By Carol Tallon
Originally published in Th Sunday Business Post (Ireland) and Costa Almeria News (Spain)
Last week, president of Sareb, Spain’s so-called ‘bad bank’, Belen Romana had her first appearance before the State Senate. Set up in 2012, government-owned Sareb is essentially a State management agency – comparable to Nama here in Ireland – tasked with managing the real estate assets of nine financial institutions across Spain; Bankia, Catalunya Banc, Novagalicia Bank, Banco Gallego, Banco de Valencia, Ceiss, Banco Mare Nosrum, Liberbank and Caja3.
The agency’s president spoke at length of the procedural aspects of its creation – an essential pillar of excellence, integrity and transparency – and the importance of its mission. She discussed challenges the agency faced to date, namely; figuring out what to buy and how much to pay.
How it works:
In essence, both residential and commercial real estate assets from the nine financial institutions listed above were transferred to Sareb. There were two categories of transferred assets, firstly, repossessed or distressed properties with a net book value of €100,000 to €250,000 and secondly, those with a net book value in excess of €250,000. Net book values were determined by the Bank of Spain, based on stress tests carried out on each of the institutions’ balance sheets, and a discount was then applied. The level of discounting was dependant upon the results of the stress tests. Additional discounts of between 7 and 13 per cent in respect of operating costs and essentially risk was then applied.
Following due diligence, Sareb found little space between the price paid and current market values, therefore the body is now adopting a strategic plan of value creation, which means simply that they will ‘work’ the properties to increase the real value and potential sales price in excess of the book value. An example of this might be to attract commercial tenants into key commercial properties, thereby increasing the market value of the properties in question. Other initiatives include the completion of unfinished housing developments. So far this year, the agency has completed 33 developments, effectively bringing 680 new housing units to the market.
The role of Sareb is twofold and this is manifested in two distinct contracts with the State. One contract is to effectively manage properties for a period of two years and the second contract is to sell for 15 years. As the management contract is due to expire in December 2015, Sareb has elected to outsourced this management, particular as they do not have the expertise in-house.
Similar to Nama, another aspect of Sareb’s role is to work with their indebted developers. As part of this process, 5700 proposals or business plans were received from developers in the first 6 months of the year and half of these have resulted in agreements to work together to sell the properties. In total, over 13,000 business plans have been received and considered over the 18 month life of the agency.
Looking at the numbers:
Sareb acquired a portfolio ‘worth’ €50,700 million, comprised of 100,000 properties and more than 90,000 developer loans linked to a further 350,000 properties. While the portfolio is distributed throughout Spain, most of the properties are in Madrid, Catalunya and Valencia. In exchange for this portfolio, Sareb issued an equal amount of debt to the state by way of bonds. This enabled the nine financial institutions to effectively ‘repair’ their balance sheets, access immediate liquidity and get back to the business of lending.
The agency was, in effect, born or created with €5.7 billion of debt, this caused a leverage problem as it represented 92 per cent of its balance sheet and interest was to be paid on that. Due to the high financial risk faced, Sareb decided in 2013 to reduce that level of debt to 80 per cent in order to protect themselves from possible interest rate increases over the 15 years of its life . By way of example, a single point increase of Euribor would mean a increase of €2.2 billion over, say, a 9 year period. Due to its commitment to repay interest from the outset, Sareb was forced to start selling assets straight away. In 2013, its first full year of activity, Sareb generated revenues totalling €3.8 billion, €3.2 billion of which was allocated against debt repayment and went back into the state coffers. The bonds repaid to date total €3.6 billion, which is 7 per cent of the total issued debt. and a further €1.7 billion in interest has been repaid.
To date, Sareb has sold 10,900 properties. This is the equivalent to selling 40 units per day – up from an average figure of 25 units per day in 2013 – and this volume is likely to increase sharply as more and more newly finished developments become available for sale.
In her address, Ms Romana responded to criticism that Sareb has been slow to engage with social housing agencies and went on to outline their plan, which commits the agency to assigning, albeit a temporary assignment, of 2,000 homes to the various local authorities nationwide for use in their existing housing programs. Here and at many points throughout her address, the agency’s president referred to their commitment to operate under principles of integrity, transparency, and civil engagement. During her Senate address, and again in response to questioning, the president of the Spanish agency made direct comparisons with Nama and was self-congratulatory on having achieved relatively tighter controls and procedures to prevent conflicts of interest arising. Ms. Romana also tried to shake off the ‘bad bank’ tag by declaring in her conclusion “We are neither a bank, nor are we bad”. To back this up, she confirmed that Sareb properties “always sell at market prices”. This last statement is questionable and considered improbable by local market commentators and by investors, both domestic and overseas, who are confident of a bargain from the agency.