The property sector in crisis

The Prime Minister, Minister of Finance, President of Banco de España and the directors of the biggest private banks are all declaring there is no crisis in Spain, the Spanish economy is very sound, the banking system is exceptionally strong….and so on.

In reality, the property sector is in a full blown crisis, becoming more and more serious every month and, since the construction sector over the last years has become the most important sector in the country, especially in the tourist regions, and since the banks have been over financing a speculative property development, the impact of this crisis may have a very negative impact on the Spanish economy.

Warning voices

- In the second week of September, the European Commission reduced its expectation of economic growth in the European Union and admitted the financial crisis may affect the real economy.

- Due to great lending exposure the City Group has reduced the credit worthiness of several companies, among them the Spanish banks:  Popular, Banesto, Sabadell and Bankinter,

- A leading economist of Dresdner Kleinworth said Spain is in danger of a serious crisis. “House prices may fall but what is even worse is that the corporate sector’s deficit has grown so large that it needs to find financing equivalent to 10% GDP every quarter just to stand still.”

- Merril Lynch down rated the value of several Spanish property company and constructors, among them Ferrovial.

- Alan Greenspan, former President of the “Fed” has said he sees similarities in the present situation with the crisis years of 1987 and 1998.

Llanera the next victim?

Llanera, the big Valencia property company, may be the next victim of the crisis. The company, which has acquired 40 million m2 of land to build urbanisations coupled with golf courses, has debts of 304 million Euro and cannot pay 400 companies who have provided financing. They are now reducing the work force and trying to find banks willing to refinance the debts. CAM and Bancaja have been their financers up to now, but are now trying in all haste to reduce their exposure in the property sector. Llanera may be in liquidation before the end of this year.

In the Province of Alicante alone, 2,000 small building companies are in danger of collapse due to the crisis and the new laws on sub-contracting. The law obliges companies to have personnel qualifications in avoiding work related accidents. 17% fewer new companies were formed in July, compared with the same month last year.

Financial analysts calculated, with the share prices of last weeks, the main shareowners of the six main property companies have lost 8.177 million Euro; a figure similar to the defence budget of the country. The principal losers were Jose Manuel Entrecanales of Acciona, Esther Koplowitz in FCC, Florentino Perez of ACS, Villar Mir from OHL, Rafael del Pino in Ferrovial and Luis del Rivero in Sacyr.

Property scandal on Costa del Sol and elsewhere

A number of British citizens have taken the property company Grupo Mirador and the sales agency Palmera Properties to courts for fraud. The sales company, located in Benalmadena, which specialised in selling “off-plan properties”, took commissions of up to 3,500 Euro from the clients when they made their initial down payments.

Grupo Mirador, which had developments in Benalmadena, Villanueva de Rosario and Fuente de Piedra, spread over a number of small companies, have sold houses, which have later been seized as security against the companies’ debts.  They have also issued payment notes without funds, used bank guarantees with a financial company that lacks authorisation for this activity and have failed to comply with the building specifications for their projects.  Some of the companies in the group are in a ruinous financial situation, with important embargoes…..

The promoter Francisco Contreras, known as “El Pocero” upon a sentence for 4 years imprisonment by the Madrid courts, promptly appealed the decision in the Constitutional Courts. He deposited the 1.9 million Euro in guarantees demanded by the judge.

Contreras has projected a town with 13,500 dwellings in Sesena (Toledo), without guarantees for a stable water supply. The project was approved by the previous (socialist) mayor and also the regional government of Castilla – La Mancha.

In Catral (Alicante) the new PP municipal government, which succeeded the socialist mayor who had authorised the construction of 1,300 illegal houses, has presented a new general plan which includes all the illegal construction.  The Regional government has ordered the bulldozing of 34 houses, is preparing the order for demolition of another 81. Over the summer the illegal construction has continued, in spite of the previous fireworks from the Regional Government.

The PP majority in Orihuela town hall, without the obligatory certificate of water supply from the Hidrographic Conferederation of the water district Jucar, has approved a plan to build a further 2,570 houses on the coast,

What will happen in Marbella?

18,000 dwellings were built illegally during the administration of Jesus Gil and his local party, GIL. The Junta de Andalucia (socialist) and the new town council of the town (PP) are discussing how to resolve the situation. The Junta presented a General Plan in which it foresees “a revision and regularisation” of the illegal construction, plus construction of 50,000 new dwellings over 10 years and a declaration of 3.8 million m2 as green zones. However, part of the new green zones is declared as “urbanizable” in the previous general plan (meaning earmarked for construction).  If the land is expropriated, the private owners may get only 30 to 35 Euro per m2 against the 800 which they paid.

The solution may be to demand contributions from the promoters/owners of the illegally constructed dwellings. Since many of the promoting companies from the Gil Era have disappeared, this will mean private owners of the illegal dwellings will be presented with the bill. The new mayor, Angela Muñoz, recommended the people affected should present official complaints. The lawyers are looking forward to year long process.

There may be some very reasonably priced property for sale in Marbella in the future …….

Weathering the crisis

You will have seen them, they are everywhere: offers to “amalgamate” all your debts into one loan and lower your monthly repayments, at the same time “releasing some of the value of your property.”  You will have noticed them heralded in posters on telegraph poles and as ads in the foreign language press. If you phone the companies to find out what they offer, you will soon have a fast talking salesman on your door step and you may be on very slippery ice!

As the cost of living on the Spanish coasts and islands rapidly increases and mortgage interest rates rise with the Euribor, pension payments from the home countries have difficulty keeping pace with inflation and many foreigners, who feel their standard of living is slipping, are looking for ways to weather the crisis.

