Wall Street Mega-Landlords Piled into Spain’s Rental Property Boom, and Now it Hits a Wall?

Blackstone Group, Cerberus Capital and others face a problem.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Demand for rental housing in Spain may have hit a wall, so to speak, while supply remains more or less unchanged, according to a new study by the real estate agency Fotocasa: Last year, 14% of Spanish adults had rented or were looking to rent a new property; this year, this figure has slumped to 9%.

The most notable reduction occurred in the youngest age range (18-24) where the number of people who had rented a new property or were looking to rent one plunged from 29% to 15% in the space of just one year. In the 25-34 year-old demographic the demand for rental property fell from 28% to 19%.

There doesn’t appear to have been a concurrent shift in demand to the ownership market. Demand for buying properties is more or less where it was last year, says the study. “Young workers are opting to stay at their parents’ home or to live in the flat belonging to their partners,” said Beatriz Toribio, Fotocasa’s director of research, during the report’s presentation.

The main reason is the unprecedented surge of rents in recent years. In 2017, rents rose by an average of 9%, although in some large cities, rents jumped at an even faster pace. “Over the past four years the price of rents in Madrid and Barcelona, Spain’s two biggest cities, rose by 30% and 40%, respectively,” Toribio said.

Now, both cities’ latest rental booms appear to have run their course, or are on the verge of doing so. Whither they go, the rest will follow. That could be unwelcome news for the Wall Street mega-landlords that have piled into Spain’s rental housing market in the last year. In 2017 alone global private equity funds purchased some €60 billion of real estate assets from Spanish banks — almost three times the total outlay in 2016. Many of the assets were purchased at a heavily subsidised discount.

Now, according to the Spanish Savings Banks Foundation (FUNCAS), those same funds are beginning to worry that Spain’s real estate boom may be running out of steam, given that many Spanish families, scratching a living on poorly paid, zero-security jobs, are incapable of paying today’s high prices. Many of those that can’t pay have already been evicted from the fund-owned apartments.

There’s also concern that flooding the residential real estate market with assets of dubious quality could end up depressing the price of property. And as strange it may sound, some of the world’s biggest private equity funds could be the ones left holding the bag.

At the tail end of last year Blackstone, the largest owner of property on the planet, gobbled up some €30 billion of real estate assets that had belonged to the now-defunct (and Santander-owned) Banco Popular. Cerberus Capital Management, another Wall Street titan, splashed out €13 billion on impaired assets belonging to Spain’s second largest lender, BBVA.

These two deals were among the biggest bulk purchases of dodgy real estate assets in Spanish history and they both took place in the short space of just a few months. According to the FUNCAS study, 22.8% of all property deals in Spain in 2017 involved real estate assets auctioned off by the banks.

Spanish banks still sit on a large pile of defaulted loans backed by real estate, and they hope that 2018 will be another bumper year for sales of these non-performing loans (NPLs) and the affiliated properties. Banco Sabadell plans to offload €2 billion of them a year until 2020. Partly state-owned Bankia hopes to sell €3 billion of them each year for the next three years. Santander has set a target of €6 billion just for 2018. Much will depend on investor appetite, which appears to be waning

One of the main reasons for this surge in NPL sales is the recent introduction of new accounting rules (IFRS 9) that force banks to provision not only for loans that had gone sour but also loans that are likely to go sour some time in the future. But the law grants lenders a five-year grace period before having to actually adjust their capital ratios to take into account the provisioned debt. That means the banks can take those losses now, but they don’t have to have, or raise, the capital to cover them for five years — until 2023.

The problem the banks have now is that the more properties they offload on to the market, the more pressure they will put on prices. And if Spain’s rental property bubble has indeed begun to hit resistance, the biggest buyers of those properties, global private equity firms, are losing their appetite for buying more.

And that is where the banks’ latest cunning plan comes in: to resurrect the 100% mortgage (no down payment), a high-risk loan instrument that notoriously helped fuel Spain’s madcap property boom and subsequent bust and mega-losses for the banks that they’re still trying to digest (see above). BBVA was the first to bring it back. Other banks have since followed suit in a mad rush to keep the market alive. And just as before, not a whimper of concern has been heard from the bank regulators. By Don Quijones.

With impeccable timing, three big catalysts of Spain’s recent economic growth are changing direction, all at the same time. Read…  Three External Tailwinds Turn into Headwinds for Spain’s Economy

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  28 comments for “Wall Street Mega-Landlords Piled into Spain’s Rental Property Boom, and Now it Hits a Wall?

  1. Justme says:

    An add-on question might be whether these very same Wall St landlords may have to unload some of their US house holdings if the bet on Spain goes bad. That could get interesting. I think we all remember that investors bought about 6-7% of the US housing stock after the 2008 crisis.

    And said Wall St landlords did these Spain deals at the end of 2017? Hmmm…..

  2. jon says:

    Still don’t see the rents or prices going down…

  3. john nilsen says:

    By chance do you know how much private equity funds have spent on real estate in other major markets around the world e.g. Canada, the US, London etc.. Here in Canada they have been blaming foreign buyers for the run-up on prices, and using that as a pretext for new taxes. Reflecting on this article, I wonder what role equity funds may have played in that run-up here and abroad.
    thanks for your thoughts.

