National Post (National Edition)
Spanish banks to cut ties with builders
National jobless rate could spike to over 27%
Spain’s zombie developers are finally about to die.
Spanish banks are pulling the plug on thousands of builders kept alive during the past five years even as they built almost nothing, said Mikel Echavarren, chief executive of Irea, a Madrid-based consulting firm that has advised on ¤22-billion (US$28.5-billion) of refinancing. The banks, forced by the government last year to set aside provisions for the developers, have no incentive to keep funding them.
“Banks have taken the hit, so extend and pretend is over,” said Mr. Echavarren. “There’s no motivation to refinance companies that aren’t viable, have no liquidity or possibility of future earnings so we’ll see a tsunami of developer bankruptcies in the next two years.”
The final collapse of an industry that accounted for as much as 18% of Spain’s growth amid the country’s decadelong real estate boom will add to unemployment, already at a record 26%, depress consumer spending needed to turn around the economy and push down the value of residential real estate that’s already dropped more than 30% since 2007, said Raj Badiani, an economist at IHS Global Insight in London.
While job losses in the con-
No motivation to refinance companies that aren’t viable
struction industry continued in recent quarters, “they’ve been less severe than expected, given the scale of the real estate slump,” said Mr. Badiani. “With banks cutting financial life support to many developers living on borrowed time, we can expect an accelerated downward adjustment in employment levels.” Mr. Badiani estimates the jobless rate could climb to more than 27% this year and house prices will fall at least 50% from the peak by 2015.
More than half of the country’s 67,000 developers can be categorized as “zombies,” with liabilities that exceed their assets and only enough income to repay the interest on their loans, according to R.R. de Acuna & Asociados, a real-estate consulting firm.
Reyal Urbis sought protection from creditors last month in the second-largest filing of its type ever in Spain after accumulating ¤3.6-billion of debt. Banks, including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, lost interest in refinancing the company, which lost ¤910-million in 2012.
Renta Corporacion SA sought creditor protection yesterday and will work with Sareb, the Spanish bad bank, following the decision. The Barcelona-based developer had net debt of about ¤160-million at the end of last year.
Spanish lenders, ordered last year to set aside provisions of ¤84-billion to cover anticipated real estate losses, have no incentive to keep unviable builders afloat after they’ve accounted for losses from ¤280billion of their loans, according to Irea.
Only developers with sufficient rental income from commercial property to repay debt or those still building homes in areas where they can be sold at a profit will survive, said Mr. Echavarren, who estimates that between 5% and 10% of Spanish developers fall into those categories.
Since 2008, more than 19,000 real estate and construction companies, or 14% of the total, have gone out of business, according to Iberinform, a unit of insurer Credito y Caucion.
Spain built 675,000 homes a year from 1997 to 2006, according to a report by a unit of Spanish savings bank Cajamar. That’s more than France, Germany and the U.K. combined. The frenzy resulted in a surplus of about 2 million empty homes that will take between seven and 13 years to absorb, according to Madrid-based property research firm R.R. de Acuna & Asociados.
The Development Ministry estimates there are around 700,000 new unsold homes in Spain and more than half of those are in coastal areas. The total number of empty homes in Spain is 3 million, according to a spokeswoman for the government who asked not to be identified by name.
At the peak of the real estate boom, Spain started work on 800,000 homes, and developers bought up enough land to develop five to 10 years of stock, according to Echavarren.
“Considering the range, there could be enough land for a maximum of 8 million homes and a minimum of 4 million,” Mr. Echavarren said, “Real demand is about 125,000 units per annum, so there’s a land bank to last for at least the next 30 years.”
A study published in November by the National Statistics Institute estimates Spain’s population will fall this year for the first time since 1981 as unemployed immigrants return home and Spaniards in search of work emigrate. The population will drop to 41.5 million in 2052 from 46.2 million now, according to the study.
“Mortgage lending and demand for homes will never recover to the highs we saw,” said Juan Villen, head of mortgages for Idealista.com, Spain’s largest property website. “A few years ago an influx of immigrants and buoyant employment among Spaniards fuelled home sales, now everyone is leaving Spain and those left are unemployed or scared that they might become so.”