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Raising money against the clock = price drops

“When the perception of reality seems to be worse than reality itself, the best possible reaction is to explain it in the greatest detail”, Bank of Spain Governor, Miguel Angel Fernandez, 13th December 2010.


The Spanish market is going through a situation in which we presume that bigger price drops will be experienced in the next nine months. Prices will fall furthermore but with moderation.

According to the Observatorio de Coyuntura Económica (OCE), property prices should fall by 24% in order to appeal to the market, whereas the agency Fitch Rating predicts in its latest analysis that prices will fall by 15%. Therefore… there is still room for price improvements for buyers and investors.

The reason we make that assumption is because the current pressure is on the main property holders, the banks and Saving Banks (Cajas), to raise money in order to meet the Government’s and also the Bank of Spain’s requirements: to increase liquidity and provisions against property risk exposure.

We do not know how much the prices will drop and also at what speed – nobody knows) – but we know that banks and Saving Banks are under pressure and also they have an increasing property stock that must be sold out as quickly as possible.

 

Why price drops will speed up from now. Raising cash against the clock!

The Spanish Government has set a deadline (September 2011) to the 17 Saving Banks (Cajas de Ahorro) to reach a minimum of 8% non-risk liquidity against property risk-exposure, which means to start raising funds from private sources; otherwise, the Government will become a shareholder by pumping money to reach the aforementioned 8% in order to calm the international markets. Additionally, the Bank of Spain advises to increase the banks’ provisions as much as possible beyond 15%.

It still remains unclear if the law needs to be change in order to allow Cajas to raise private funds specially from abroad, but the Government has decided to go ahead with this measure as a previous step to force Cajas to become Banks (this is the “new financial reform” in Spain).

At the same time, banks’ estate agents and the Government itself are launching a crusade to attract foreign home buyers in order to ease the property crisis by reducing the stock. The Secretary of National Development, José Blanco, announced a road show to appeal foreign investors.

So, we are facing a reality in which cash from investment funds and homebuyers becomes crucial. Every little helps and any single unsold apartment already means an increasing cost for the bank in management and taxation.

The banks’ road map

Let’s summarise what Saving Banks needs to go through with the financial reform. To keep it simple and following Arturo de Frias, from Evolution Securities, the financial reform’s road map is:

  1. January 2011: banks have to show their exposure to property, construction and losses.
  2. By September 2011: sort out your situation as much as you can by reshuffling the internal structure and minimise losses. Also, raise private capital to clean the balance sheet and exposure.
  3. After September 2011: depending on Saving Banks’ progression, the Spanish Government will pump money to those that have not reached the 8% provision. So far the Government has already lent €11bill to the Cajas through the FROB (Orderly Bank Restructuring Fund/Fondo de Reestructuracion Ordenada Bancaria).
  4. Ideally, the reform will be finalised with the 17 Saving Banks becoming banks. La Caixa has already announced it is ready to become a bank, leading the conversion.

How much money do the weakest Cajas have to raise?

According to analysts at Evolution Securities (20th Jan report), Saving Banks needs €50bill to back their assets and operations. The Spanish entity Nomura, which advises the Spanish Treasury, said that Cajas de Ahorro will need between €43bill and €80bill (they cannot be sharper).

We think that, in the next month, prices will drop furthermore. Banks and Cajas have already accepted losses. Since losses are a fact, the priorities are to reduce their property stock, to sum up inputs from property in their balances and to get rid of stock which is expensive to maintain.

Foreign investment funds would go for Spain if the yield was more attractive that the one forecast in any UK investment option.

CONCLUSIONS

1)      If you are considering buying in Spain, keep a close eye from now on. The market is getting very interesting. Prices will fall but if you are a buyer you may do not want to wait for 3 more years until they reach their lowest.

2)      If you want to speculate, just wait unless you have already spotted your business opportunity.

3)      In 2011, the property stock will certainly increase. It means more repossessions and larger stock to be maintained by Banks…very expensive for the banks. It is a must for them to sell. We presume that a second wave of repossessions in coming in 2011.

4)      Saving Banks are the cornerstone of the current property crisis. As far as we know, they are ready to bargain with buyers up to a reasonable price.

5)      The Secretary of National Development “road show” (José Blanco) does not make much sense. What Blanco has to do is to implement the legal framework (especially on rentals) to make it safer and predictable for investors and buyers. Also, it gives the message that Spain is just a nest of properties and sounds quite desperate.

6)      Remember, we are not giving professional advice for you to invest now or later. It is apt to you. We are just guessing from the facts and what we know

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