The slow unwinding of the US housing crisis

The slow unwinding of the US housing crisis


IT is becoming increasingly evident that the US housing crisis – the root cause of the US economic slowdown and the turmoil in the financial markets – is getting worse by the day. Any hopes for an economic recovery and a restoration of market stability will turn on how this crisis unfolds, and how it is dealt with.


Recent statements and actions by US policymakers provide some clues of what is to come. In a widely reported address to American community bankers on Tuesday, US Federal Reserve chairman Ben Bernanke drew attention to rising delinquency rates on mortgages (and not only the sub-prime variety) and the likely persistence of this trend. Foreclosures too will rise, he said, as house prices decline further and interest rate resets on mortgages take effect.


Suggesting that ‘this situation calls for a vigorous response’, Mr Bernanke stressed the urgency of reducing ‘preventable foreclosures’. And then he dropped what many view as a bombshell: he asked for banks to not only provide interest rate relief to borrowers, but also to write down principal in some cases – in other words, to forgive part of the mortgage loans. If not, there would be a stronger incentive to default among homeowners who are in negative equity on their mortgages. And that, in turn, would accelerate the decline in housing prices and make things even worse for already beleaguered mortgage lenders.


A day earlier, US Treasury Secretary Henry Paulson – who also acknowledged that housing ‘poses the biggest downside risk’ to the economy – urged homeowners (including those ‘underwater’ on their mortgages) to continue servicing their loans, if possible. While this might not be a wholly realistic suggestion, it underlines US officials’ anxiety to stave off foreclosures.


Whether such exhortations will succeed, however, is moot. Bankers are generally loath to take ‘haircuts’ on loans except as the very last resort; and one can hardly count on most homeowners in negative equity being content to continue servicing huge mortgages when they’re better off walking away and handing their house keys to the bank.


Absent such voluntary market-based solutions, there would appear to be a strong case for government intervention. Mr Paulson and other lawmakers have publicly maintained that they oppose any bailouts. However, at the same time, the scope and mandate given to US government agencies such as the Federal Housing Administration, Fannie Mae and Freddie Mac to guarantee or take over mortgages have been significantly expanded. US lawmakers are also examining bolder options. It is probably inevitable that some of these will involve an element of bailout, even if politicians are reluctant to admit as much. However, whether bailouts are involved or not, US policymakers need to address the US housing market bust urgently, despite the distractions of an election year. For it is now obvious that there is a systemic risk facing the US financial system – and that market mechanisms alone cannot deal with it.


Source: Business Times

UOL betting big on hospitality business

UOL betting big on hospitality business




(SINGAPORE) The UOL Group has earmarked some $500 million – or a third of its available funds – to expand its hospitality business in Asia-Pacific over the next three years, the group’s president and chief executive Gwee Lian Kheng told BT in an interview.


The property company plans to add some 15-20 hotels and service apartment properties over the next three years, Mr Gwee said.


‘(Right now), if you ask me to put down money, I will put it into hospitality,’ he said.


For Singapore especially, the hospitality sector looks to be the brightest going forward – even as the overall property market takes a breather – Mr Gwee said.


Yesterday, UOL launched its new 126-unit service residence development called Pan Pacific Serviced Suites, which the company hopes will be the first of many service residences under the Pan Pacific brand name.


Five such properties could open in the next three years, Mr Gwee said. Next up is Pan Pacific-branded service residences in Bangkok, which will open in about a year.


In Singapore, Pan Pacific Serviced Suites is likely to be the only one of its kind, as rising property prices mean that such an offering will be ‘hard to replicate’, the company said.


‘Moving forward, our strategy is to look at high growth markets such as China, Vietnam, Thailand and Malaysia,’ Mr Gwee said.


The Singapore property, which is located right next to Somerset MRT station, cost the group $38.5 million to build. Guests can check in from early April, and pre-opening interest has been strong, UOL said.


