Topical Spanish Property Comment Relating to EU Bank Stress Test out Today

PRLog (Press Release) - Jul 23, 2010 -
The EU Stress Tests get published today.  They assess whether banks will be able to survive future economic shocks.  A total of 27 Spanish banks have been subject to testing and several of the smaller banks are expected to fail.  Spanish regional lenders in particular are a cause for concern, having racked up heavy losses following the collapse of the Spanish property market.

Please find below topical comment from my client, Gregory Butcher, Chairman of Ocean Village Gibraltar.  Feel free to quote from any of the content and also to contact me for elaboration:

“Being based here in Gibraltar and operating daily in the property and financial markets we are aware of both the “real life” situation and the situation as shown in Spanish financial institution’s quarterly results.  The reason they differ is explained below and, by extension, why the EU bank stress tests which rely on the same bank appraisers are fundamentally flawed as a result.

I would like to make two points:

•   The first is that the benchmarking used in valuations of property assets in the appraisal of bank lending in Spain is flawed and as a result overvalues the assets and hence shows less impairment.  Spain’s financial institutions subsidise the mortgages on sales of their own repossessions to gain higher capital prices than buyers would normally pay (we can give specific examples), and appraisals take those sales as the basis of valuations across bank’s entire property book.  This overvaluation is then used by the bank appraisers and hence in the EU’s stress tests.  An anecdotal example is that the housing subsidiary of Santander was selling a house at €330,000, with subsidised mortgage, which Remax had listed for €214,000 and bear in mind most sellers accept substantial discounts from asking prices.

•   Secondly that the volume of overhang of unsold new homes (610,000), the number of repossessions expected this year (180,000, over 300% of the UK’s maximum in 1993), coupled with the homes for sale in the private market (1,100,000) represent some years supply (414,000 were sold in 2009), even if no new homes were added and yet more are still being built.  As such the overhang is greater proportionally than that in the US, which is in its third year of property price correction.  A substantial price correction is required to sell the overhang which will not have been reflected in the EU stress tests, nor will the consequential scale of the impairment.  

The UK and US have had their banking crisis, Spain faces proportionally a greater one, arguably with less resources to deal with it and yet is unable to avoid it.  It is also presumably intent on attempting its postponement.”

Ocean Village, Gibraltar, telephone 00 350 200 40048 or visit www.oceanvillage.gi

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