February 2012

BANKING SYSTEM REFORM IN SPAIN: IMPACT ON REAL ESTATE

 1. BACKGROUND

  • As of 30 June 2011, Spanish banks owned distressed real estate assets (linked to developer loans) amounting to around 88 billion euros (land positions and ongoing developments) and 87 billion euros (completed developments and housing units).
  • The Spanish Government believes that the uncertainty concerning the valuation of these assets makes it harder for Spanish banks to access the wholesale financial markets and, thus, it is key to ensuring that the banks’ asset valuations are in line with market values.

 2. NEW REQUIREMENTS: ADDITIONAL 50 BILLION EUROS WRITE-DOWN

  • The Spanish Government has approved Royal Decree-law 2/2012 on the Banking sector reform (published on 4 February 2012), which imposes on Spanish banks the obligation to make an additional write-down for a total 50 billion euros.
  • This obligation affects loans and assets (acquired by way of mortgage foreclosure or as payment of loans) related to real estate development.
  • Distressed assets: a specific provision is established for an amount close to 25 billion euros; and a 20% (land positions) and 15% (ongoing developments) capital buffer is established (on account of non-distributed profit, capital increase or conversion of hybrid products), for an estimated amount of around 15 billion euros.
  • Non-distressed assets: a general 7% provision, estimated at around 10 billion euros, is established.
  • The deadline to implement those measures is 31 December 2012. Banks involved in mergers since 1 September 2011 will benefit from a 12-month extension.
  • Coverage to exposure: upon implementing those measures, the banks’ coverage to exposure for their distressed assets will increase from 31% to 80% (land positions), from 27% to 65% (ongoing developments), and from 25% to 35% (completed developments and housing units).
  • Equity impairment situations: losses derived from the impairment of tangible assets, real estate investments and inventories will be disregarded during 2012 for the purposes of calculating the losses incurred by a Spanish company to determine whether or not it is in a capital impairment situation for corporate purposes, as the effects of Royal Decree-law 10/2008 of 12 December, have been extended to 2012.

 3. IMPACT ON REAL ESTATE

  • These measures will force banks to make a substantial write-down of 50 billion euros in record time (by 31 December 2012), in addition to that made between 2008 and June 2011 (of around 66 billion euros).
  • From a real estate perspective, these measures are a significant incentive for banks to place their real estate assets in the market.
  • In addition, banks involved in mergers must disinvest in real estate assets within three years following the merger, according to a disinvestment plan to be included in the relevant merger authorisation application (to be filed by 31 May 2012).

6 February 2012

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The information contained in this Newsletter is of a general nature and does not constitute legal advice