This is not a particularly controversial decision as the only person affected will be the developer, Jose Avila Rocas, who has been indicted in the Malaya corruption case. These Marbella villas would have been valued at over €1 million each.

The land on which the properties was build was a green area that was later reclasified for public service use. Therefore, there was no way the properties could have been included in the new Marbella town plan and they had to be demolished.

I posted another article on this blog about a new demolition law that could affect Marbella property, which allows the demolition of any property that is ‘manifestly illegal’, meaning it cannot be included in an urban plan. This would clearly cover the demolition in this case.

Golf Rio Real is a superb area and I welcome this decision as it can only add value to such a lovely location.

Guy Marrison
www.marrisonproperties.com

Once the new law is in force it will allow the Junta de Andalucia to order the demolition of any property it considers ‘manifestly illegal’. This definition would apply to any property that cannot be included in an urban plan, such as the PGOU, or Marbella Town Plan.

This is a very important development for Marbella as the new PGOU is expected to be approved in May this year. There are approximately 500 properties, mostly apartments in Marbella, that will not be effectively legalised by inclusion in the new urban plan.

Under the new demolition law, these properties would be considered ‘manifestly illegal’ because they were built in designated green areas, or municipal land, and cannot be included in the new urban plan for Marbella.

The law includes provisions that allow the Junta de Andalucia to order summary demolition without having to go though the courts. This provision has been included because often developments are completed by the time a case reaches court.

The timing of this announcement is likely to create some urgency in Marbella because the PGOU has been finalised and it is clear that 500 properties are ‘manifestly illegal’. Therefore, demolition of illegal properties is now a very real possibility this year.

I think this is a very good proposition because the nature of Spain’s justice system does not prevent illegal building and the effects can be hugely costly to rectify.

My only concern is that the innocent parties who bought property in good faith will be given relief.

I look forward to your comments.

Guy Marrison
www.marrisonproperties.com

“In our estimation, there will be a significant reduction of 30% in real terms over the next few years”.

Officially, house prices in Spain have fallen by just a few percent in 2008. However, Credit Suisse notes this and explains:

“House prices on a national level have not fallen yet, particularly the official ones, because some vendors have chosen to maintain prices and the fewer number of sales do not reflect the reduction in prices”.

The report based its argument on the fallen in transactions: 40% fewer re-sales and 27% fewer new properties were sold year-on-year.

Pointing to offer prices and sales prices, the bank estimates that transactions are “closing at much lower prices” than offer prices.

The bank states three reasons for a continued fall in prices: “an over-valued property market, increasing unemployment and tightening credit conditions”.

A very interesting part of the report focuses on the psychology of the Spanish people towards the  Spanish real estate market. In arguing why we haven’t witnessed a fall in prices the bank says this is based on an historical error on the creation of value. In Spain the property market has created “an illusion of money, has a monopoly on investment and low interest rates and high rental costs led to more activity”.

In Spain as a whole the bank estimates 25-30% of property was bought speculatively and the 1.5 to 2 million excess housing will take “3 to 4 years to absorb”.

There is not too much to disagree with here. Broadly speaking I concur that 30% will be the average house price reduction. However, the report covers Spain as a whole and I believe that some areas will be more affected than other and consequently see bigger falls of up to 50%.

The suburbs of big cities such as Madrid and Valencia have much of the excess supply and these areas will see higher reductions in prices over the next few years - they will also take longer to recover.

On the Costa del Sol I would also predict that prices will fall by 50% in some areas. I will cover this in more detail in another post, but Marbella’s corruption scandal in 2006 actually places it very well to recover before other resorts on the coast because no new developments have been built in the last three years.

Therefore, while the Spanish property marketas a whole will like fall by 30-50%, some areas including Marbella are only likely to see falls of up to 30%, with some areas like the Golden Mile perhaps only falling by 20%.

Guy Marrison
www.marrisonproperties.com

Direct Property Holdings

According to a report in Reuters, the eight largest banks in Spain acquired €7.8 billionin property assets from struggling developers and individuals. Santander was the most active buying €2.6 billion in Spanish real estate assets.

This figure will be much larger when all banks are include and a conservative estimation of €10-12 billion could be extrapolated from the above figure. This has obviously continued into 2009 so this figure will now be even higher.

Indirect Holdings

Spanish banks have further exposure though the debt for equity swaps they have executed with struggling developers. these include:

Metrovacesa: eight banks led by Santander cancelled €2.1 billion in loans for a 55% equity stake in the developer. The deal valued the shares at €57 each; they were trading at €17 at the time of the announcement. The banks also agreed to buy a further 1.8% each at €57 a share.

Colonial: last year almost 30 lenders to the company were involved in a debt restructuring of €7 billion, which left Banco Popular with a 9% equity stake.

Sacyr Vallehermoso: a huge developer that is struggling under massive debt. A consortium of banks is considering restructuring debt. The banks are forcing sales of assets such as Repsol and the motorway operations - however this may also results in equity stakes being taken.

Habitat: refinanced €1.58 billions in loans last year. Looking for a buyer to inject new capital, but will most likely see the 30 plus creditor banks take equity in return for cancelling loans.

