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Spanish banks stop refinancing loans that kept developers alive | The country “definitely ranks top of the class for overdoing it”

Neil Callanan and Sharon Smyth

Potential buyers inspect and bid on new and used construction equipment at an auction in Ocaña, Spain


When Spain had Europe’s third-biggest construction market, Angel Fernandez used to travel to the Netherlands to buy equipment for Spanish homebuilders. Now he watches as buyers come to Spain to take diggers, excavators, and trucks to countries where they won’t just gather dust. Standing in a sunburned field in Ocaña, a 90-minute drive south of Madrid, Fernandez looks on as Ritchie Bros. Auctioneers sells never-used construction equipment at discounts of as much as 20 percent. “My business is being made obsolete,” says Fernandez, who is there to look for bargains for Spanish clients that are still operating. “When the crisis began in 2008, we all thought that it would be over in two or three years, but we got to 2011 and realized we were in worse shape.”

Spain was slow to come to grips with its housing crisis. Almost half of Spain’s 67,000 developers are insolvent but have avoided bankruptcy because banks kept permitting them to refinance their loans, according to R.R. de Acuña & Asociados, a property consulting firm. Now banks have begun to turn off the spigot in response to government demands that they set aside more money to cover losses on real estate loans. “Construction in Spain ground to a halt four years ago, but banks chose to refinance initially, which is a slow death,” says Jeroen Rijk, vice president of sales for Europe at Ritchie Bros. “They aren’t doing that anymore, which is why there is so much product on the market now. Spain definitely ranks top of the class for overdoing it.”

Spain is still looking for solutions to its financial crisis. On Sept. 6, European Central Bank President Mario Draghi announced a new program to buy unlimited amounts of government bonds of nations that meet certain conditions, including submitting their economic policies for vetting by the International Monetary Fund. Spanish Prime Minister Mariano Rajoy hasn’t yet said whether the country will take part, frustrating German leaders. “He must spell out what the situation is,” Michael Meister, finance spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said on Sept. 24. The fact that he’s not doing so shows “Rajoy evidently has a communications problem. If he needs help, he must say so,” Meister said. A spokeswoman for Rajoy said the prime minister is following the road map for economic recovery agreed upon with his European partners.

Home prices have fallen 32 percent since the peak in 2007, according to Tasaciones Inmobiliarias, Spain’s largest home value appraiser. Building permits plummeted 87 percent last year from the 2004 peak, according to data compiled by the Ministry of Public Works. There’s no sign of the decline abating, with construction output down 16 percent in July compared with a year earlier, according to Eurostat, the European Union’s statistics agency.

The government ordered banks to set aside loss provisions equal to 80 percent of the value of loans made for land purchases and 65 percent for unfinished developments. In May, lenders were told they must set aside about €30 billion more to cover potential losses on €123 billion of real estate-linked loans on which borrowers are still making timely payments. In August, Spain said it would create a so-called bad bank, in which it will place soured real estate assets from troubled lenders so they can resume lending. Rajoy agreed to create the institution because it is among the conditions for the country’s banks to receive €100 billion in aid authorized by the European Union in July.

As the bad bank disposes of its assets, completed projects are likely to be the first things it will sell. That could push down the value of similar properties an additional 10 percent to 20 percent, Alvaro Serrano and Sara Minelli, London-based analysts at Morgan Stanley, said in a September report. Lower property prices would mean Spanish banks might have to set aside an additional €7 billion to €14 billion against bad debts, they said, which would be enough to wipe out their domestic earnings for 2013.

Banco Popular Español has the highest exposure to real estate developers at about 20 percent of its balance sheet and hasn’t yet made adequate provisions for potential losses on those loans, Serrano and Minelli wrote. Unpaid arrears from troubled developers will help push the bank to a loss of €847 million this year, the analysts estimated. “The bank is still in the process of provisioning, but we have already provisioned what is required of us and more,” a spokesman for the bank says.

Ibrahim Arrejehi, a buyer for Saudi Arabia’s Arabian Contractor Co., was at the Ocaña auction to bid for equipment to sell in his home country as well as Pakistan, Afghanistan, and India. “New machinery in Spain is selling at around a 20 percent discount from the peak, and used items are going for around 40 percent lower,” says Arrejehi. He was among 1,370 bidders from 74 countries who bought 2,086 items, according to figures compiled by Ritchie Bros. The Canadian company opened the 60-acre Ocaña location three years ago to augment a site in Moncofa, in eastern Spain, that reached full capacity a year after it began operations. Globally, as much as 10 percent of the equipment Ritchie Bros. handles comes from distressed sellers, according to Rijk. “That percentage is higher in Spain,” he says. “There was too much of everything, and there is still too much of everything.”

The bottom line With almost half of Spain’s 67,000 developers insolvent, banks are cutting off loans as the nation comes to grips with its housing bust.


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