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Posts Tagged ‘distressed property’
As a property agent with a reasonably high profile, we receive a lot of requests from developers to promote their products. An increasing number of these have been Spanish developers offering 100% mortgages (including closing costs) for buyers and high commissions (6-10%) for the agents. They´re usually big developments (500 units+) with facilities such as swimming pools, golf courses, sports centres, shopping malls etc.
I´ve always had suspicions about these developments and so I visited one this week (23 Nov 2010) to satisfy my curiosity. I won´t give away too much information about the resort we viewed, but there are lots of them in the Costa del Sol and it´s highly unlikely we will ever promote one.
The development we viewed had more than 1000 units all told, and although construction has completed, most have never been occupied. The developer told me they were 80% sold, but he actually meant that they´ve taken 20% deposits for 80% of the properties pre construction and most of these buyers have no intention of completing, certainly not at 2007 prices.
As sales fell off a cliff in late 2008 and people delayed closing, the developers cashflow dried up and funds have clearly not been available to maintain the resort over the past 18 months. Mould was visible on every property we viewed with cracks on the interior and exterior walls, walkways and ceilings. No heating or lighting fixtures had ever been installed.
The golf course was overgrown, the sports centre was never started, the shelves on the supermarket were bare, and the entire roof of the indoor swimming pool will need to be replaced due to the inadequate air conditioners that were installed.
The developer clearly owes the bank a fortune and the bank is desperate to divide this debt between 100s of buyers rather than one developer (who is probably insolvent).
Hence the 100% mortgages.
The pitch is that the bank provides 80% on their “valuation”, the developer “pays” your 20% deposit plus your closing costs and then you get your free property with exclusive access to their rental pool.
Give me a break.
So you get a 2 bed property for €250,000 without having to spend a penny. You just need to service a €200,000 mortgage over 20 years at a variable interest rate with a net rental income that probably wouldn´t amount to more than €4,000 per year. Setting aside the substantial problems with the existing and non existing facilities, no other bank would give you a valuation of more than €175,000 and they wouldn´t lend you more than 70% of it.
Clients ask me about Spain all the time and I´ve no doubt Torcana would have quite a few takers for Spanish property like this with 100% mortgages, great facilities and easy access to the beaches and airports. We´d mostly sell them to people who would buy sight unseen. We might sell 50 of these over two months if we put our minds to it, and we´d make a tidy commission on them all.
The only problem is that our reputation would be destroyed within a year, because these are terrible investments.
That doesn´t sound like a sustainable business plan to me and so it looks like we´ll be sticking to places like Florida until other markets become sufficiently attractive (not to mention safe) to investors.
I´m curious about two things.
Firstly, why are Spanish banks allowed to blatantly inflate the valuations of properties on their books and then offer mortgages on them? Secondly, what sort of property agent would actually encourage their clients to invest in them?
The result of all this is that lots of naive buyers are going to get (forgive me) screwed, but they won´t purchase anything close to the amounts of properties needed to reduce the current oversupply and return some semblance of market normality to the area.
Regards
Colin
I was in the south of Spain earlier this week (22 Nov 2010) with an American friend who wanted to purchase a holiday home. I´m in the area often enough, but I haven´t spent time viewing a variety of properties along the coast and in the hills behind it since the middle of last year.
Apart from helping out a friend, I figured it would be a good time to see what had changed and if there were any great deals out there.
After some intensive online researching, we booked appointments and viewed about 17 properties between the two of us. They were located in Las Mijas, Almuñecar, La Herradura, Lentigi and Granada. If you´re not familiar with Costa del Sol, that´s a pretty decent mixture of small vs large towns and coastal vs mountain properties.
One of the village properties we viewed in the mountains of Granada had extraordinary views and was really well priced at €105,000. Most village properties aren´t like that though, and the owners of them generally wanted 30-50% more than any rational buyer would be willing to pay.