    • Wolf Richter says:

      I don’t have this data. But it would be interesting.

      In the US, the PE firms have sold off their single-family rental divisions to the public (REITs), and these REITs are now back buying up homes. But this is different from foreign investors buying homes and letting them sit vacant. When an investor buys a home and rents it out, it remains part of the housing stock. If an investors buys a home and lets it sit vacant most of the time, this home is removed from the housing stock.

      Investors buying homes in urban areas and letting them sit vacant really distorts the housing market.

      • d says:

        “Investors buying homes in urban areas and letting them sit vacant really distorts the housing market.”


      • QQQBall says:


        are home loans in Spain recourse to the borrower?

        • Wolf Richter says:

          Yes, but not only that, they’re also mostly variable-rate mortgages. That’s why they caused so much damage and social upheaval last time they blew up. So 100% mortgages — full recourse and variable rate — in a rising interest-rate environment are very risky for lenders and borrowers.

        • QQQBall says:

          thank you. that is a toxic mix. plus prices inflated by high leverage.

  4. Aussie Andy says:

    I believe the Spanish look down on renting, home ownership is highly prized. As for 100% mortgages I have no problem with this so long as it doesn’t exceed 100% (purchaser covers closing costs). As everything today is a $dollar down and a $dollar a day

    • robt says:

      I have a problem with 100% mortgages, insofar as having a down payment of any amount indicates that the purchaser has at least some degree of financial responsibility and discipline. A concomitant symptom of no-down-payment purchases is lax qualification standards, exactly what happened during the last mass mortgage default event.
      Also, even assuming the purchaser can sell for the price they bought, the property is immediately significantly underwater when sales commissions and expenses are considered.

    • John Taylor says:

      I’m a big supporter of all housing loans being non-recourse (take the house but nothing more).

      Banks have the financial clout to have options. They essentially control the supply of cash into the market which indirectly controls the market. If banks want to take crazy risks like 100% loans, at least it’s not as disruptive to society if they are non-recourse. The government has their backs and they know this.

      For the purchasers, they’re stuck with what’s offered – it’s not a level playing field. If all you can get are overpriced homes at full recourse 100% loans, some people will take that risk with the hope that they can have a decent place to call home which they can be proud of. For those who don’t take the risk – like me – you’re stuck basically knowing that you’ll always be living a temporary hotel-room style existence in makeshift places. If I wait another decade for housing prices to rationalize I’ll be in my 50’s – so it also means giving up on raising a family.

      It’s a depressing mindset so I fully understand why people roll the dice on making things work. If they lose (maybe their jobs disappear or their variable payments become unaffordable) they shouldn’t be treated like deadbeats or criminals, but recognized as regular members of society facing hard times.

      • Rafael says:

        Great comment. But having the members of congress and senate
        in their pockets banks will have upper hands. Their bonuses and
        stock options will take precedent over the rational thinking. Members of the society are the core of banking existence but we are soon or later being treated as the criminals and deadbeats. I think that the
        banks are doing much better job of screening applicants and making sure that people are not going to be delinquent. I am a builder from Chicago and we notice the interest among the young price conscience people. This is great. If you can only buy what you can afford than I have to build what I can sell. We have the economy based on the government spending , government regulation. Young people are being trained not to take risks be politicly correct and their sense of
        business is distorted. I think that very few people dream of being small or medium business owners or taking the business over from their parents. I find this very sad . It is not an American way of life. In my business if you are bright and hardworking person you can make in one or two years what most of the people make in twenty years The sad story is that young people live in the social media distorted reality and they would rather spend hours on watching You Tube and Facebooks rather than pursue some money making interest or so called jobs. The parents by fueling the very often unrealistic expectations of their kids , are not helping. I am in the position that I create something tangible something of the value. I prefer that over
        being the creator of mortgage or some financial derivative of
        very suspicious value. Young people do not see the value in durable good formation or construction work. The dream jobs nowadays are state , city or federal government positions which offer job stability
        good pays and tones of free benefits. No risk involved, no creativity needed. What a sad reality ? But it is scary to start your own small business and face state , city and federal taxes, regulations and workforce competition with the big companies who offer less opportunities to growth but offer stability and health insurance.

  5. Javert Chip says:

    “…loans that had gone sour but also loans that are likely to go sour some time in the future [; b]ut the law grants lenders a five-year grace period before having to actually adjust their capital ratios to take into account the provisioned debt…”

    This is like saying you can drive drunk today, but you don’t have to report that you killed anyone for 5 years.

    The most amazing thing is regulators actually get paid for thinking up this crap. What’s the difference between this ridiculous policy and the way European (especially Southern European) banks have operated for the last 20 years?

    • Mean Chicken says:

      Eurozone debt is zero risk till it’s not, so your guess or mine is as good as any other drunkards. Cheers!

  6. ScottS71 says:

    Great articles this week, as always.

    What discount rate are these assets being unloaded for by the banks? If they are big enough, they would have room to move in rental and selling price; untill ROI doesnt work.