Reyal Urbis: last year made a very canny deal with Banesto and sold about €400 million in property assets; also has a joint venture with Banesto to sell its portfolio. Also seems likely to fall into its creditor banks hands.

These are just some examples of how Spanish banks are increasing their exposure to Spanish real estate by taking large equity stakes in Spanish property developers. The snapshot above deals with publicly traded developers on which there is information, however 90% of loans made to developers in Spain are to the private sector.

Loans and Mortgage Exposure

Outstanding loans to developers and real estate-related concerns amounts to €300 billion, with a further €600 billion in individual mortgages, according to El Pais.

Therefore, as this article shows, Spanish banks are heavily exposed to the Spanish real estate sector. Their decision to continue buying property assets to prevent loans going bad (and avoid having to make provision for more capital) also means they are continuing to assume more and more risk.

I would be interested in hearing from you if you have more information or questions on this subject.

I will also be following up this article with another on why the banks have made these decisions.

Guy Marrison
www.marrisonproperties.com

The price values the land at approximately €5,000 per constructable square meter (the land allows a property of 20,000m2). Golden Mile Villas sell for between €10,000 and €13,000 a square meter so is seems a canny purchase. The vendor, the uncle of the President of Syria, has owned the land since the 1980s.

This valuation underlines the importance of location when investing in Marbella real estate. The old adage remains true and that can also be said of Marbella as a whole. While surrounding resorts have seen prices decline rapidly, property prices in Marbella have held up relatively well - particularly established locations such as the Golden Mile.

Our belief is that investors should be looking at established areas such as the Golden Mile, Marbella Old Town, Nagueles and Los Monteros as presenting the best opportunities in 2009.

In addition, quality and location are more important considerations than price. Quality properties in good locations at undervalue will show the greatest (and fastest) return to investors in Marbella property.

If you are an investor and you would be interested understanding more about real estate in Marbella, post a comment or contact us.

Guy Marrison
www.marrisonproperties.com

The redemption requests follows a downward valuation of the funds assets of 7.5%. This seems a hopeful valuation as the first asset sold, an office block in Madrid, was sold at a 17% loss (on valuation, not purchase price) - perhaps reflecting the true market value.

Unit holders will be locked in for two years until the fund’s assets are sold. This is a quite uncomfortable situation for the 50,000 unit holders as the assets will be disposed of at the bottom of the market and will likely result is a large loss for the fund.

This decision will be controversial because it effectively denies unit holders access to their money for two years, and they may need it. It also means these investors have capital to invest in the wider market and soak up some of the excess supply. The Bank of Spain needed to grant approval for this and they duly did. They never seem to say no to Santander…

The fund holds a diverse portfolio of property assets in Spain. Therefore, we may see opportunities arising in the Marbella propertymarket for both block sales and individual units in newer areas such as Nueva Andalucia and Elveria.

In contrast to Santander’s rather brutal strategy, BBVA paid out 95% of a similar Spanish real estate fund it operates from its own reserves. In our view this will prove a much better decision. BBVA customers are happy and will return (perhaps together with some from Santander) when future funds are opened.

In addition, BBVA will have a longer time horizon in which to dispose of the funds assets - unlike the two year commitment Santander has made.

There is another point that we have raised for some time: why are banks plunging ever deeper into real estate? Adam Smith provide long ago that specialism is the key to value creation. Therefore, banks should be lending money, not investing in and operating giant real estate portfolios.

Banks will be critical to the recovery of the Spanish property market and we would encourage them to help in attracting new long-term capital and to dispose of their ever growing property portfolios.

Guy Marrison
www.marrisonproperties.com

This is the first such merger (read: rescue) in the Spanish banking sector, and is likely to be followed by many more as the fallout from the Spanish real estate downturn causes bad debts to rise. The necessary consolidation of the Spanish banking sector has been predicted in articles published here since the middle of last year (see more articles on the Spanish banks).

This is an important development because the banking sector, and specifically its ability to provide mortgage financing, is critical to the spabilisation on the Spanish property market. So even though Marrison Properties operates in the Marbella real estate market, the macro environment in Spain will in large part influence Marbella property prices.

The federal deposit insurance agency will need to provide up to €2.7bn to make the merger possible, according to sources in a Bloomberg article. The combined entity will become the fifth largest savings bank in Spain with approximately €60bn of operations.

Will this affect your mortgage?

If you have a mortgage with either bank you will not notice any change. However, if you are looking for a mortgage it is worth noting that this new bank will likely not provide the best rates, as it will be concentrating on its bad loans and conserving capital to protect against future losses.

What does this mean for the Spanish banking sector?

Anyone who has ever visited a Spanish town will have been struck by the number of banks on the high street. Clearly the sector will need to consolidate and we have been predicting that less than half the banks will remain after this process.

Savings banks (cajas) in particular will have to consolidate because their capital adequacy will not be sufficient to avoid bankruptcy from bad loans. Expect more announcements of mergers (or rescues).

