19 March 2012 | By Ruth Green
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With real estate and energy in the doldrums, legislative reform is keeping lawyers busy as the government attempts to cure Spain’s recession hangover
Spain has experienced some of the worst of the global financial crisis and the eurozone malaise, with Moody’s recently downgrading its credit rating to A3. As the country grapples to climb its way out of recession, the government is trying to rein in the economy’s problems with legislative reforms, providing plenty of work for lawyers.
The onslaught ensuing from the economic crisis took many by surprise, none more so than Spain’s real estate sector, which had enjoyed a veritable boom over the previous decade. In 2008 the bubble burst and with it Spain entered into the mother of all real estate hangovers, or resaca, as it is known in Spanish.
At the start of the millennium, the Bank of Spain became concerned about strong credit growth and Spanish banks increasing their provisions for bad loans. Many are now nursing hundreds of billions of euros of unsellable land, property and unrecoverable loans on their balance sheets that are refusing to go away.
Alfonso Fernández-Puebla, a partner at Gómez-Acebo & Pombo, notes: “The past four years have been very difficult for the Spanish real estate market. The whole Spanish economy and the real estate market itself is conditioned by financial stability. As a result, there have been some massive issues affecting the real estate sector and the big question is, who’s going to acquire these properties?”
On 4 February 2012, the Spanish government enforced a new Royal Decree to overhaul its banking sector. The decree will force Spanish banks to clean up their balance sheets by making them raise an additional e50bn (£41.7bn) by the end of 2012 to cover their exposure to toxic real estate loans and assets.
As Uría Menéndez partner Diego Armero points out, although both international and national banks have been forced to sell off their portfolios of mortgages in Spain, they have been affected in different ways.
“The situation is different for international and national banks,” says Armero.
“Whereas national banks such as Santander have a much more residential-heavy portfolio, international banks are much more exposed to the commercial property market.”
As a result, many Spanish banks may still be hard pushed to try to sell off their portfolios.
“This is resulting in a lot of work for law firms and will surely lead to much more work,” says Felipe Yannone, a partner at Garrigues. “The banks have been set the deadline for the end of the calendar year, but a number of them have already been asked to merge and so there may be some mergers even before then.”
Spain’s Minister of Economy Luis de Guindos has told banks that if they merge they will get an extra year to make additional provisions. The move would also entitle them to ask for financial assistance from Spain’s bank rescue fund Fondo de Reestructuración Ordenada Bancaria.
Madrid-based Salans partner Jesús Varela highlights how much the crisis has affected real estate work for lawyers over the past four years.
“The market has changed dramatically, with the volume of real estate transactions dropping to less than half it was before. We’ve been lucky so far, but the traditional market is going to reduce,” he says.
Certainly, although figures compiled by the Bank of Spain reveal that foreign investment in the Spanish property market rose by 32.8 per cent in the first half of 2011, it is believed that Spain lost around e38.6bn of foreign investment in this market throughout the course of last year.
Elsewhere in the market, the energy sector has also received a hit from new government regulation. On 27 January 2012, the Spanish government issued a decree that announced a moratorium on all feed-in tariffs for the renewable electricity sector.
Spain’s feed-in tariff system differs to many other countries in that it is part-funded via the taxpayer as part of the governmental budget.
The government has said that the budget has now been exhausted and that it will no longer able to subsidise these projects as it has done previously. As a result, producers of renewable electricity in the solar, wind and biomass sectors are no longer eligible for the tariffs.
The changes come after a controversial decree issued by the last Spanish government in December 2010 imposed cuts on feed-in tariffs for both new and existing solar photovoltaic projects. By contrast, the new government has announced that the latest decree on feed-in tariffs will not affect existing projects, or projects where the feed-in tariff may have already been approved.
As Hermenegilzo Altozano, energy and utilities head at Bird & Bird in Madrid, notes, all of these regulatory changes have already had a huge impact on Spain’s energy market.
“The tariff deficit has been very elevated so the government is trying to reduce this through regulation and this is having an enormous effect on the solar sector,” Altozano reveals. “There are also huge problems affecting the wider renewable energy market in Spain. Financing for many projects is being revised and greenfield projects have been completely suspended.”
Garrigues partner Marcos Botella Serrano says clients are already finding it tough to cope with the changes.
“For our solar electricity clients it’s an enormous problem because this regulated tariff is making it much more difficult to develop these projects,” he says. “Wind is still at a much more basic stage, so our clients in this area haven’t been quite so affected.”
