The Party’s Over- Let the Bargaining Begin

Monday, August 23, 2010

Dear Reader,

On Friday, I told you about the shambles that is the Irish real estate market. Ireland isn’t alone, though. There is a similar story playing out in Spain. But in Spain, buyers can do fire sale deals direct with the banks. Deals where you can buy quality units for 50 cents on the euro or less.

Let me explain…

After a decade of runaway demand and floods of cheap money in Spain, Spanish real estate developers took their eye off the ball. They took on more debt and risk than they should have. They overpaid for land. They over built.

It was quite the party on Spain’s costas. Today there is the mother of all hangovers. Unemployment in Spain is topping 20%. There are few buyers. Some Germans are still buying second homes here… but the domestic market, and British and Irish buyers, have all but disappeared. The market has stalled. There isn’t enough space to house redundant cranes. They are being scrapped, or auctioned off and shipped to China. Banks control 50% of the real estate that is on the market. A sense of fear pervades. This is classic crisis investing territory. We could profit…or just buy our Spanish dream home for cents on the euro.

Crisis investing means buying when everyone else wants or needs out. At an aggregate level, markets overreact and overshoot both on the up and downside. Assets become mispriced.

In Spain, banks lent to developers to build. Developers built in anticipation that there would be no problem selling their units. They thought the good days could never end. Then everything stopped. Credit and financial crises combined with major oversupply. Sales dried up.

Today, banks need to purge their loan books. Spanish real estate agents aren’t happy campers. Here’s the way things play out. The few buyers that are around find their property through a real estate agent. Then, they look for finance from a Spanish bank. The bank discourages the buyer by offering a paltry loan…maybe 40-50% loan to value. Then, out comes the good old bait and switch…the bank offers the buyer a property that’s on their own books for maybe 50 cents on the euro—and make the buyer a great loan offer.

Many real estate agents have all but given up selling to anything but cash buyers. Outside of poaching buyers from real estate agents, the banks aren’t at all savvy at selling the huge amounts of real estate they now own. The result is a market in disarray. The result is that amazing deals can be done direct from banks for the sophisticated buyer who knows how to deal with the banks.

Spain is as desirable as a place to vacation or retire as it was three years ago. Last year, Spain greeted just under 60 million foreign tourists (only France fared better). Beach, golf, skiing and culture can all be on your doorstep. The only difference to three years ago is the price tag. You can find your dream retirement or second home for a fraction of what you would have paid in 2007. And, your dollars (US or Canadian) now go much further thanks to exchange rate movements in your favor.

Exciting times. We need to keep our heads, and focus on quality, however. Look to the most desirable areas…areas with intrinsic value. Remember my three golden rules.
-Buy quality (location, construction, amenities and fit-out)
-Don’t take on any construction risk…buy completed units
-Don’t take on any project risk…make sure the condominium is functioning

Half-built projects dot the coast. Forget it. Look for high quality, completed units where the condominium is functioning. I’m focused on areas like Granada, and high-end destinations on the Costa del Sol. Granada has intrinsic value and hasn’t experienced over-building to the same extent as some of the costas. The most desirable parts of Marbella and Malaga could be the first to recover once some demand recovers.

If you have an interest in Spain, you should pay attention to the crisis opportunities in the areas I’ve mentioned. You can buy quality assets here for cents on the euro. Now is the time to start looking.

Ronan McMahon