While on the surface it seems as though the Spanish banking system has been through the worst of the downturn, received finance from investors and the European Union, there are worrying signs that this may not be the case. A number of property experts across Spain have stepped forward to confirm that much of the land assets acquired by Spanish banks, as developers went bankrupt, may be worth a fraction of the value in their accounts.
As at the end of 2012 Spanish banks had exposure to €97 billion of land assets and due to the illiquid nature of this particular market it is almost impossible to put a realistic value on these assets at the moment. Some experts believe some of the less in demand land assets may have fallen by 80% from the peak of 2007 although official data suggests a fall of 43%.
What can the banks do?
Prior to the European economic downturn the Spanish property market was going through something of a boom time with new developments appearing in coastal resorts and inland. While many of the land assets located in some of Spain’s more popular coastal resorts will eventually reap some kind of benefit for the banks in question, the same cannot be said at this moment in time for much of the inland assets.
Quote from PropertyForum.com : “If there is one country which epitomises the ongoing problems within Europe it has to be Spain with record unemployment, property prices in freefall, banks looking to offload their unwanted properties at any price and a future which at best looks difficult.”
If we take a look back over the decade prior to the economic crash, many farmers across Spain were approached about selling their land to developers with all parties involved seemingly set for a big payday. However, many developers were caught out by the economic downturn, which in all honesty was difficult to predict with any great confidence, and as such they reneged of their loans meaning that land assets reverted back to the banks.
Some experts are predicting that a whole host of Spanish banks will need to complete various developments, at potentially enormous cost, in order to stand any chance of selling these assets in some shape or form. This comes at a time when the Spanish banking system is still struggling, banks are looking to cut costs and funding rather than investing. What next?
A number of new regulatory issues have come into play for the European banking sector designed to ensure there is sufficient capital available to support the system. As a consequence many Spanish banks will need to take a further write-down on the value of their assets which will weaken their balance sheets and potentially push them to the verge of bankruptcy. This is an issue which has been ongoing for a couple of years now although unfortunately, while on the surface it looks to be improving, the situation behind-the-scenes is worsening.
The potential dumping of billions of Euros of land assets over the coming years will also have a material impact upon the land market and a knock-on effect to other investors who may well have acquired property at fair values.
While we are highlighting the Spanish banking difficulties in this particular article, there are many other banking sectors around Europe and indeed around the world that will have similar issues. The value of many of these land assets will need to be adjusted on various banking group balance sheets which could lead to significant write-downs and losses. It seems highly likely that more regulatory funding will be required in the short to medium term, to support the banking system, and indeed investors may well be asked to play their part yet again.
These ongoing issues could be compared to the darkness before a new day because once these assets have been written down to “fair value” and the banking system refinanced then this should clear the decks. Whether we will see an immediate bounce at this point is debatable but we are slowly but surely nearing the end game for this current ongoing crisis.