Bigger banks, such as Santander and BBVA, will also record big losses this year as their loan portfolio’s deteriorate. In my opinion they are in much worse shape than is being reported (particularly Santander).

While this may seem like bad news it is not. Consolidation will result in healthier banks will the capacity to make new loans and mortgages that are needed to stabilise property prices.

We are actually heartened to hear this process has begun as it should indicate the start of a restructuring of a sector in deep trouble. The sooner this plays out the better. Mortgage holders are likely to be unaffected.

Guy Marrison
www.marrisonproperties.com

But all is not as it seems: Santander is offering its own employees cut prices loans if they acquire a property from its growing real estate portfolio. Some media reports have praised this a a creative way of disposing of its property in hard times; and a way for its employees to snag a bargain.

However, it smacks of desperation. I say this because some I have seen some very attractive real estate in Marbella being offered by banks that, if priced correctly, would be very snapped up by the investors I represent. The problem is the banks do not seem to want to sell at a loss, however small - yet.

So they seem to be turning to their employees to avoid booking a bad loan. This gives the truest picture of the state of Spanish banks: desperation before the inevitable crash and bailout.

See another article on the Spanish banking sector: Spanish Banks Heading for Trouble.

Why would a bank hawk its property portfolio to its employees unless all other buyers had declined the offer prices? And shouldn’t the bank be keeping its operations apart from its employees?

This strategy raises more questions about the health of Santander and other Spanish banks - and calls into question how the property market can recover when the banks that should be making loans are the main buyers of real estate in Spain.

My view is that the only way the Spanish property market can recover is for new capital to be introduced to buy up the over-supply at prices that are attractive. This means banks and others suffering losses. This is the way markets work and until it happens no recovery is in sight and prices will stay depressed.

If you have a contrarian view I would be glad to hear from you.

If you liked this article see other about Spanish Banks.

Guy Marrison
www.marrisonproperties.com

As a keen monitors of Spanish banks for our marbella mortgage operations I started to have doubts about their strategy when the real estate musical chairs began at the end of 2007. Now I predict a massive bailout is on the horizon and getting closer.

Once it became apparent that large loans to developers were going sour I expected to be invloved in a flurry of deals as investors I represent would buy marbella real estate assets from struggling investors. Instead, the banks decided they would be better off taking on the assets rather than booking a loss.

Reuters reports that since the downturn started, banks have acquired €7.8bn in real estate assets. That is in addition to the debt for equity swaps that have also transformed the banks into the largest developers in Spain.

It is unclear exactly how much exposure the banks have the the real estate sector in Spain but it has been suggested that €45bn worth of real estate assets are directly owned by Spanish banks. In addition there are outstanding loans of €300m to property developers (this is a conservative figure) and much more in residential mortgages.

In short, Spanish banks are hugely exposed to the real estate market in Spain, and the downturn has just begun.

I have been flagging up this issue for quite some time because it is holding abck a recovery in the Spanish property market. This is because every time a bank buys an asset to prevent recording a bad loan it prevents the market from reaching the bottom and a subsequent recovery. Therefore, valuations are being manipulated by this activity and it delays the inevitable: its like death from a thousand cuts.

Spanish banks are doing more harm than good. All that capital could be going to providing new mortgages or boosting the tier one capital a bank needs to cover losses that are already there, just not booked.

The bank’s view that they are getting bargains and the profits will roll in once the market recovers is pure folly. It may not seem so now but the mighty are set for a big fall.

“Reduce your prices!”

This year the Spanish property bubble burst in dramatic fashion. Rather than a gradual decline in sales activity, property developers have witnessed there sales completely dry up. The reality has been too much for some of the star developers to take and they have resorted to desperate pleas to the government and marketing gimmicks rather than effective action.

In response to repeated entreaties to the government for assistance in buying unsold properties, the housing minister advised the developers to take the only sensible action available to them: reduce sales prices to encourage first-time buyers.

The developers we told that “we live in a market economy” and that each developer would have to “decide on the appropriate reduction”. This was a clear signal that the government will bail-out the construction sector by buying-up unsold properties, as the main developers association had been demanding.

Why this is important if you are buying or selling

Developers have to reduce their sales prices in order to reduce the oversupply that exists in much of Spain (not though in Marbella, but I will cover that in another article).

This will benefit buyers because they will pay less for new properties. It will also help sellers because the sooner the supply side problems are resolved it will be easier to sell their properties. Sellers benefit for another reason: they may sell for less, but they will also buy the next property for less so there is no real loss.

False markets and opportunities

Developers are selling for less, and in some cases giving you a free car or furniture. However, their advertised sales prices have not been reduced. Buyers will not be encouraged by free cars, they want an affordable house; and they don’t want to bargain for it, they want a fixed advertised offer they can compare with other offers in the market.

So, the housing minister is correct in demanding reductions from developers and refusing assistance.

There will be some huge opportunities in 2009 as developers seek to sell at big reductions, and re-sale prices will fall to match this. There are opportunities for those who are well informed and prepared. If you are interested in taking advantage of this, contact us to learn how you can benefit from our market analysis and experience.

Guy Marrison
Marrison Properties
www.marrisonproperties.com