The company explored building a small office, home office (Soho) development on the site, but decided to go with service residences in order to ride on the current international business expansion into Singapore and the corresponding growth in expatriates looking for short-term housing, as well as the chance to grow the Pan Pacific brand.


UOL bought the hotel brand last year in a bid to become a key player in hotel management in the Asia-Pacific region.


The deal brought the Pan Pacific group’s 12 hotels in the US, Canada and Asia into the UOL portfolio, adding some 3,800 rooms.


Now, UOL is looking to take the brand further with its first foray into service residences.


‘Moving into the extended serviced accommodation business is a logical extension of the brand as it is complementary to our current hotel accommodation offering,’ Mr Gwee said.


UOL itself, however, is not a newcomer to the service residences scene. It owns such a property under its Parkroyal brand, which it will maintain as a four-star property.


Pan Pacific Serviced Suites, on the other hand, is slated to be a five-star offering.


UOL also bought a hotel plot at Upper Pickering Street in a government tender in October last year. This ‘may, or may not’ be branded as a Pan Pacific hotel when it is completed by early-2011, Mr Gwee said.


For the overall property market, Mr Gwee said that UOL is ‘cautiously optimistic’ on the back of the sub- prime lending crisis in the US and the resultant credit crunch.


The developer plans to launch its ‘mid-range’ condo Breeze by the East on Upper East Coast Road as soon as it can.


Mr Gwee expects mid- level home prices to climb at least 10 per cent this year, pushed up by en-bloc sellers looking for replacement homes.


UOL shares closed four cents down at $3.65 yesterday.


Source: Business Times

US housing woes: It’s the affordability, stupid!

US housing woes: It’s the affordability, stupid!




GLOOM. Doom. Calamity. Home prices are tumbling. We’re bombarded by sombre reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last. It’s elementary economics. Say, houses are apples. We have 1,000 apples, priced at US$1 each. They don’t sell. We can either keep the price at US$1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.


Even many economists – who should know better – describe the present situation as an oversupply of unsold homes. True, there is about 10 months’ supply of existing homes as opposed to four months a few years ago. But the real problem is insufficient demand. There aren’t more homes than there are Americans who want homes; that would be a true surplus. There’s so much supply because many prospective customers can’t buy at today’s prices. By definition, the ‘housing bubble’ meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.


Look at some numbers from the (US) National Association of Realtors. From 2000 to 2006, median family income rose almost 14 per cent to US$57,612. Over the same period, the median-priced existing home increased about 50 per cent to US$221,900. By other indicators, the increase was even greater. But home prices could not rise faster than incomes forever. Inevitably, the bust arrived. Credit standards have now been tightened, and the (false) hope of perpetually rising home prices – along with the possibility of always selling at a profit – has evaporated. For many potential buyers, prices have to drop for housing to become affordable.


How much? No one really knows. There is no national housing market. Prices and family incomes vary by state, city and neighbourhood. Prices rose faster in some areas (Los Angeles, Miami, Phoenix) than in others (Dallas, Detroit, Minneapolis). Some economists now expect an average national decline of about 20 per cent. The Federal Reserve estimates that owner-occupied real estate is worth almost US$21 trillion. A 20 per cent reduction implies losses of about US$4 trillion.


The largest part would be paper losses for homeowners: values that rose spectacularly will now fall less spectacularly – back to roughly 2004 levels; that’s still 30 per cent or so higher than in 2000. But hundreds of billions of dollars of other losses are already being suffered by builders (from the lower value of land and home inventories), mortgage lenders (from defaulting loans), speculators and homeowners (from lost homes). Mark Zandi of Moody’s estimates that mortgage defaults this year will exceed 2 million, up from 893,000 in 2006.


To be sure, all this weakens the economy. No one relishes evicting hundreds of thousands of families from their homes. Eroding real estate values make many consumers less willing to borrow and spend. Some economists fear a vicious downward spiral of home prices. More foreclosures depress prices, increasing foreclosures as people abandon houses where the mortgage exceeds the value. Losses to banks and other lenders rise, and they curb lending further. Particularly vulnerable would be Fannie Mae and Freddie Mac, the two government-sponsored housing lenders.