Medium quality - it´s not going to work as an investment strategy
With the exception of one (which I´ve discussed in this post) the coastal properties we saw were of medium quality and prices were generally 10-30% lower than peak rates. Think €190,000 for a two bed and €240,000 for a 3 bed, with either sea views, or walking distance to the beach, or both. The trouble with these units is that there are tens of thousands (and perhaps hundreds of thousands) of them all over the Spanish coast.
They´ll make perfectly nice holiday homes, but supply will exceed demand for another decade or more. That makes it difficult, if not impossible, to foresee even modest capital gains for the owners of them.
As for rental yields, you´d be lucky to get 2-3%.
Regards
Colin
Florida has spent most of the past 10 years near the top of many Irish & British buyers list of places to purchase holiday homes and property investments.
According to a recent survey carried out by the National Association of Realtors (NAR) and our own anecdotal evidence from the ground, the international buyer has never been more important in Florida but they are being led not by the British and Irish, but by the Canadians.
Torcana has never had a bigger variety of international clients than we have now. For example, we sold 25 properties to 7 different nationalities in October this year in Sabal Point alone, which included Americans, Canadians, Spaniards, Swedes, Germans and of course, British and Irish.
According to the NAR survey, 36% of international buyers in Florida were Canadian, followed by 16% in Latin America, 15% in the UK and 14% from the rest of Europe.
Setting aside Florida´s natural strengths as a holiday, retirement and investment destination, the combination of a huge drop in property prices (up to 70% from 2007 prices) and a weak US dollar are attracting huge numbers of international clients whose pounds, dollars and euro have never stretched so far.
Another key trend we´ve noticed among our key overseas buyers is the disappearance of the new property purchase and the dominance of the cash buyer. Agents and developers who are depending on sales of brand new properties and/or sales to buyers who need mortgages are in for a very tough time on both counts. There simply isn´t a demand for it.
The statistics bear this out: 81% of all international buyers and 73% of UK buyers in Florida paid for their properties with cash (i.e. no mortgage financing) while 89% of all international buyers and 81% of UK buyers purchased a second hand rather than a new home. These are both enormous changes from just 3 years ago.
The typical two bed apartment we are selling now for $65,000 to cash buyers would have been previously sold for $195,000 to buyers availing of cheap finance. These are prime properties in great locations which can be sold either vacant or with a tenant already in place, depending on whether the buyer is a pure investor or somebody seeking a holiday home.
So it would seem that the buying opportunities are still there for those with the means and ends to get them.
Just don´t be surprised to see keen eyed Canadians and Latin Americans joining you in the taxi queue at Orlando International Airport next time you pay the Sunshine State a visit…
Regards
Colin
Ireland isn´t quite as deluded as Spain (at least the statistics are reliable), but properties are still overvalued. An “off market” bulk deal that landed in my inbox a couple of weeks ago serves as a prime example. It was 40+ tenanted apartments in a central Dublin location with an asking price of more than €20 million. The gross rental yield was 2.6% - which I can get in a bank. I wouldn´t have bought those apartments for €10 million, never mind €20 million.
Spain is a very beautiful country and it had one of the biggest real estate booms ever seen. I get asked about it all the time by investors who like the idea of purchasing a great value property there.
I tell them all the exact same thing - if you want a pure holiday home there are some acceptable deals, but if you want to make any money continue waiting because prices have not fallen enough and rental yields are still way too low and unpredictable.
Nobody in Spain (including the Central Bank) trusts official goverment estimates of an 11% decline in property prices over the past two years. The ministry of housing also refuses to release data on actual sales prices rather than the asking prices, which, as you can imagine, would be quite useful to people considering an investment there.
In contrast to the deluded government numbers, privately held property portals like idealista.com publish much more reliable estimates of a peak to trough decline in the real estate market of 24%.
My problem with Spain is that it should be a 60% decline considering the rampant speculation and house building that went on, not 24% and certainly not 11%.