Spain is not alone in imposing cuts in the energy sector. France, Italy and Germany have also been forced to reduce their feed-in tariffs. Nonetheless, the cuts are creating problems for Spain, which aims to have 20 per cent renewable power by 2020, according to the National Renewable Energy Plan. A recent report by the Asociación de Productores de Energías Renovables revealed that Spain already fell short of its renewable power target in 2010, reaching 11.3 per cent instead of 12.1 per cent.
There are some positives, though, notes Altozano, who highlights a number of local energy companies that are casting their gaze further afield with considerable success.
“We’re starting to see more Spanish energy companies investing abroad, including solar energy projects in France and Italy, as well as in Asia, Latin America, the Middle East and South Africa,” he says.
Open for business
According to José Manuel Soria, Spain’s Minister of Industry, Energy and Tourism, 2011 was a record year for tourism, with the country receiving 56.9m visitors, an 8.1 per cent rise on the the previous year.
However, in spite of the booming tourism trade, there are still concerns over waning confidence from foreign investors as the unemployment rate continues to escalate, reaching a 17-year high of 22.85 per cent in the third quarter of 2011.
Under growing pressure to perform in the difficult climate, a number of Spanish companies are now looking for alternative ways to expand their businesses. According to Gómez-Acebo & Pombo partner Sergio Antón, the online era has finally reached Spain.
“When it comes to the internet, there’s tremendous opportunity for Spain, which is a little behind the rest of Europe. Businesses are slowly realising that there’s a whole new world to discover online,” he says.
As Salans partner Alejandro Alonso notes, the prospect of launching a business online is broadening the horizon for Spanish entrepreneurs.
“It’s clear now that if a shop or business opens on the street and is unsuccessful, it will close immediately,” he says. “A lot of Spanish companies are therefore trying to open their doors online as the investment is so much less and the number of consumers can be so much more.”
Alonso adds that a number of organisations have been set up to help promote Spanish businesses abroad, including La Asociación Española del Lujo (Luxury Spain), which helps promote Spanish luxury brands in the international market.
If ventures such as this succeed in helping Spain win back confidence from foreign investors, then there may be more than just tourism for the government to smile about in 2012.
Where to eat in Madrid
For your first night in Madrid, try dinner at Sacha. This bistro-like restaurant has the original feel of when it was founded 40 years ago. The food is top-quality, as are the wines. Make sure to plan ahead though, as it is usually fully booked, particularly in the summer, since the outdoor terrace is one of the best in town.
Another good choice is La Tasquita de Enfrente. Small and charming, it has excellent service and staff, but no menus. Selections are verbally announced without prices.
99 Sushi Bar is probably the best Japanese restaurant in town. It is not a big place, but has a 10-guest private lounge. The food is a delight. Highly recommended for foodies.
Finally, if you come to Madrid in the autumn or winter, Malacatin is the place for a typical long Spanish lunch. It is a great tavern where you can enjoy a Cocido Madrileño (hot soup as a starter, then an overwhelming main dish that is a mix of chickpeas, cabbage, black pudding, chorizo, pig’s feet, veal, chicken, bacon and potatoes). Book in advance.
Alfonso Fernández-Puebla, Gómez-Acebo & Pombo
Hogan Lovells advised Spanish real estate group Metrovacesa on its sale of Metropark Aparcamientos to Interparking, a member of the Fortis Group, for e99.7m (£83.1m)
Freshfields Bruckhaus Deringer advised Metrovacesa on the e5bn restructuring of the Spanish real estate group. Clifford Chance advised the lending syndicate made up of around 40 banks, while Uría Menéndez advised the syndicate of banks that control Metrovacesa.
Garrigues acted as the key adviser to Barcelona-based construction company Fomento de Construcciones y Contratas (FCC) on its e400m sale of the Torre Picasso skyscraper to Pontegadea Inmobiliaria. Garrigues also advised on the sale of Grupo FCC’s corporate headquarters for e60m.
Linklaters and Clifford Chance advised UAE state-owned IPIC on the e7.5bn acquisition of a 48.8 per cent stake in Spanish oil company Cepsa from French energy company Total. Freshfields advised Total on the deal.
Freshfields and Uría Menéndez advised Spanish oil and gas company Repsol YPF on a buy-back share transaction from Sacyr Vallehermoso for around e2.57bn. Clifford Chance advised Sacyr.
Freshfields advised Qatar Holding on the acquisition of a 6.16 per cent stake in energy group Iberdrola via a capital increase and the acquisition of treasury stock for e2.1bn. Allen & Overy and Uría Menéndez were retained by Iberdrola for the transaction.