Up to a point, there’s a case for providing relief to some mortgage borrowers. In many cases, everyone would gain if lenders and borrowers renegotiated loan terms to reduce monthly payments. Losses to both would be less than if their homes went into foreclosure and were sold. The Treasury has organised voluntary efforts. Some measures being considered by Congress (for example, overhauling the Federal Housing Administration) might help. But other proposals – particularly empowering bankruptcy judges to reduce mortgages unilaterally – would perversely hurt the housing market by raising the cost of mortgage credit. Lenders would increase interest rates or downpayments to compensate for the risk that a court might modify or nullify their loans.


The understandable impulse to minimise foreclosures should not serve as a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today’s homeowners makes little sense if it penalises tomorrow’s homeowners. An unstoppable free fall of prices seems unlikely.


Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices. — The Washington Post Writers Group


Source: Business Times

Greenspan says credit recovery hinges on US housing

Greenspan says credit recovery hinges on US housing


NEW YORK – A recovery in global credit markets will depend on stabilisation in US home prices and a massive reduction in housing inventory, former Federal Reserve Chairman Alan Greenspan told Deutsche Bank AG clients on Wednesday, according to sources.


Mr Greenspan, the US Fed chairman from 1987 until 2006, also blamed the credit crisis on a ‘general underpricing of risk’ and a ‘breakdown’ of how assets are valued after the US housing bubble burst, sparking broader concerns about credit markets last year.


‘The sooner we can get home prices in the United States stabilised, the sooner we will resolve all questions,’ he said, according to two sources who were on a conference call with the former central bank chief.


Excessive housing inventories must fall before more signs of recovery are evident, he said. One in 10 US homeowners now hold mortgages that are larger than the worth of their homes, according to Moody’s, a sign that foreclosures may rise, adding to inventory and depressing home prices.


‘The level of housing has got to fall,’ Mr Greenspan said, according to one source on the call. ‘If it doesn’t fall further we are going to be involved with a continual backing up of inventory pressing on prices.’


US home prices dropped in the fourth quarter, the first consecutive quarters of decline since 1982, according to Freddie Mac, the second largest US home funding company.


Mr Greenspan, retained as a senior adviser to Deutsche Bank in August, added that he sees companies buying back stock in record volumes and that corporate balance sheets are in relatively good shape, according to the sources.


‘We still have a way to go, but we are at least seeing some early signs that the process is well underway,’ said Mr Greenspan, who in January was named an advisor to Paulson & Co, a US$30 billion hedge fund that successfully bet last year that the mortgage markets would fall. — REUTERS


Source: Business Times

Scams and schemes compound woes of US housing crisis

Scams and schemes compound woes of US housing crisis


(CHICAGO) As the US housing meltdown forces hundreds of thousands of Americans from their homes, the extent to which fraud was a factor in the crisis is just coming to light.


Products such as stated-income loans – known as ‘liar loans’ because no proof of income was needed – led to widespread misrepresentation by borrowers about their earnings.


But far more sinister forms of fraud, including identity theft and ‘straw buyers’ – those created using fake documents – are also coming into the open.


Mike Reardon of nonprofit lender Neighborhood Housing Services of Chicago (NHS) points out two such properties, both boarded up, on South Rockwell Avenue in Chicago‘s blue-collar South Side.


The owner of one of the homes was traced to Texas, he said. ‘Turns out it was a case of identity theft,’ Mr Reardon said, shaking his head. ‘He had no idea he owned a home in Chicago.’ Across the street, he points to another boarded, slowly rotting home, which had last been sold to a woman named Susan Haas.


‘I may be wrong, but I’ve been looking for months and months and I can’t find any proof Susan Haas exists,’ he said.


Many fraud schemes kept running as long as cash kept flowing from Wall Street. Once the credit crunch turned off the supply of easy money, the perpetrators simply walked away. Estimates vary as to how prevalent fraud was during the boom.


