers and sellers of Spanish property

Andrew Belles

Leave a Reply