Today’s real estate market in Spain is still quite active (esp. in residential properties, compared to other countries where most population rent apartments not to say other uses). Yet some insights are key to make appropriate decisions. Financially-sound investors searching to maximize their investments opt for different strategies, roughly:
• Direct investments in properties.
- In ordinary, open market.
- In public or private auctions.
• Indirect investment via purchase of non-performing mortage loans (NPLs) whereby the investor subrogates the seller-creditor.
Focusing in NPLs, some insight comments for consideration when deciding on investment strategies:
Pros and cons in NPL investments nowadays:
Selling parties are mostly banks needing to get rid of these assets due to banking legislation that was enacted following the financial and real estate crunch back in 2008. Financial sector is constrained by the regulatory framework as the government penalizes banks with bad/doubtful debtors of mortgage loans with a retention for the outstanding debt, so the bank not only loses repayment income but has a further balance sheet reduction.
This has been an incentive for Banks to put their NPLs for sale with good discounts, through different channels – private market or the public-owned company that absorbed huge amounts of mortgage loans and assets from the credit crunch (Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, SAREB).
Generally, purchasing NPls involves lower cost in principle due to being an indirect investment requiring to complete foreclosures (or other forms) and court proceedings to get possession of the asset or obtain debt re/payment plus interests and delay interests (e.g. award of property; or the debtor catches up on mortgage installments).
On the other hand, purchasing NPLs investors can better plan timing and somehow negotiate purchase price with selling party (banks) rather than in open public auction.
Relevance of the type of property:
Residential property nowadays may be less interesting due to the progressive reinforcement of legal protection on debtors, implying certain cost increases for the investor-performer, mainly as regards delay interests and limitations, legal costs, time to sustain unpaid installments as pre-requisite to activate foreclosure proceedings, % of auction value required to pay to get property awarded, and in some cases (e.g. individual NPLs) debtor’s pre-emption rights, and also indirect taxation. Still, profitability- yield, growth potential etc. are in many cases attractive for investors considering passive income vs value appreciation, short vs long term strategy, portfolio diversification (mix), and appetite for risk. In this respect portfolio acquisitions (usu large volume acquisitions) are the general rule to achieve acceptable yield considering not only the cost of acquisition, but also the necessary admin& legal costs associated.
Tips for successful deals:
In view of the landscape, an investor should consider the following:
1. Have sound own financial capacity, readily available funds. NPLs portfolios imply certain high amount of investment. Local bank finance involves complex and long bureaucratic procedures and restrictions among others due to AML check requirements.
2. Engage a coordinated team of trusted lawyers and tax advisors with local practice in real estate, litigation-procedural law, international and foreign investment controls and international transactions, to accompany the investor throughout long processes from start to end, it all in order to:
- Have an efficient tax and legal design and planning of tax and legal structures within the opportunities offered by the legal framework.
- Establish relations with local banks, AML checks (esp. UBO and source of funds disclosure requirements to help prepare and present the information consistently, to help investor open and operate local bank account. Some countries and investors are subject to reinforced AML due diligence.
- Defend investor’s interests in the court, usu. foreclosure proceedings for the smooth flow and agile process: “time-to-market” considering the sector’s own timings heavily conditioned by delays in proceedings due to courts big workload: accurate legal analysis of ongoing proceedings, status of occupation (tenants -debtor, lessees, squatters, etc.), strategies to recover possession and solve legally squatting situations, legal and tax planning when needed on specific operations, and accompanying in the proceedings from start to end – obtaining control or possession , or alternative formalization of re-sale, assignment or transfer of loan, or asset lease sale, etc., with legal certainty and tax benefits available.
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