“Amalgamating the debts”

A couple may have total pension payments of 1,800 Euro per month. They bought their dream house in Spain 5 years ago in the name of their son, still working, financed over 20 years with a floating interest rate. In the beginning they had to pay 900 Euro monthly in repayment of capital and interest, but today it has increased to 1,200 Euro: They have 600 Euro per month left to live on.

Then the representative from one of the credit companies comes. He offers to replace the mortgage over 20 years (15 years remaining) for one over 30 years from today, with monthly payments of 800 Euro, if the son guarantees the payments. Our couple has 300 Euro more at their disposal each month.

Their debts have of course not diminished. On the contrary, they may have to pay up to 12% commission and costs on the total capital to have the monthly payments reduced. They have also placed their son in a difficult position, he will for a lifetime (30 years is one generation) have the possibility hanging over his head that he will have to take over the payments. Who knows his situation in 10 or 20 years, he may have become redundant, have contracted a serious illness or have himself become a pensioner with a limited pension and no interest in the house in Spain.

“Releasing the value of the property”

Then our couple may be considering the offer from the salesman of another financial company “to release the value of the property.”  There are different schemes for this but essentially you get a loan on the value of your property. The money can be paid to you in a lump sum, or in monthly instalments. You continue to live in your home. When you die, the company takes over the property.

There are several questions to consider and a danger to be aware of. Let us start with the questions:

-         Will the model presented to you allow you to sell your home and move to another, smaller dwelling, one closer to your family, or into a care centre?

-         What is your age? If you have passed 70 maybe it would be better to get the payment in a lump sum, instead of monthly payments.

-         Do you have any heirs?  If you sign for such an arrangement they may be left with nothing.

The danger is the value of the property. At the time of signing the agreement, a value for the property will be fixed. In some agreements it is stipulated that if the value falls below what is set at the beginning, you will have to compensate them or they have the right to sell the property.

As we all know, property values in Spain are falling at the moment (any real estate agent will tell you so, if you ask him to sell your home). If you entered into an agreement to “release the value of your property” a couple of years ago, with a clause like the one we describe, you may expect a visit from the financial company.

Please read once more the notice by Gwilym Rhys Jones on Costa del Sol we included in the Weekly Report of last week:

“Are you yet hearing rumblings that the disaster of equity release is about to be unleashed upon us?

It has been ruthlessly sold here to the old folks all over the Costas and the islands.

We warned them but they still did it.

Now the property values have fallen and the pathetic investments into which the funds went to pay the interest have gone south.

Rothschild and their ilk are now calling on the old folks to stump up serious dinero or they foreclose.

This disaster happened in the UK in the 60s & 70s.”

Financial Times

“Second homes face price fall”

By Jim Pickard in London and Mark Mulligan in Madrid

Published: September 28 2007 18:41 | Last updated: September 28 2007 18:41

The price of second homes in the Mediterranean and eastern Europe could fall as a result of the credit crisis, a leading property expert has warned.
Michael Ball, a professor of property at Reading ¬University, England, and an adviser to the UK government, said holiday homes in many parts of Europe were exposed to a correction.

Not only had prices risen fast amid speculative interest and the easy availability of credit, but the supply of new flats had been increasing at a prolific rate.
Prof Ball pinpointed the Mediterranean and central and eastern Europe as being particularly “vulnerable” to falling prices.
“There are a variety of reasons in that in both of those areas, credit has been used and people have been very optimistic about long term values,” he told an audience of property professionals on Thursday night.
 
“There has been a boom, the market has been driven by foreign investors and now that is beginning to turn.”
The professor cited, as an example, Estonia, where house prices had dropped by an estimated 10 per cent in the past 12 months. “That will probably trickle through to other countries,” he said.

Savills, the estate agency, says the value of British-owned homes overseas have risen from £7bn in 1994 to £52bn ($106bn, €75bn) today through new purchases and rising prices.

The most common motive of buyers is to make a profit – rather than to have somewhere to go on holiday – according to a survey by the company. This speculation might have made some markets even more precarious. Some buyers might have overestimated the potential rental returns that they can get through letting these properties.

Prof Ball said many such markets were “risky” because there was no history of what fundamental values should be.
Ian Marcus, head of European real estate at Credit Suisse, said he believed there was “a large over-supply” of holiday homes in many European resorts.
The warnings come amid widespread price falls in the second home markets of Florida with some resorts seeing double-digit drops in the past year. The number of home sales in Florida dropped 43 per cent between the first and second quarter.

In Spain, demand for second homes on the Mediterranean coast has been softening for two years, according to estate agents. Many have reported a virtual standstill since May after a series of corruption scandals and a collapse in property¬related shares.

At least one mid-sized developer – Llanera – faces bankruptcy. One central bank official in Madrid said: “There is growing evidence that smaller real estate companies and house-builders who launched projects late in the cycle may have problems.”

Charles Svoboda, executive vice-president of the association “Abusos Urbanisticos NO”, has added the following comment to this article:

“Prices are falling in some areas, but because many properties are second or holiday homes, owners are reluctant to drop asking prices, unless they are anxious to sell. It was reported that many small constructors and developers have closed down in the past few months in the Valencia region, about 20% of the 13, 000 plus. Many of these small enterprises are in fact, front companies for the larger ones- they hire the illegal workers, enter into the shady deals, etc. and when things go wrong they simply fold their tents, declare bankruptcy and disappear. While the number of employees in major enterprises has recently shown a small increase, these numbers do not account for the thousands of contract , temporary or illegal workers who have been let go in recent months. To avoid paying for the August vacation or being forced to hire on a permanent basis, many thousands of construction workers were dropped at the beginning of the summer holiday period. There appears to be no way of knowing how many have been hired again, but the downturn in construction suggests that very few have work-and most have no social security net to fall back upon.”