Most importantly, the Spanish banks are still not telling us how many bad loans they have. The Bank of Spain estimates that there are potentially €181 billion in “problematic” real estate loans. In other words, loans worth 10% of GDP could be bad but this isn´t reflected in their accounts and they´d rather not talk about it.
Regards
In the late 1990s, enormous wealth was being transferred from venerable pension funds to Silicon Valley kids in their early twenties setting up overvalued dotcoms. I was a 20 something in San Francisco at the time and even at that tender age I couldn´t believe what was happening in front of my eyes.
Similarly in the late 2000s, an ever bigger amount of wealth is being transferred from those who overpaid massively for real estate to those who are willing to underpay massively for real estate. Funnily enough, a lot of the money lost was from the same venerable pension funds repeating their mistakes from a decade earlier!
The last two years have been great for Torcana as we´ve been sourcing a lot of high quality distressed property. Our job was to put it in front of cash buyers who are keen to take it off the hands of those who paid top dollar for them when prices were irrationally high.
We target areas that are going to recover fast when the tide turns. They are places within a 15 minute commute to the city centre, where professionals buy and rent, where they send their kids to great nearby schools and in neighbourhoods that are safe and clean with lots of parks and shopping areas. Makes sense to buy these kinds of properties right?
Despite having a local office, an enviable network of contacts and Torcana directors living in Florida fulltime, it´s getting very hard to find these deals. There are practically no new condos being built in Orlando at the moment and inventory of existing units is falling fast - the year on year sales figures are up 22%.
Residences at Sabal Point meets all of our investment criteria and with prices at $54 per sq ft (you couldn´t build them for twice that) we´re probably not going to have much trouble selling the 31 units we´ve exclusively secured for investors. As with all of our products, this is a turnkey investment with full services provided to buyers.
Regards
Colin
If you take a step back and look at what´s been happening to the property market over the past 10 years, you might figure that lots of people would take advantage of these booms and panics by selling when prices were high and demand frothy and buying when prices were low and demand flat.
Some people do exactly that, but not enough. The force of the herd mentality which encourages euphoria during price rises and panic during falls can be overwhelming. Warren Buffett has plenty of folksy quotes to illustrate how he made his fortune by doing what he felt was rational, which was usually the opposite of what most people were actually doing at the time.
Property shouldn´t really be treated differently to other products though. We should buy property when prices are low. If people want to buy it from us when prices are higher, then we should sell it to them. Then you repeat the cycle and buy more when the prices fall again.
Ironically enough, it´s the people who can treat property the same way they would treat an ipod who stand the best chance of making money out of it.
Regards
Colin
Last week a friend of mine showed me his new ipad. It was an impressive gadget and after checking out their eyewatering sales estimates I couldn´t help but take my hat off to Steve Jobs for anticipating demand ahead of the curve for yet another blockbuster device.
As happened with the ipod and the iphone, other companies are now rushing to launch rival devices, which will soon drive down prices and widen their appeal way beyond gadget enthusiasts like my friend above.
In theory that´s how a market works - price goes down and demand goes up. If Zara put an advert in the newspaper saying they´ll have 50% discounts on all stock the following weekend, there´ll be hoardes of people queuing outside the door on Saturday morning. If my favourite restaurant suddenly doubles the price of everything on its menu, I´ll start looking for somewhere else to unwind on a Friday evening.
Property isn´t at all like that though. It and many other financial assets move to a different rhythm. If property prices are increasing, more people will want to buy them, not less. There are few things that can cause people to rush to their check books as much as seeing a friend getting rich and wanting a piece of the action for themselves.
Over the past 3 years we´ve seen how the flipside is equally true. Unlike a department store, most people will not rush to buy a technology stock that just fell 30% overnight, and most people don´t rush to buy a property when the market is falling either.
Regards
Colin
A very positive article on the Florida Tampa Bay coast was published earlier this afternoon in the USA Today. Please see main extract below.
