Distressed in Europe

The economies of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) are in disarray.

Europe is in the throes of sovereign, political and financial crises. Greece is bankrupt and burning. Yields on Portuguese bonds hit 17% earlier this year.

This is the type of crisis situation that gets my attention. (I have written before about the opportunity to buy real estate at fire sale auctions in Ireland at discounts of 80% or more on peak prices.)

If you have been dreaming about that Spanish Hacienda or Portuguese villa in an olive grove, you are right to get excited. Prices have fallen. Almost every day I have a meeting or conference call to discuss a crisis opportunity on the Iberian peninsula.

But, PLEASE, PLEASE wait.

The deals are set to get much better. Why pay twice as much as you have to for any property? I’d rather wait. So far…waiting has saved me, and members of Real Estate Trend Alert, thousands.

On Portugal’s Algarve and Spain’s costas…Irish and British people bought villas on golf courses at inflated prices with 100% financing from developers who are now bankrupt.

This buyer in many instances is not making his monthly payments. The banks are sitting on the problem. They might realize 250,000 euro from the sale of a villa with an 800,000 euro mortgage. The shortfall would need to be written off and the bank’s loan book would need to be written down. They don’t want to do that.

I visited Portugal’s Algarve on a scouting trip to find distressed opportunities two years ago. This is an area I like…and enjoy visiting. You haven’t yet heard about Portuguese distressed opportunities from me because there are much better deals to come.

Because the banks continue to sit on the inventory and hide the problem, fire sales in this part of the world haven’t played out the way we are seeing with the auctions in Ireland.

Estimates put the total of Spain’s excess supply and distressed inventory as high as 2 million units. Much of this inventory (50% is a reasonable guess) is along the touristy costas.

There has been no genuine effort to move this huge amount of inventory. Spanish banks have offered finance of up to 100% for some buyers of distressed properties on their books. But the prices offered don’t make any sense—they tend to be priced at a 30% – 40% discount from peak prices. On the open market these units would have to be discounted by another 50% to sell.

Before we will have any sense of how far prices will fall, we need a market. In Ireland we have been able to get a snapshot of the market through the fire sale auctions. They tell us that prices will likely be 65% to 90% off peak prices (depending, of course, on location, type of unit, etc.) if you need to sell today. If there was any true market in Spain or Portugal I expect that we could buy at discounts of this magnitude.

This year I have detected a change of tone in my contacts on the ground. Finally, the banks and developers are willing to admit that they can’t sit on this inventory forever. They need get the bulldozers rolling or sell it off. They’ll likely do a bit of both. When they sell, it will be “off market”. The prices won’t be made public. Otherwise the banks would find themselves with a lot of angry customers who bought at the “old” price.

This is just the type of opportunity I look for on behalf of the Real Estate Trend Alert group. But the deal has to be right. So, for now—do nothing. You’ll hear from me when it’s time to act.

Editor’s Note: Ronan McMahon is a director of Pathfinder, IL’s preferred real estate advertiser.