Last week, we hosted our 2020 Spain roundtable in which we spoke to four debt specialists about how deeply covid-19 has impacted the liquidity of real estate finance in the country.

The summary of the discussion? Trouble is on the horizon with the various financial and regulatory props expected soon to be removed to reveal a market in need of liquidity. Opportunistic money is waiting.

Full coverage of the virtual discussion will be published in our winter print edition and on on 1 December. In the meantime, here is a taste of what we learned:

Distress is still a way off: An unprecedented level of government intervention and support for businesses means we will need to wait until possibly the end of Q1 2021 to begin to understand how many borrowers are in genuine distress and have defaulted on their debts. In the coming months, a deterioration in the credit quality of the balance sheets of Spain’s banks is expected, due to the sharp contraction in the income of corporations and households. In the meantime, opportunistic buyers are circling the market.

The pandemic has prompted domestic banks to scale back lending activity: According to the roundtable participants, most banks in Spain are focusing on supporting their existing customers and refinancing their own loan positions rather than providing new lending. The Bank of Spain, in its autumn 2020 Financial Stability Report, said there has been a sharp decline in new lending in the real estate credit market. Several of Spain’s banks have spent recent years shedding pre-2007 non-performing loans from their balance sheets, meaning they will be determined to carefully manage their exposure to real estate through this crisis. That is likely to mean less appetite for new loan deals.  

Covid-19 is further opening Spain’s lending market to non-banks: The reduced availability of bank finance is expected to prompt alternative lenders to grow their share of the Spanish lending market. According to The Business School, previously Cass Business School, 15 percent of origination in 2018, the most recent data available, was done by non-bank lenders excluding insurers. One roundtable participant said private funds have stepped into the market to lend, often by setting up joint ventures with local operating partners. Covid-19 is expected to accelerate the diversification of lending sources to Spanish real estate.

Beds and sheds remain popular among lenders: Consultancy CBRE predicts investment volume for the whole year will surpass €8 billion, which would be 30 percent down compared to 2019. Equity investment is down, but not out. Our roundtable participants said logistics is the most popular strategy in Spanish real estate, with no shortage of lenders willing to provide finance. Residential properties such as build-to-rent apartments and senior living were noted as the kind of income-producing assets debt providers are currently interested in.

The market is in a better position to recover than it was during the global financial crisis: Although market experts expect the downturn to last well into 2021, and maybe longer, most consider the Spanish real estate sector to be better prepared to weather the covid-19 storm than it was during the 2007-08 financial crisis. The sector is considerably less leveraged, more professionalised and investment has been less speculative than leading up to the previous downturn. Sources added the amount of liquidity in the market looking for sustainable returns could prevent a significant downturn given the relative dearth of such returns in other markets.

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