Cloud falls over homes in the sun

Spanish banks are facing a growing problem as repossessions of houses along the Mediterranean coast start to clog their books and threaten to hit the already creaking economy hard - with gallery.

Vacant apartments at the El Valle golf resort in Truyols, Spain. Xabier Mikel Laburu / Bloomberg

The fate of Spain’s economy rests in a large part on thousands of empty villas on the sun-splashed Mediterranean coast.

Struggling Spanish banks control more than €100 billion (Dh524.86bn) in distressed property assets in the wake of the collapse of the country’s housing market, analysts estimate.

Most are second homes in developments built during a 10-year construction boom targeting the same European buyers and investors coveted by Dubai and other markets.

The banks are now effectively the biggest property agents in the country, with more than 100,000 repossessed homes on the market.

But selling those homes will not be easy. There are anywhere from 700,000 to 1 million empty apartments and villas in Spain, most of them in coastal areas.

“Banks will take years to clear [property] off their books,” said Arturo de Frias, an analyst with Evolution Securities. “I think the big question is what is going to happen to real estate prices.”

Home prices in the fourth-largest economy in the euro zone have fallen 17 per cent since the market peaked in 2008, according to government data. But most analysts say the plunge has been much steeper, particularly in resort areas, where prices are down as much as 50 to 60 per cent.

Prices are likely to continue to fall anywhere from 5 to 10 per cent in the next year, especially with more distressed and repossessed properties entering the market, analysts say.

To help sell their villas and apartments, banks have started offering potential buyers the type of lending terms that have not been seen since the boom era. Loans covering 100 per cent of the purchase price are available on some repossessed properties, with repayment of up to 40 years.

But the loan offers typically apply only to the bank’s own repossessed property, not homes available in the general market.

“It is a cause for uproar among developers, who claim unfair competition,” said Mark Stucklin of Spanish Property Insight, which tracks the market.

Last month the Spanish government embarked on a tour of Europe to promote Spanish homes, the first large-scale marketing effort since the sector collapsed three years ago.

But UK buyers, once the largest market for Spanish homes, remain wary. The British press has documented dozens of scandals involving illegally built homes, many of which resulted in UK buyers losing their properties or facing huge expenses.

Michael Cashman, the British European parliament minister, called the tour “inappropriate”, citing the long list of grievances.

“I would not advise any investment in Spanish property until this problem is resolved,” he said.

Once, 80 per cent of the buyers for second homes in Spain were from the UK. Now about only 10 to 20 per cent are British, with the bulk of the buyers coming from Scandinavia, Germany and Ireland, property executives say.

But despite the downturn, luxury villas and apartments are selling in markets such as Ibiza and Marbella, where there is a steady stream of international visitors and quality homes are scarce.

“Demand is picking up,” Mr Stucklin said.

Even so, that might not help the banks. Last year, the Bank of Spain said lenders were facing a €15bn shortfall, although some analysts believe it will be much higher, especially if prices continue to fall.

Many of the banks have been carrying property, rather than putting it on the market when prices are depressed. But changes in the banking laws now require them to offload at least 10 per cent of their property portfolio a year.

“That’s a big incentive to get it off their books,” Mr de Frias said.

Some analysts fear the banks will soon flood the market, adding to the glut of supply and further driving down prices. The number of repossessions is expected to double in the next year.

No one is sure how much the banks stand to lose. If prices continue to fall, losses could total more than €120bn, some analysts predict.

Government officials insist the problems can be solved. “We calculate the big banks could take impairments in line with the Irish experience and still not need any capital and still offer a tangible return,” Mr de Frias said.

Investors will have an opportunity to pronounce their own judgement on the state of Spain’s banks in July, when Bankia, a company created by the merger of seven of Spain’s savings banks, is planning to raise €4bn through an initial public offering.

The bank’s management has vowed to hold bad property loans in a separate entity to help make shares more attractive.

One analyst called the offering a “brutal stress test” for the banking industry.