Arthur Prieston, chairman of the Prieston Group, which provides mortgage-fraud insurance and training to lenders, said that ‘at least 30 per cent of the loans out there contain some form of misrepresentation’. ‘But because lenders often have to sell off properties quickly to cut their losses, we will never know exactly how much mortgage fraud has been committed,’ he added.


Mr Prieston estimates that mortgage-fraud losses were around US$4.2 billion for 2006, adding that figures for 2007 ‘will be much higher’. In a recent case in Chicago, he said the authorities prepared to file charges against a woman who had fraudulently bought five properties.


‘When we turned up to serve papers on her, we found she was nine years old,’ he said. ‘Her uncle had stolen her identity.’ The mortgage scam known as identity theft is relatively simple – the perpetrator uses a stolen identity to buy property with no money down, then rents it to tenants until it goes into foreclosure, collecting rent but never making a mortgage payment.


A far more lucrative scam, using what are known as straw buyers, was much more common, according to Boston-based real estate analyst John Anderson.


‘The vast majority of the cases I’m aware of involved straw buyers,’ he said. ‘Thanks to products like stated-income loans, people walked away with a ton of free money.’


All you needed was to buy a foreclosed property at a bargain price, have it falsely appraised with a grossly inflated value, then sell it to a straw buyer at a big profit. The straw buyer never makes a payment and the home goes into foreclosure. The process was often repeated over and over again.


‘We’ve seen some properties that were sold like this dozens of times,’ NHS’ Mr Reardon said. ‘This artificially pushed up prices in some neighbourhoods and when those fake buyers walked away, the abandoned homes pushed prices down.’


‘The real victims are the genuine borrowers who bought here at inflated prices and are stuck now with mortgages worth more than their homes,’ he added.


False appraisals were also used to fool genuine borrowers. ‘We get a lot of cases involving fraud that we refer to the state attorney general,’ said Lori Gay, CEO of Los Angeles Neighborhood Housing Services, a nonprofit lender that also offers financial counselling services. ‘Some 15 to 20 per cent of the cases we see have some element of fraud.’


The US Federal Bureau of Investigation saw Suspicious Activity Reports (SARs) related to mortgage fraud rise to 47,000 in 2007 from 7,000 in 2003, spokesman Stephen Kodak said.


‘This year it looks like we’re on track for 60,000 SARs, which is a significant rise,’ he said. ‘This has required more allocation of manpower to mortgage fraud cases.’ Mr Prieston, the mortgage insurer, said that had major lenders been proactive in checking the identities of the people who were buying properties using stated-income loans and similar products, then a lot of fraud could have been avoided.


‘A lot of lenders claim they were victimised by fraud but helped to constitute it by looking the other way,’ he said. ‘The sad fact is that the vast majority of mortgage fraud out there could have been prevented.’


Mr Anderson, the Boston-based real estate analyst, is among those who were warning for years that easy credit created an easy climate for fraud. ‘The banks on Wall Street had to know there would be fraud. If they didn’t they’re morons.’ – Reuters


Source: Business Times

Mixed landed housing site for sale

Mixed landed housing site for sale CHESTNUT VILLE (I and II), a mixed landed site at Dairy Farm Crescent, has been put up for collective sale and the indicative price for the combined plot is $90 million. This represents a land price of $741 psf over the land area, inclusive of an estimated $1 million development charge. The development currently comprises 11 townhouses and 34 walk-up maisonette units with a combined land area of about 122,677 sq ft. Credo Real Estate, which is marketing the site, says that the site is zoned for three-storey mixed landed housing. This means the site may yield a combination of conventional terrace houses, semi-detached and detached houses; or cluster landed housing with strata terrace houses, strata semi-detached houses and strata bungalows with communal facilities. Credo executive director Tan Hong Boon added that it commissioned a study by an architect and one of the possible schemes allows the site to be developed into 10 strata detached, 22 strata semi-detached and 27 strata terrace houses, together with another four conventional semi-detached houses and two bungalows. Based on the indicative price of $90 million, the potential developer’s breakeven price for an intermediate strata terrace house and a conventional bungalow should be about $2.1 million and $3.8 million respectively, added Mr Tan. Credo also pointed out that according to the Land Transport Authority, the planned Bukit Timah MRT Line is slated to include a Chestnut Station and a Hillview Station, both of which could be expected to be close to the site. Mr Tan also expects good response for the mixed landed housing site as ‘they are not easily available in the market’. Source: Business Times

