Non Core Real Estate

Industry trends

The buoyancy with which the real-estate sector in Spain closed 2016 continued into the first half of 2017. Sales continue to increase, which is still being reflected in the price of housing and new starts.

According to the latest available information from the General Council of Spanish Notaries, over 212,000 homes were sold in Spain in the first five months of 2017, a year-on-year increase of 14.5%. The rise is based on the positive trend that continues in the determinants of demand, including: growth in employment, increased consumer confidence, low interest rates and expectations of a revaluation of housing in the coming years among other.

Thus the price of homes at the close of the first quarter of the year has risen at a year-on-year rate of 5.3%, in accordance with the latest figures from the National Institute for Statistics (INE). This rate of growth is slightly higher than that at the close of the previous quarter (up 4.5%), and maintains the positive trend.

The mortgage market retains its momentum. New residential mortgage loans, not including refinancing, have increased year-on-year by 16.8%, according to data from the Bank of Spain corresponding to the first five months of the year. If refinancing is taken into consideration, the new loans have fallen 9.4% year-on-year in the same period.

The figures for construction activity indicate that new home starts continue to rise, according to data on new approved housing construction permits, which rose at a year-on-year rate of 15.1% in the first four months of 2017, with permits for nearly 25,000 units approved.

Overall, the real-estate market in Spain continues to grow, following the trend begun in 2014. If this trend is maintained, 2017 will be the fourth consecutive year of growth in both sales and home starts and the third in which home prices have risen.

Activity

BBVA continues with its strategy of reducing its exposure to the real-estate sector in Spain, both in the developer segment (lending to real-estate developers plus foreclosed assets derived from those loans) and in other real-estate assets. As of 30-Jun-2017, the net exposure stood at €8,760m, a fall of 14.2% since December 2016, driven primarily by wholesale transactions during the half year. In addition, it should be mentioned that in the second quarter of 2017 there was a further transfer of the outstanding portfolio of €220m to Banking activity in Spain.

During the first six months of 2017, on top of steady growth in standard retail sales there were three notable sales of wholesale real-estate assets portfolios: one of the rental buildings in the service sector for a gross value of close to €300m; another for around 3,400 residential dwellings with a gross value of €357m; and a third that corresponds to the contribution of assets to the subsidiary Testa Residencial of around 1,500 rental units for residential and service-sector use, and for a gross value of €485m. An office building has also been sold for a gross value of €56m. Overall, 14,563 units were sold during the half year at a total sale price of €1,169m. This represents a significant increase on the same period last year, both in the number of units and sales price. The policies and commercial plans established for each asset type will continue in place in 2017 with the aim of accelerating sales and reducing the stock, with specific actions targeted at the product which has spent the longest time on the balance sheet. In addition, work will also be carried out to increase the pace of reducing stock through the sale or contribution of packages of assets to participated real-estate companies or through commercial agreements with developers. The different initiatives under consideration are analyzed on a case-by-case basis, with the goal of preserving the economic value of the assets.

In terms of total real-estate exposure, including outstanding loans to developers, foreclosed assets and other assets, the coverage ratio was 57% at the close of the first half of 2017, an improvement of one percentage point on 31-Mar-2017.

Non-performing loans have fallen again, with limited net additions to NPLs over the period and a coverage ratio of 60% as of 30-Jun-2017.

Real-estate developer loans
(Million euros)

Coverage of real-estate exposure (Million of euros as of 31-03-17)

Results

This business area posted a cumulative loss in the first half of 2017 of €191m, compared with a loss of €207m in the same period last year. The highlights of the income statement in this respect are: earnings from sales higher than the first six months of 2016, boosted by the sale of an office building, and the generation of lower net interest income as a result of lower exposure, partly due to the different transfers made of the outstanding portfolio to Banking activity in Spain.

Financial statements (Million euros)