Financial reporting by real estate companies in Europe
Sareb commentaries (january 2013)
1. SAREB
Society to manage assets from the bank restructuring
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(Spanish Bad Bank)
Commentaries
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa December 2012
2. SAREB’s AIM
SAREB’s aim is to back the process of restructuring and recapitalizing the Spanish
banking sector. In other words, it is an asset management company that deals with
the segregation of troubled assets, property of banks, that need public support for
their recapitalization and so, need to be transferred to a company such as SAREB.
SAREB is a key element in the process of cleaning up the balance sheets of the
banks, as it…
banks, as it…
Permits segregation of assets from the balance sheets of banks that
require public assistance.
Substantially reduces any uncertainty regarding the viability of such banks.
Facilitates the centralized management of the problematic assets so as to
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manage them on preservation and recovery of value, thus making possible
to divest the assets in an orderly manner over a period of 15 years.
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries
3. INITIAL BUSINESS STRUCTURE
The 100% of its initial capital stock has been completed. Private shareholders are the main
The 100% of its initial capital stock has been completed Private shareholders are the main
group (55%), made up by national investors, especially banks and insurance companies and only
two foreign investors (Deutsche Bank and Barclays Bank); the rest (45%) is FROB’s public capital.
Private shareholders have contributed 524 million euros and FROB has contributed 431 million
Private shareholders have contributed 524 million euros and FROB has contributed 431 million
euros. These amounts will be increased during the second stage (2013). SAREB will issue
subordinated debt that will be subscribed by the private entities along with other investors. They
will also contribute the needed resources up to 3.8 billion euros from their equity capital. In total,
25% will be equity capital and 75% subordinated debt.
25% will be equity capital and 75% subordinated debt
SAREB already handles a volume of assets amounting to 45 billion euros, transferred from
entities in Group 1. In the second stage (Q1 ‐ Q2 2013) assets from Group 2 will be transferred
and, predictably, there will be a capital increase and subordinated debt will be issued.
and predictably there will be a capital increase and subordinated debt will be issued
Under no circumstances, as currently stipulated by the Law (Real Decreto), will the volume
exceed 90 billion euros.
SAREB’s Board of Directors will have to report, not only to the private entities with a 55% of the
capital, but also to the FROB with the 45% and to the European Commission as the financial
backer.
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries
4. SOME FEATURES OF SAREB
Asset Type Characteristics
Foreclosed RE Assets
Foreclosed RE Assets Foreclosed real estate assets whose net carrying
amount does not exceed €100,000.
Loans/credits to RE Loans whose net carrying amount is higher than
developers €250,000, defined as the total per borrower.
Corporate holdings Controlling corporate holdings linked to the real estate
sector.
First, the assets from Banks in Group 1 (Bankia, Catalunya Caixa, Nova Caixa Galicia,
Banco de Valencia) have already been transferred (December 2012). They amount
to 45 billion euros.
In a second stage, assets from Banks in Group 2 will be transferred (Q2 2013).
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries
5. TRANSFER VALUE
The transference price of the assets has been one of the principal dilemmas for SAREB.
The assets are transferred with an average haircut over the gross book value of 63% for
the foreclosed assets and of 45.6% over loans. Of course, always keeping in mind their
characteristics and location.
Average Average
Asset Type Haircut
Asset Type Haircut
Loans (67%)
Loans (67%) 45.6%
45 6% Foreclosed assets (33%)
Foreclosed assets (33%) 63.1%
63 1%
Finished housing 32.4% New housing 54.2%
Unfinished projects 40.3% Developments in progress 63.2%
Urban land 53.6% Land 79.5%
Other land 56.6%
Other with collateral 33.8%
Other without collateral 67.6%
From the peak in the market, the real transaction prices have fallen by 30%, in the best
areas, and up to 70% in the worst. These data confirm that SAREB would have foreclosed
assets at currently realistic market prices.
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries
6. SAREB IS A REALITY
The deadlines are being met.
Th d dli b i t
The investors have covered their investing needs. SAREB has been legally established. The
profitability and initial strategies have been set.
