LONDON Nov 8 A wave of Spanish property developers are set to go bust as the country's "bad bank" starts a real estate sell-off that forces lenders to face up to the severity of the country's property crash.
Thin trading in real estate since 2008 has masked the extent of the property crash, meaning lenders have been able to refinance loans to keep developers afloat and give their own balance sheets a relatively healthy sheen.
But reality will hit when the bad bank, which is about to absorb toxic loans and related property to clean up the banking system, starts to sell its haul and finds that investors show little interest, or demand steeper discounts than those on offer, real estate experts said.
A poor response would trigger a wider fall in property values and sharply reduce the value of the assets on developers' already fragile balance sheets.
"The formation of the bad bank can only help banks and only harm developers," said Humphrey White, head of investment at property consultant Knight Frank in Spain. "Many have been propped up by false valuations, and this may be a much-needed price correction rather than a slow death."
Further casualties would follow last month's announcement by Reyal Urbis, one of the country's biggest developers, that it was in talks with lenders over 4 billion euros ($5.1 billion) of debt and may need to seek creditor protection.
It followed a move by Spanish investors in French property company Gecina to file for bankruptcy after a bank refused to refinance a 1.6 billion euro loan, one of the biggest bankruptcy actions in Spanish history.
During the third quarter, 1,466 companies went into administration in Spain, up 22 percent from the same period a year ago, official data shows. Thirty percent of the companies that went into administration were in the construction or real estate sector.
More than half of all Spanish developers could be in danger, given how much land and unfinished projects many of them are sitting on, said Rafael Powley, a Madrid-based director of strategic consulting at property consultant Jones Lang LaSalle.
"Banks have refinanced developers for four or five years, but there will be little incentive now to keep them alive. At some point there has to be an end to this story."
Spain is setting up the bad bank, known by the acronym SAREB, to take up to 90 billion euros of toxic real estate assets out of the banking system and sell them at deep discounts over 15 years. It is due to start operating by the end of the month.
Together with Ireland, Spain has suffered Europe's most severe property crash, leaving its banks with 184 billion euros of bad real estate debt and half-built developments around the country.
Though banks have already written off billions of euros of bad debt, the crash has put Spain centre-stage in the euro zone debt crisis as investors believe a high budget deficit, soaring state debts, and deepening economic contraction will force Madrid to seek more external help.
SAREB will struggle to find buyers for about two-thirds of the assets because they relate to empty land or unfinished developments, figures compiled for Reuters by property consultants CBRE and Jones Lang LaSalle show.
Investing in such sites means spending money to start, demolish or complete schemes without any guarantee of selling them or finding tenants. With Spain in recession and a glut of property built up during the boom years, few have the stomach for such investment.
Prices for commercial and residential Spanish property have fallen by between 30 and 80 percent since the bubble burst, depending on type and location, but could fall by another 10 percent, while most land will have no value in the short term, said Powley.
Some of the world's largest real estate funds including Deutsche Bank's RREEF property arm have previously expressed an interest in buying Spanish property but said prices still had some way to fall.
Another factor that will drive developers to the wall is that many of their loans were syndicated during the refinancing wave, increasing the likelihood that slices of debt will sit within the bad bank, Powley said.
"The bad bank won't have the resources to refinance these loans and will presumably deal with them more aggressively," he said. "They will have to repossess the assets, and the ripple effect will go way beyond the bad bank."
Talks between developers and their banks about getting loans to build out schemes will stop if the property or debt is transferred into the bad bank, said Mikel Echavarren at real estate consultant Irea.
"They will be negotiating with people who have no interest in tarting up their balance sheets."