FITCH: SAREB PROPERTY SALES UNDERLINES SPAIN PROPERTY WEAKNESS

(The following statement was released by the Fitch rating agency)
LONDON, June 10

The start of property sales by Spain’s bad bank, SAREB, underscores our negative view on the Spanish residential property market, Fitch Ratings says. As the pace of disposals by SAREB speeds up, it will add to supply which may further depress prices.

SAREB (Sociedad de Gestion de Activos Procedentes de la Reestructuracion Bancaria S.A., which is managing assets transferred from Spain’s largest nationalised lenders) said last week it had closed sales of 550 homes in three months from late February. Taking into account the 800 more sales that SAREB said are pending and the further 2,200 preliminary offers it said have been made on properties, and the total could rise to 3,550. The figures also do not include the results of a sales campaign conducted at the recent Madrid International Real Estate Exhibition. Nevertheless, the rate of actual sales will have to be accelerated for SAREB to meet its target of selling 42,500 homes in the next five years given its 15-year deadline to liquidate the portfolio (SAREB’s portfolio includes over 55,000 homes).

This could prompt increased selling by banks, some of which have already begun lowering prices and accelerating disposals in anticipation of supply from SAREB depressing prices further. However, SAREB and the banks will want to find the right balance between speeding up the pace of asset sales and causing prices to fall, and it does not appear to be in the interest of either to trigger additional sharp property price declines by an overly aggressive sales approach. SAREB has a 15% annual return on equity target and its majority shareholders are the banks that it will compete with as a seller in the residential property market.

It is not clear how long it will take SAREB to dispose of its property portfolio. We think excess supply of property will continue while SAREB and lenders have such large portfolios to liquidate. Therefore, we do not expect Spanish house prices to trough before the end of 2014 at the earliest, although there may be earlier signs of stabilisation in regions that experienced less dramatic pre-crisis housing booms.

Overall, the imbalance between supply and demand means we think it will take several years to absorb the entire stock of properties that have to be sold by both SAREB and private lenders. Official sources suggest a stock of unsold new properties in Spain of around 700,000 units (these do not take into account the 620,000 properties built since 2004 under the cooperative system or self-construction, or unfinished developments).

2012 saw around 114,000 newly built properties sold. At that rate, it will take more than six years to clear the existing property overhang. Combined with the weak labour market and limited access to the capital markets for most of Spain’s banks, this means the bottom of the residential market is unlikely to be reached soon. In our RMBS criteria update published on 20 March, we increased the haircut for repossessed properties in light of property market dislocation. These forecasts took account of the likely impact of SAREB’s sales on the market. Last year, we increased our forecast for Spanish foreclosures by 25% and said we expected house prices to bottom out at 40% below their 2008 peak.

Contacts: Carlos Masip Director Structured Finance +34 917 025 774 Fitch Ratings España, S.A.U. Calle General Castaños, 11 28004 Madrid Juan Garcia Senior Director Structured Finance +34 917 025 774 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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