S’pore ranked top Reit market in Asia-Pacific

S’pore ranked top Reit market in Asia-Pacific


Survey cites support from regulators to the industry as advantageous




SINGAPORE has been rated as the best location in Asia-Pacific for overall real estate investment trust (Reit) potential – for a second year.


According to the second annual Asia-Pacific Reit Survey – undertaken for financial services provider Trust Company and law firm Allens Arthur Robinson – one of Singapore‘s significant advantages is the support that the industry receives from regulators such as the Monetary Authority of Singapore and the Singapore Exchange.


Senior property, finance and business experts across the Asia-Pacific are confident that the region’s Reit markets will remain strong, the survey said.


However, the findings also showed that low yields, poor regulatory processes, the effects of financial engineering and adverse taxation developments will continue to be the greatest threats to Reits in Asia-Pacific.


The experts believe that most of these threats will diminish significantly in the longer term.


The survey suggests that over the next one or two years, companies will increase the size of their existing Reits rather than launch new ones, but this trend will be reversed in the longer term of three to five years.


According to the survey’s findings, retail, commercial/office and industrial and retail property will continue to be the main focus for market growth, even though the retail, commercial and office markets have cooled in the last 12 months.


The hotel and hospital sectors are expected to heat up while industrial and infrastructure property is expected to experience slight growth. Residential property, however, will remain cold, the survey said.


The findings also showed that China, India and Vietnam are ranked as the top three hot property growth markets in Asia-Pacific for the next five years. Singapore, which ranked fourth, was the highest placed established Reit market. Good growth is also expected in Malaysia.


Vicki Allen, executive general manager of institutional services at Trust, acknowledged that since the survey was conducted, some caution has surfaced in global Reit markets. But she said that Asia-Pacific Reit markets have fared reasonably well compared with their North American and European counterparts.


Robert Clarke, a partner at Allens Arthur Robinson, suggested that regulatory flexibility is key to staying ahead. He cited Singapore as an example.


Source: Business Times

UK lenders lost £700m to mortgage fraud

UK lenders lost £700m to mortgage fraud


(LONDON) UK mortgage lenders probably lost £700 million (S$1.9 billion) last year to organised fraud that inflated real estate prices, according Britain‘s Association of Chief Police Officers.


Mortgage fraud for profit ranges from overvaluation of newly constructed homes to deliberate ramping of commercial real estate prices, often involving mortgage brokers, appraisers and attorneys, the association said in an e-mailed statement yesterday.


Fraud for profit differs from fraud for property, where individuals inflate salaries or savings to qualify for loans.


Concerns about mortgage fraud are mounting among banks as the UK housing market cools, ending a decade of gains during which property values tripled. Mortgage approvals fell to a nine-year low in January, after lenders granted £370 billion of mortgages last year.


Mortgage fraud ‘remains a significant element of the UK‘s annual fraud losses’, said Mike Bowron, commissioner of the police department of the City of London district in the UK capital. His comments accompanied a release on the report’s findings.


In one instance an individual made a profit of more than £10 million through fraud, the police association said. The release didn’t provide details of frauds committed.


Lenders should make more identity checks and seek to establish a central database to flag areas where fraud is more prevalent, police recommended in the report.


Criminal gangs use mortgage fraud as a way of laundering money and making ‘significant’ incomes, the report found, because of the ‘current low risk of detection and high profit opportunities’.


London, the UK‘s most expensive property market, was the most active area for fraud, the report found, accounting for 46 per cent of cases.


