Gaining ground

Lenders trying to capture high-yielding opportunities should consider the lack of debt available to buy land for Spain’s residential comeback.

Lenders trying to capture high-yielding opportunities should consider the lack of debt available to buy land for Spain’s residential comeback.

Spain’s residential market is coming back. In one clear indicator, major domestic banks are now happy to provide finance to cover building costs, even if their risk appetite falls short of issuing riskier loans such as those to finance land acquisition.

This is in stark contrast to their activities prior to the financial crisis, when they appeared to be willing to fund land indiscriminately.

Back then, banks joined the fiesta of Spain’s housing bubble, with annual projections of 700,000 new houses at the peak of the cycle. The subsequent crash hit them badly. Banco Popular, for instance, was one of the major victims of Spain’s real estate crisis. The lender was recently bought by rival bank Santander for €1 including a distressed portfolio with – surprise, surprise – land comprising the largest asset, accounting for €12.6 billion of the balance.

Given this background, banks’ aversion to funding land acquisitions for residential developments is understandable. Today, however, there is a need to fund the purchase of land, particularly for Spain’s smaller developers with no alternative to banks’ debt financing.

After years of stagnant activity, housing developers operating in the country now have plans to increase their construction projects on the back of rising demand for new houses, sustained by Spain’s improving economic fundamentals.

Last year, new developments in Spain ramped up by 20 percent to 60,000 residential units and, by the end of 2017, new-build houses are expected to reach 80,000 units. With housing demand projected to be between 120,000 and 140,000 for the next two years according to CBRE, house prices look set to increase.

With local banks reticent to finance residential land, debt providers looking for high-yielding financing opportunities should assess this gap in the market. It’s true that major developers with financial muscle are currently using alternative sources, such as equity, to fund their land purchases, but flexible lenders able to provide more than plain vanilla loans could source interesting deals.

Last September, for instance, JPMorgan provided a €150 million bridge loan to accelerate Neinor Homes’ Spanish land acquisitions. The two-year loan was written at an annual all-in cost below 450 basis points. The debt package, set to be repaid by March 2018 with the proceeds resulting from Neinor’s ordinary business, will allow the developer to bring forward its land acquisition programme for residential developments, initially scheduled for 2018, to the last quarter of 2017.

Debt funds are also starting to benefit from this gap between supply and demand for land financing. Real Estate Capital’s market sources note that European debt funds have been operating in Spain in recent months, offering short-term financing for the purchase of land with loan-to-value ratios in the range of 50 percent to 70 percent. Through these deals, debt funds are targeting an IRR from 10 percent to 15 percent.

These higher-yielding opportunities do, of course, come with added risk. Residential developers, however, have learnt from the past and, although construction is on the rise, it is now carried out on a more measured scale. Demand for new houses is still higher than supply, especially in Spain’s major cities. As southern Europe becomes more of a lending opportunity, this is one niche to explore.

In a series of upcoming features, Real Estate Capital will be examining the residential finance market, in Spain and beyond.

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