    Also interesting that, like someone pointed in another article, for the US market, the public doesnt have access to these deep discount auctions; which appears to be the same in Spain.

  7. Lenz says:

    If you were wondering at what discounted auction prices here’s one example from personal experience in Los Angeles, CA.

    Oct 2015, 1bed apt for sale asking price $280k
    After a few rounds bank rejected any offer bellow $330k, even a cash offer above original asking price.
    It was removed from the market and 3-4 months later bank sold it at auction to an investment group for $225k.
    May, 2018. 1bed apt in the same are going for $400k range.

    • ScottS71 says:

      free market capitalism at its finest hour.

    • Bellinghouse says:

      The same thing happened to me when I was attempting to purchase condos in Scottsdale in 2009-10. I put offers in on condos on the MLS for full price, $80 – 90k. Some were short sales, which the owner would approve and their agent would forward my offer to the bank. I would follow the listings and notice that they would sell at auction for as low as $55,000. This happened on six properties and I got NONE of them.

      • Mean Chicken says:

        Why weren’t you at those auctions? I too noticed prices at auction seemed below previous asking prices and the transaction price almost seemed pre-arranged (my personal suspicion) the couple of times I attended for sake of of curiosity.

      • Rafael says:

        You were not supposed to get them. They went to the hedge founds.

  8. d says:

    The hedgies can afford to buy bulk rentals, as it is a place to park excess cash. They never really loose on these deals, as the write all losses and maintenance off against taxes. And can always IPO then off as REITS off some form.

    REITS are a different issue as they frequently finance their deals

  9. Cynic says:

    I sense that these people have failed to understand, in making these acquisitions, that they are operating in a profoundly different culture to the Anglo-American.

    Young Spaniards are perfectly happy to stay at home with mummy and daddy, with the good old home cooking, just so long as they get opportunities for sex somehow -this can always be managed.

    Apart from being broke, they are simply not champing at the bit to get out there and be royally screwed by landlords native or foreign.

    Spaniards are a herd-like and unadventurous race (hence the success of Francoism) who look in general to profit from family, contacts and corruption rather than make their way in the world boldly, and home is always where the safest herd is.

    Only dire, starvation-level poverty drove the Conquistadors over the seas.

    You are more likely to starve now paying an extortionate rent, than staying at home.

    • d says:

      “Only dire, starvation-level poverty drove the Conquistadors over the seas.”

      Or was it fear that Portugal (Columbus was after all Portuguese) would get the new lands discovered by china. The treaty the gave Brazil (which neither knew at the time existed) to Portugal. When Spain wanted Portugal to end up with nothing in the Mainland Americas. Suggest this most strongly.

      It is important to be fair and remember Spains Major problems, start in the Vatican.

      As to multi generational living it is intelligent and financially beneficial, much of Asia still lives that way, They take those intelligent living methods with them, when they emigrate. it one reason why their Family wealth, grows so quickly.

      Those 6 + bedroom Multistory Mini Mansions that are frequently a Realtors nightmare are hot fast moving stock if you have wealthy Asian or Poloynesian family clients.

      There is one directly over the street from me now. It is the best house in the street, it has a family of four plus the older brother in-law and his wife. The eldest daughter is 27 unmarried, has a good job, and owns another tenanted rental property.

      The mother is quiet concerned that at 27, the daughter has no permanent male companion. She is quiet attractive, personally I believe she just dosent like boys. A lot of chinese girls come here, as we have a very relaxed attitude to girls like that, in this country.

  10. hendrik1730 says:

    Romans, citizens, countrymen, lend me your ear – nihil novi sub sole. The fact that 100% loans ( no downpayments ) are being “resurrected” in Spain is only to blame on the regulators. If they make it illegal, it does NOT happen. It’s as simple as that.

    Cfr. the repeal of the Glass-Steagall Act and zero-interest rates. Which led straight to the Great Depression. With thanks to a certain mr. Bill Clinton and another mr. Alan Greenspan, both of which are honorouble men.

  11. raxadian says:

    What most people don’t get is that Rental properties is at most a middle term good business. Because in a ddecade or so things change and more places to live get build. Even owning buildings in the most important business or tourists hub of a city is not a surefire investments because people and cities change.

    When late comers start to invest in time to pull out.

    Same when everyone and their dog is trying to sell you something as a sure way to make money.

    Think of it like the sea, it rises and lows but you also have waves.

  12. MD says:

    Getting economic growth – hence popularity – via usurious lending practices is just so damn easy for a country’s political elite, when the thinking is only ‘do what it takes to hold on to power’.

    This is why it keeps happening again and again – and shows the difference between statesmen (who manage a country) and politicians (who manage the next election). We have lots and lots of the latter in the world these days – very few of the former.

  13. Mark says:

    Is there a cart and horse element here? I have seen the price gouging on rent with many friends here in Spain and it only happened after the banks started offloading to these big investors. Previously, we saw properties appearing at auctions (after the bank managers had first pick) and then all of a sudden, there was just the real junk coming available.

    Should they take any big losses at some point, maybe it’s a bit of justice for the price gouging that’s been going on.

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