‘Victims of mortgage fraud range from those who purchase a newly built property only to find that their home is worth considerably less than they paid for it through to those on low incomes who, through the actions of corrupt professionals, take on a debt they simply cannot afford,’ the association said in the report.


The report was based on evidence from 47 UK police forces, government departments, insurance companies, the Financial Services Authority, lending associations and 45 mortgage providers, who represent more than 75 per cent of the market. — Bloomberg


Source: Business Times

UK housebuilders face hard times

UK housebuilders face hard times


Fewer houses built as higher interest rates, credit crunch drive away buyers


(LONDON) Britain‘s housebuilders are building fewer homes in the face of tighter mortgage lending and an uncertain price outlook, but slashing volumes and costs may not be enough to lure back investors to the battered sector.


Britain‘s major builders completed fewer homes last year – about 76,000, down around 10 per cent on 2006 – as higher interest rates and the global credit crunch drove away buyers.


And things are set to get worse, with analysts predicting 10-16 per cent fewer new homes this year, a price fall of around 3 to 5 per cent and a drop of some 20 per cent in transactions.


Such worries have pushed shares of major housebuilders including Barratt and Taylor Wimpey down more than 50 per cent in the past six months.


The stocks have recouped some of the losses since mid-January, as value investors entered the market, but analysts warn of tougher times ahead and prolonged volatility, as data so far sends mixed signals on the market conditions.


‘Tighter credit is the major constraint, and this is unlikely to change for a while. So no one is expecting that a short, sharp shock will be followed by a swift, V-shaped recovery,’ Charles Stanley analyst Tom Gidley-Kitchin said.


Citigroup and KBC analysts agree the sector is cheap, but they caution that any revaluation is unlikely until late April and May when more solid data on the spring selling season is available.


‘A lot of this (macroeconomic and liquidity risk) is already in share prices . . . (but) our preference is to wait for another three months or so of data, as by then there will be much more evidence of either a stabilisation in the market or a clear drop in activity,’ Citigroup analysts said.


Housebuilders, in the midst of reporting 2007 results, are divided on whether the market is showing signs of recovery after its sharp downturn in the final few months of 2007.


Barratt chief executive Mark Clare, on the one hand, said last week the market was improving more quickly than he had expected.


He pointed to a 36 per cent rise in property viewings from the second half of 2007 and a return in the number of people cancelling reservations to the usual level of about 20 per cent.


These signs of hope were given a tentative boost last week by official figures. While reporting the smallest rise in mortgage lending for 21/2 years, the Bank of England also said that mortgage approvals – an indication of future lending – unexpectedly picked up in January.


But other builders such as Galliford and Redrow turned more cautious, as they prepare to spend more on incentives such as part-exchange deals and mortgage assistance to restore falling sales.


Persimmon reported a 19 per cent fall in presold homes last week versus a 14 per cent drop in January, while Barratt’s forward sales decline was 7 per cent versus 6 per cent in January.


A further weakening in house prices – which in January recorded their biggest quarterly fall in at least a decade – would be a big blow to builders, which are under additional pressure from high prices for raw materials.


Builders’ drive to cut costs, which has been so far centred on reducing labour costs, closing branches and renegotiating terms with subcontractors, will also have only limited impact on improving margins without house price rises, analysts say.


‘We see the new build sector having difficulties cutting costs as land within cost of sales is essentially fixed or rising, materials costs look likely to rise and the hoped for 5-10 per cent cut in labour costs looks hard to achieve,’ KBC analysts said.


Cazenove analysts estimate the impact of lower house prices on builders’ bottom line is four times bigger than a volume change, with a one per cent drop in prices cutting operating profits by 4 per cent.


They believe after a recent recovery, the shares of housebuilders no longer adequately price in the possibility of a recession. UK housebuilders trade at 9.5 times forecast earnings, versus the overall market’s 11 times.


For longer-term investors, however, builders still appear a good bet, with tight supply of new stock set to continue and a massive discount to their asset values such as land.


