Wall Street Mega-Landlords Piled into Spain’s Rental Property Boom, and Now it Hits a Wall?

Blackstone Group, Cerberus Capital and others face a little problem.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Demand for rental housing in Spain may have hit a wall, so to speak, while supply remains more or less unchanged, according to a new study by the real estate agency Fotocasa: Last year, 14% of Spanish adults had rented or were looking to rent a new property; this year, this figure has slumped to 9%.

The most notable reduction occurred in the youngest age range (18-24) where the number of people who had rented a new property or were looking to rent one plunged from 29% to 15% in the space of just one year. In the 25-34 year-old demographic the demand for rental property fell from 28% to 19%.

There doesn’t appear to have been a concurrent shift in demand to the ownership market. Demand for buying properties is more or less where it was last year, says the study. “Young workers are opting to stay at their parents’ home or to live in the flat belonging to their partners,” said Beatriz Toribio, Fotocasa’s director of research, during the report’s presentation.

The main reason is the unprecedented surge of rents in recent years. In 2017, rents rose by an average of 9%, although in some large cities, rents jumped at an even faster pace. “Over the past four years the price of rents in Madrid and Barcelona, Spain’s two biggest cities, rose by 30% and 40%, respectively,” Toribio said.

Now, both cities’ latest rental booms appear to have run their course, or are on the verge of doing so. Whither they go, the rest will follow. That could be unwelcome news for the Wall Street mega-landlords that have piled into Spain’s rental housing market in the last year. In 2017 alone global private equity funds purchased some €60 billion of real estate assets from Spanish banks — almost three times the total outlay in 2016. Many of the assets were purchased at a heavily subsidised discount.

Now, according to the Spanish Savings Banks Foundation (FUNCAS), those same funds are beginning to worry that Spain’s real estate boom may be running out of steam, given that many Spanish families, scratching a living on poorly paid, zero-security jobs, are incapable of paying today’s high prices. Many of those that can’t pay have already been evicted from the fund-owned apartments.

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There’s also concern that flooding the residential real estate market with assets of dubious quality could end up depressing the price of property. And as strange it may sound, some of the world’s biggest private equity funds could be the ones left holding the bag.

At the tail end of last year Blackstone, the largest owner of property on the planet, gobbled up some €30 billion of real estate assets that had belonged to the now-defunct (and Santander-owned) Banco Popular. Cerberus Capital Management, another Wall Street titan, splashed out €13 billion on impaired assets belonging to Spain’s second largest lender, BBVA.

These two deals were among the biggest bulk purchases of dodgy real estate assets in Spanish history and they both took place in the short space of just a few months. According to the FUNCAS study, 22.8% of all property deals in Spain in 2017 involved real estate assets auctioned off by the banks.

Spanish banks still sit on a large pile of defaulted loans backed by real estate, and they hope that 2018 will be another bumper year for sales of these non-performing loans (NPLs) and the affiliated properties. Banco Sabadell plans to offload €2 billion of them a year until 2020. Partly state-owned Bankia hopes to sell €3 billion of them each year for the next three years. Santander has set a target of €6 billion just for 2018. Much will depend on investor appetite, which appears to be waning

One of the main reasons for this surge in NPL sales is the recent introduction of new accounting rules (IFRS 9) that force banks to provision not only for loans that had gone sour but also loans that are likely to go sour some time in the future. But the law grants lenders a five-year grace period before having to actually adjust their capital ratios to take into account the provisioned debt. That means the banks can take those losses now, but they don’t have to have, or raise, the capital to cover them for five years — until 2023.

The problem the banks have now is that the more properties they offload on to the market, the more pressure they will put on prices. And if Spain’s rental property bubble has indeed begun to hit resistance, the biggest buyers of those properties, global private equity firms, are losing their appetite for buying more.

And that is where the banks’ latest cunning plan comes in: to resurrect the 100% mortgage (no down payment), a high-risk loan instrument that notoriously helped fuel Spain’s madcap property boom and subsequent bust and mega-losses for the banks that they’re still trying to digest (see above). BBVA was the first to bring it back. Other banks have since followed suit in a mad rush to keep the market alive. And just as before, not a whimper of concern has been heard from the bank regulators. By Don Quijones.


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