The sale announced by Banco Santander of its entire real estate stock, with the exception of its headquarters in the capital of Cantabria, and the simultaneous long-term rental of the same will be the largest real estate transaction in the history of Spain. With publicly available information, buyers paid 4,000 million Euros, while in parallel will sign a lease on a longer term basis (around 20 years) after which it would have the option to repurchase at market prices, a “lease –back” in any order.
Hours later, the second largest Spanish bank, BBVA, has announced the sale of all properties in Madrid, with the exception of the emblematic Palacio de Recoletos. The operation, in fact, is an active exchange of land owned by another company to carry out an ambitious real estate development that would include the construction of venues for its various services in the north of Madrid, now scattered over eight buildings. Faced with the apparent departure of Santander’s real estate sector, BBVA would rationalize his ownership thereon.
What elements are common to both, in addition to the time of this announcement? Both conform with the rest of the banking system, one of the main groups of property owners in the country: in addition to the headquarters, banks and savings banks together hold more than 40,000 offices, mostly in property. Another common denominator is that the two banks will generate capital gains from the sale (1,400 million Euros are announced by Santander), which will feed its own resources and strengthen its solvency ratios, both aspects of fundamental importance in expanding the processes that address both entities. There the similarities end.
The final results of the operation of Santander are less easy to anticipate. That a major operation done to assimilate the other major foreign entities alone is not sufficient guarantee that will generate the same consequences on the efficiency of the organization and ultimately on the wealth of its shareholders. Unlike the purpose of BBVA, the most important purpose, and most obvious, of Santander has a lot to do with the need to have sufficient liquidity and solvency to acquire other assets, presumably banking. Be influenced, therefore, by regulatory requirements before or after alleging that the asymmetries between the forms of expansion and the calculation of own resources, are more demanding than with other real estate assets.
The financial logic would say that the most basic operation of Santander is primarily determined by the real estate cycle. The bank enters into a lease with these long-term real estate funds. Unless those tenants, real estate investment funds (including those managed by the Banco Santander), are particularly clumsy or too generous, the present value of such leases, capitalized at the rate of discount applicable to Santander as lessee, will match the selling price of the property. Income to pay for rent will be a percentage (market is around 6%) which turns on the value that now have the properties.
In other words, given a hypothetical collapse of the Spanish property market, as Santander would keep the assets in property committing to a long-term rental, for a financial value equivalent: the same proportion in which falling house prices affect the value of the property owned, that the “surrender value” of a lease, committed to long term, and based on market prices prior to the alleged reduction in market prices. Rather than a strictly real estate transaction, it seems reasonable that those responsible for the Santander have tried to adapt its strategy to sell the bank, trying to optimize financial resources in the regulatory context and pressure by the growth of banking business strictly.
The positive effects assume to be the exploitation of regulatory asymmetries, both in taxes and in demands for solvency. In the first case, the asymmetry stems from the fact that rent payments are tax deductible, while the costs are not attributable to their own resources to finance a property owned by the bank. In the second, the solvency rules for punishment in terms of resources, the maintenance of real estate owned, compared with the option of renting. It is believed in something more than EUR 200 million releases of resources which would be announced through the operation.
Together with the previous effects, operational efficiencies could be gained if, in parallel with the sale and rental, the bank also would waive the management associated with real estate, to specialists in outsourcing the management, which could result in lower operating costs, and greater concentration of its resources, in bank management.
This could be in short, an optimization strategy (solvency, liquidity) and operational (alleged exploitation more efficient, on lease of property), but not an operation designed to extract speculative gains assets whose value can fall. After all, these buildings are an integral part of the business, such as information technology, security, communications and human resources. In the same way that many banks have outsourced activities and resources that are necessary for their business, but that can more efficiently be performed a third party, why not do the same with the management of the estate? The necessary condition for them to be wise in order to lead to greater efficiency in banking.
Ultimately, the success of an operation like that of Santander, which seeks to maximize liquidity and solvency to continue growing in the banking business in-house
(Open offices, for example) or external (through acquisitions of banks), will depend on the optimal use of these basic resources (solvency and liquidity) in their ordinary activities on their “core business”. What matters ultimately is not to grow because they have resources, but using them efficiently, creating value for shareholders. If it can be seen in the share price and their contrast with those of others who have chosen to maintain these real assets.
What parallelism can we find in our banks in the US who are pretty beefed up with real estate assets after the economic turmoil and what can we as Real Estate Agents do to gain leverage on these events?