Sitting in an office in Paseo de la Castellana in the shadow of Real Madrid’s famous Bernabéu Stadium, Juan Barba
recently took a short break from his urgent daily duties to brief PERE on the progress of Spain’s ‘bad bank’.
The Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (Sareb) is not really a bank, of course. It was set up last November to help cleanse the Spanish financial sector in the wake of the global downturn and excessive exposure to real estate. Some €50 billion of assets were transferred to Sareb in two tranches, with the biggest contributor being Bankia. The mission is to dispose of the assets at the highest possible value to ensure that Sareb makes the best possible returns for its shareholders.
The portfolio of nearly 200,000 assets is divided into two groups: real estate assets, for which Barba has responsibility, and financial assets, comprising property development loans. The real estate assets division has 76,357 vacant homes, 6,293 rented homes and 14,859 plots of land and already has done deals with the likes of The Blackstone Group, Goldman Sachs and H.I.G. Capital. The overall strategy is to realize assets by selling them via ‘retail’ channels as well as to institutional investors.
“It seems like it has been a long time since we started, but it has only been 10 months,” said Barba. “In January, there were three people here, but we have been building up the team and organizing for the tremendous task of managing €50 billion in loans and assets. One of the first priorities was to understand what we had inherited.”
Divide and conquer
Barba spoke about how the portfolio was totally mixed up at first. There were huge parcels of rustic land, or fincas, mixed together with small apartments. “On my side – the real estate owned assets – we have gone about ‘segmenting’ the assets,” he said. “The challenge with everything in Sareb is the size; we have approximately 107,000 assets and it takes more than just a couple of days to attach prices to these.”
As part of the segmentation process, the real estate asset group has segmented coastal residential land into main cities and secondary cities. “That helps because we have many investors coming here – hundreds – looking for particular things,” Barba explained.
Barba noted that coastal assets had received a lot of demand, and some 60 percent of the portfolio is completed dwellings. It also has rental assets for sale, which has attracted Blackstone and Goldman. “We are creating portfolios of rentals in order to meet demand from investors,” he said.
Also segmented is the commercial real estate portfolio, which only accounts for about 15 percent of the overall portfolio. It doesn’t have any dominant, prime buildings, rather it comprises a mixture of retail units, industrial assets and offices.
Barba also spoke of the use of special vehicles called bank asset funds for wholesale deals as opposed to retail sales. They are joint venture structures in which an investor brings a specialized manager and a business plan for the assets. In the first such example, in August, Sareb completed a €100 million deal called Project Bull with Miami’s H.I.G. Capital for nearly 1,0000 homes.
A need for understanding
Barba talked of the need for investors to understand Sareb’s needs. “It is not just a question of pricing but of having a business plan,” he said. “That is going to be even more meaningful for the portfolios we put out into the market in 2014. Investors need to understand we are trying to create joint ventures, not trying to simply get rid of assets.”
Barba continued: “It also is important that investors understand we might be in a change of cycle and they don’t get attached to the old market in terms of being a very illiquid one, where the price was the only reason to buy a portfolio. If the sentiment of the market changes then the pricing changes, even if the fundamentals are not quite there – a bit like the London market in 2009 and 2010.”
Summing up the real estate assets approach, Barba said: “We want to hear investors and their demands. The more specific the better, and we would try to put that in the market.”
A wide variety of firms have approached Sareb, from high-yield funds and private equity firms to some value-added strategies. “In terms of private equity, we see offers where they are not so concerned with the multiple but with the IRR,” Barba said. “For us, that is problematic. There also are some funds more concerned with the multiple, which is more aligned with our interest. We are trying to get in front of them and create joint ventures.”
The main challenge to Sareb’s mission, however, is the pace of recovery of the Spanish economy. Barba currently is working out the budget for 2014 and said the program would be along the same lines as this year. The one difference might be that Sareb will look to create more specific product to cater to niche demand.