July 19, 2020

Spanish real estate legal context post-Covid19- REO, NPLs: Keys and tips for investors.

Spanish Real estate market has suffered for some years from the public scrutiny, from authorities and society representatives and numerous rules and intervention measures aim at favoring and protecting debtors, especially consumers and small businesses, widening a gap of legal uncertainty that has been exacerbated by the economic crisis following the outbreak of the Covid-19, which now discourages the interest of investors and, at the same time, as all crisis this one brings opportunities for those who can identify them on the right time.

1   At present we have:

  • Law 29/1994 of 24 November on Urban Leases, in its latest reform on the subject of rental periods, extended the term of the tenant of dwellings from 3 to 5 years.
  • Law 5/2019, on real estate credit, reinforces the protection of the mortgage borrower and/or guarantor, debtor, and guarantors, with longer and more complex procedures. Spanish central Bank has been warning of its interpretation that loan portfolio assignments must respect the rights of debtors and guarantors provided in this Law.
  • Multiple scattered rules at regional and municipal level on housing policies with debtor-friendly measures for vulnerable groups complicate the picture, e.g. in Catalonia, Law 18/2007, of 28 December, on the right to housing, and more recently Decree-Law 17/2019, of 23 December, on urgent measures, amended by Decree 1/2020, forcing the exploitation of empty housing, and house availability as a solution for vulnerable groups at risk of eviction, even accepting squattering.
  • COVID-19 measures: aids after the coronavirus crisis substantially consist of moratoriums on evictions, on mortgage loan installments and rents, for residential houses and offices, retail stores, and industrial premises of small businesses.   The impact on the real estate sector will not be uniform, but rather will vary according to the sector (tourism, hotels, and restaurants, etc.), the type of product (offices, commercial premises vs. residential) and location, etc

2. In this new context, investments in REO and non-performing Loans NpLs portfolios will sustain a significant impact:

Investors must review the composition mix of each portfolio, taking into account,

type of assets, authorized uses, type of user and, very importantly, the location of the property, the underlying asset, because the territory will determine its regulatory framework and help better redefine the schedule to achieve a return on investment, which goes through the legal procedure (expected to suffer higher legal costs) to get the award and possession of the property, and this, in a context in which, as noted, it is estimated that in some regions up to 10% of homes can be “occupied” without legal title requiring extra efforts to vacate squattered properties.

  • The collapse of courts and governmental agencies with staff shortage are accumulating, imply slows down the procedures to obtain the yield generally expected in pre-coronavirus times in this type of operations (e.g., foreclosures, modifications or evictions of leases, etc.).
  • Valuations and liquidity will be reduced, which makes it advisable to adopt more conservative strategies in investment profitability projections.

3. Yet, smart investors can find the positive side, and realize some good news:

  • Investors with financial capacity, good product analysis, good legal team, and medium and long term vision will be able to improve negotiation positions and find good investment opportunities at lower prices. Now good legal professionals in these projects are a value driver
  • Spanish Supreme Court, in its recent ruling STS 151/2020 of 5 March 2020, confirmed the inapplicability of the mortgage debtor’s repurchase right when the loan is transferred in a package of credits, a typical NPL operation, unless an essential element of the loan is on a judicial dispute, i.e. the existence or legitimacy of the loan and so disputes over any other non-essential aspect may no longer trigger debtor’s repurchase or rescission rights, thus facilitating these operations.
  • Royal Decree-Law 26/2020 of 7 July 2020 aims to reactivate the housing sector with a public-private cooperation program for the transfer of public land by means of building lease or surface rights for the construction of affordable rental housing, although it requires the participation of autonomous communities and town councils.
  • As the new normal becomes installed, a good knowledge of new keys and the gradual reactivation of economy allow to redefine plans to suceed in the new context.
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