Florida is a huge second-home destination. It seems to have something for everyone: secluded beaches and urban buzz, golf communities and marinas, high-rises and bungalows at prices from ultra-luxury to shockingly affordable. It’s also diverse. The mansions of Palm Beach are far removed from the beach towns of the Panhandle and theme parks of Orlando.
But if everything that Florida offers came together in one place, it would be on the coast of Pinellas County. This includes Clearwater and St. Petersburg, just outside Tampa. It’s known by other names, including the Tampa Bay Area.
“We call it the ‘Nature Coast,’ ” says Debra Nobile of Innisbrook Real Estate Services. “The east coast (of Florida) is all big buildings and parking lots. Here, everything is nestled among the trees. There’s more beach. It’s more laid-back.”
Anthony Jaquinto, a longtime Realtor with Re/Max Realtec Group, says the area has great appeal to part-timers.
“The second-home market is big, about half my business,” he says. “It’s because of the beaches and the country clubs and all the other amenities.
“The Tampa Bay Area has an enormous amount to offer. There’s a really terrific airport, and within 35 minutes, you can be at towns up and down the coast or in premier golf communities. We have professional football, baseball, hockey, a big downtown and lots of cultural happenings.
“It’s much more cosmopolitan than Jacksonville or the Panhandle but much more affordable than Naples or Palm Beach, and a lot more natural than the entire East Coast. There are so many choices and amenities, and it’s all very user-friendly.”
It even has major theme parks: Busch Gardens and Adventure Island.
In much of Florida, only the deepest pockets can afford waterfront. But Pinellas County — the strip of coast from St. Petersburg north to Clearwater and beyond — invites a wide range of buyers.
“There are more or less luxurious communities, gated or non-gated, condos, single-family homes and townhomes,” Jaquinto says. “The price range allows almost anyone access to the Gulf. I can show you a smaller two-bedroom condo right across the street from the water for $150,000 or penthouse apartments on Sand Key for $2 million. Whatever your purchase price, we can probably accommodate you.”
That’s more apparent since the BP oil spill in April caused jitters on Florida’s west coast, and prices for some listings dropped 5%.
Condos along the water begin around $150,000, and single-family houses, even those with boat docks, can be found in the low to mid-$300,000s. Inland property is even less. Condos in the area’s premier golf communities begin at just $100,000, Nobile says.
The combination of low prices, beaches and urban amenities attracts buyers largely from the Northeast and Midwest. Jaquinto says many properties are used just for spring break and winter holidays. Thanks in part to affordability, they are often rented out at other times.
For people that purchased property in the USA between 2003-2007 it´s been a pretty disastrous 3 years. Don´t think anybody will disagree with that.
What about the people that bought in 1980 or 1990 or 2000? As the chart below illustrates, they are looking just fine. The red line is property prices adjusted for inflation every year and the blue line is average property prices in each of those years.
What about the people purchasing today at the 2001 prices? Where will they be in 10, 20 or 30 years?
Buying at historical lows means the rental yields will be high and once financing becomes available the supply of buyers (and property prices) will increase dramatically. If you purchase in 2010 at 2001 prices and sell in 2015 at 2005 prices, you´ve more than doubled your money.
However, the longer term view will depend a lot on interest rates and inflation too.
Unlike the Greeks, the US government can inflate its way out of trouble. Whatever your opinion is of the US debt (53% of GDP by the way), it´s ability to borrow is greater than any other country on the planet thanks to the unique status of the dollar.
Borrowing levels will have to stabilise though, and although there are lots of ways of doing that (some painful, others problematic) inflation is going to be a side effect.
If inflation does take hold in the US, that means interest rates will go up, which means higher mortgage payments for people. That´s not good if you have a mortgage.
Historically, that has also lead to higher rents.
It has also led to higher property prices.
So where will that leave the proud owners of distressed Florida properties with no mortgages in solid locations with steady renters?
Laughing probably, all the way to the bank.
Kind Regards
Colin Murphy