The number of households in England is currently estimated to outgrow housing stock by 38,000 a year due to immigration and a growing number of single-member households, according to the government.


Britain already has one of the slowest rate of housing starts across Europe, ahead of only Slovakia, Poland and Germany – a fact which builders, and many industry analysts, blame on the government’s tight planning laws.


‘With an ongoing restrictive planning regime, it is unlikely that enough homes will be built to catch up demand. This is not a problem that will ease over the next few years,’ Panmure analysts said\. \– Reuters


Source: Business Times

Property valuations in focus amid Spanish angst

Property valuations in focus amid Spanish angst


(LONDON) Spanish property developers, having enjoyed what once seemed an unstoppable boom, could face a severe mauling unless they bow to more realistic pricing as the economy slows and banks rein in lending.


The true value of real estate is a growing bone of contention as more debt-doped property firms get into trouble, leaving creditors and opportunistic buyers to squabble over assets, as in the on-off takeover saga engulfing property firm Colonial.


James Preston, who heads the Madrid office of European property funds firm Rockspring, sees international banks and investors losing confidence in the absence of an improvement in property market transparency in Spain.


‘It can only prolong the pain and result in a protracted, ‘U-shaped’ recovery,’ he said. ‘It is doing a disservice to this market which is at the aperitif stage of a very long, foul meal.’


‘I don’t believe valuers are marking to market, full stop,’ Mr Preston said. ‘And I don’t believe valuers are reflecting the reality for any property company, quoted or otherwise, in particular in relation to land banks.’ Such scepticism is shared by other real estate experts.


‘Spanish property values are lower than people think,’ said JPMorgan analyst Harm Meijer here.


Mr Preston sees a parallel, in terms of lack of transparency, with the US sub-prime crisis, which has so far led to banks writing off up to US$160 billion and resulted in a global debt logjam as confidence in the value of mortgage-related debt collapsed.


Spain‘s relatively conservative banking industry bears few US sub-prime scars. It churned out 31.6 billion euros (S$66.9 billion) in residential mortgage-backed bonds in the second half of last year, as other markets seized up, according to Moody’s. But it could yet face more trouble as an unprecedented construction boom – accounting for almost a fifth of Spain‘s economic growth – slows sharply.


Across Spain, unemployment is rising faster than anywhere else in Europe. Consumer confidence is at its lowest level since Spain‘s last housing crisis, in the early 1990s, according to Eurostat and Bank of Spain data.


It is not just smaller-scale builders of coastal holiday homes or speculative owners of land banks with dubious planning rights that may be vulnerable, though these are seen by analysts as most overvalued in the current climate.


Several Spanish property developers have filed for creditor protection in the last few months, while Barcelona-based Habitat last week staved off bankruptcy at the eleventh hour by refinancing 1.6 billion euros of debt.


Some of Spain‘s biggest property firms – including Colonial, Metrovacesa, Martinsa Fadesa, and Realia – have also bulked up on debt, which until recently was paid back with steady cash flow in a rising market.


Unlike in the United States and other parts of Europe – where there is a clearer demarcation between housebuilders and commercial property landlords – these firms have both housing and commercial property and so are exposed to any weakness.


The Bank of Spain has said Spanish homes may be up to 30 per cent overvalued. The government, which faces general elections on March 9, expects house price growth to ease to low single digits but not turn negative. But it is no longer just housing which could be a problem.


Commercial property – pricey by regional standards – could suffer too since a slower economy will undermine corporate demand for space and drag on rental growth.


Office rental yields – a valuation measure which moves inversely to price – are 4.5 per cent in Madrid and Barcelona, a percentage point less than in London‘s City district, according to data from CB Richard Ellis (CBRE).


CBRE says yields in Spain‘s top two cities have risen about a quarter percentage point since the third quarter of 2007. But the correction has been more acute in Britain, which like Spain is coming off one of Europe‘s biggest, longest property booms.


Office, industrial, and retail property valuations in Britain have been cut by 13-14 per cent since the summer\. \– Reuters


Source: Business Times