A question of values in Spain

Following the lead of the US and Ireland, the Spanish government is about to pass a law that will regulate the transfer of toxic real estate assets from Spanish financial entities to a so-called ‘bad bank’, which is to be named Sareb.

So will Sareb solve all the problems in the sector? Probably not, but it is surely an important step forward.

It is now blatantly obvious that the Spanish financial sector was not in as good a shape as the Spanish authorities and the sector itself believed until relatively recently. But it is probably not in as bad a state as many may now believe.

Sareb may represent the last step in the search for a solution for the troubles of the Spanish financial sector, but it will definitely not be a solution to problems in the real estate sector.

It is also true that what should have been done some three or four years ago has, in fact, been done in a few months during 2012. Three new laws were approved in February, May and August, and the fourth will be the one that creates Sareb.

While many things surrounding Sareb remain unclear, what is known is that the Spanish banks are trying to get rid of their real estate portfolios by offering discounts of up to 80 per cent.

To avoid the evil of public debt, Sareb has to be at least 50 per cent owned by private entities. Unfortunately, these entities are reluctant to take a shareholding of the bad bank, regardless of the fact that Sareb will have to make profits.

There are several reasons for this reluctance, among them the fact that the price at which the assets being transferred to Sareb will be valued is still unknown.

The level of the discount to be applied is also unclear. The problem is to find the appropriate balance in this regard so investors can decide to back Sareb without simultaneously damaging the weak Spanish real estate sector.

Spanish banks also fear that, despite not wanting to join Sareb, they may end up being forced to.

Some argue that the bad bank is a good idea that has arrived too late because the assets have already suffered too much. Others say - and probably pray - that the price of those assets will be so low that it will encourage credit to flow back into the market. Yet others fear a repeat of the Irish situation whereby, despite the 50 per cent discount applied to the assets transferred to the Irish bad bank, it was found that the value of the portfolio had decreased by a further 25 per cent two years later.

It is far from clear that the valuation being given to the assets is the right one due to the high degree of uncertainty that exists in the market - and in any case, it will probably be difficult to sell the portfolio after two years anyway .

Demand for these assets is expected from hedge funds, venture capital entities and insurance companies, but only when prices hit the right discounts.