The following executive team has been formed: Chairwoman (Belén Romana); Managing
Director (Walter de Luna, from the private sector ‐ ING Real Estate Finance); fifteen
advisors: five of them are independent, four appointed by FROB and six by the private
shareholders. Likewise, it is expected to count with a workforce of 100 employees.
shareholders. Likewise, it is expected to count with a workforce of 100 employees.
SAREB has rented a space of 20,000 sqm in Madrid CBD to set up its headquarters. This
will be the assets management centre.
The haircuts have been established according to the requirements of the European
Th h i t h b t bli h d di t th i t f th E
Commission and the first assets have already been transferred.
SAREB is considering the investment in CAPEX. In that case, SAREB would be able to
promote plots, demolish or continue unfinished projects, refurbish properties or contribute
promote plots demolish or continue unfinished projects refurbish properties or contribute
to the urban development of the land.
SAREB has to handle the assets, increase their value and put them into the market in the
following 15 years.
following 15 years.
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries
7. PROVISIONAL BUSINESS PLAN
A provisional business plan, with a 15‐year horizon, is being designed. It envisages the
macroeconomic and financial developments in the Spanish economy and, specifically, in
the real estate market.
The market’s absorption capacity, based on each asset type, and the region in which
they are located, are also considered.
The company will have an expected return on equity (ROE) of around 15% in a
conservative scenario. Fiscal benefits, high haircuts, as well as a dividend of the 8% for
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the shareholders in the fifth year, are to be expected.
SAREB is a reality and its success will depend on a good management and the market
evolution. SAREB ill h
l ti SAREB will have to manage, market and add value to the assets in a
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professional and efficient way.
Part of the assets will generate irreversible loss, like long term unworkable land. That
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should be compensated by the potential revaluation of other assets that, in time, will
add value. It is quite likely for the assets with the highest liquidity to be sold at a “break
even” situation.
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries
8. MANY YET PENDING ISSUES
PRICE. It seems that the low demand, the huge amount in stock and the negative
economic environment, will lead to yet another adjustment of the prices in the short‐
term. Placing the assets in the market must be organized so as not to overflow the
sector with offer.
sector with offer
FINANCING. This will be one of the keys for selling success. At first, SAREB will not
approve of financing operations. “Healthy” banks are more competitive just because
they can offer financing for their assets on sale.
DEADLINES. To be in the market as soon as possible, SAREB should segment the
portfolio, identify the higher liquidity assets, due diligences, create portfolios,… A society
as large as SAREB needs time to take off.
MARKETING AND MANAGEMENT CHANNELS. SAREB will have to manage and market
tens of thousands of assets. The RE operating management might need the assistance
tens of thousands of assets. The RE operating management might need the assistance
of other market players as regards property taxes, community expenses, maintenance,
etc., in order to add value to its management for the next 15 years.
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries
9. MANY YET PENDING ISSUES
DISINVERSION MODEL. It seems that SAREB will not focus the selling in the retail
property market, but will turn its attention to it in the last instance. It will mainly market
asset portfolios when their value has increased.
asset portfolios when their value has increased
COMPETITORS. SAREB will compete in the market with the rest of players, being those,
primarily, “healthy” banks that are also disinvesting in a professional way and whose
huge asset portfolios will not be transferred to SAREB.
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FINAL BUSINESS PLAN. To do list: segment the portfolio, identify the assets with
higher liquidity, gather information, create an individual strategy for each portfolio,
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promote plots, demolish or continue unfinished projects, refurbish properties or
contribute to the urban development of the land. It remains yet to be seen if SAREB will
rent the assets to generate cash‐flow or will design capitalize investment vehicles like
REITs. To sum up, it will define the Asset Management strategy for each type of asset.
REIT T it ill d fi th A t M t t t f ht f t
…
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries
10. SUMMARY OF THE REPORT
SAREB has been basically created in order to improve the balance sheet of some
banks and for the recapitalization of the financial sector.
SAREB is a reality and its success will depend on a good management and the market
evolution. SAREB will have to manage, market and add value to the assets in a
professional and efficient way in the next 15 years.
f i l d ffi i t i th t 15
It is a very long‐term project. Time will tell if the profitability targets are realistic or
not.
There are still many pending issues before having a more objective vision about its
functioning. In the coming months we will have more answers and a better informed
opinion.
opinion
Ignacio López‐Tolosa MRICS
Twitter @NachoLTolosa
SAREB Commentaries