Europe on Sale? Baloney!

The economies of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) are in disarray. Europe is in the throes of a banking crisis brought on by (among other things) exposure to Greek sovereign debt. Many of you have been asking if now is the time to jump in. Some of you read this piece in The Wall Street Journal and got excited.

If you have been dreaming about that Spanish Hacienda or Portuguese villa in an olive grove, you are right to get excited.


The deals are set to get much better despite brokers’ efforts to talk up markets. If, like me, you closely follow what’s under the bonnet of European real estate markets you will have found that these comments from brokers and journalists don’t give the full picture.

Sure, as the writers of articles like in the WSJ piece above point out, prices have fallen. But they are set to go into free fall in parts of Spain and Portugal. As for Greece…how far prices will fall and what currency real estate will change hands for is anyone’s guess. You would be insane to go there now and spend euros unless the deal is so good you are almost given a villa.

Ireland’s economy and real estate market is in deep distress. Four years into our crisis, prices are still falling. As I told you three weeks ago, a recent survey put Ireland on top of the charts for price falls so far this year. And as you have been reading in these alerts: My recommendation for Ireland is to only buy if you find a killer deal.

Ireland isn’t a buy…but there are nuggets in the debris. For now, at least, the best place to find these nuggets is in the fire sale auctions I have told you about.

Before we look at what really is happening in the rest of Europe — a word of caution…

Europe Has Gone to “No Bid”

“Price expectations have finally adjusted to the new reality. People are finally accepting that the game has changed,” says Joachim Wrang Widen, director of Christie’s International Real Estate in Europe.

This is the type of rubbish we have come to expect from brokers. Almost all markets in Europe are still “no bid”. There’s almost no activity.

Mainstream outlets across Europe and the US (this was quoted unquestioned in The Wall Street Journal) are more than happy to fill space with these half truths and misrepresentations. Sometimes the newspaper is trying to keep the real estate ads sections of their newspapers full.

I watched this play out in Ireland, too. The market in Ireland stopped in ’06 amid uncertainty over stamp duty (transfer tax) rates. By ’07 it imploded. Read how the following Irish deal is described, and then I’ll comment:

Earls Well that ends well
By Tommy Barker
Saturday, May 09, 2009

BUYERS, be brave — you’ll be the real winners at Waterfall’s Earls Well development — getting the best new homes, bar none, built in Cork (if not all of Munster) in decades. And, you’re being offered them for a bargain, value for money price.

Assertive statements, to be sure, especially when prices here for these smart, contemporary-designed country houses do indeed start at just over the €1 million level — at what is clearly the worst time ever for the country’s house builders and property market.

But, it’s true, there’s value, and quality of build here the likes of which you won’t have seen in a decade of the property boom. Had these houses been launched a few years ago, prices could well have been up to and over the €2m mark.

Nothing sold in this development. Not a single “real winner”. The developer hasn’t actually closed on the access land even now. This was written at a time when the developer’s business was unraveling and the Irish real estate market was dead and buried.

Why Pay Twice as Much as You Have to for Any Property?

So, tread carefully when it comes to attaching any significance to what you read or what agents tell you. It’s easy to get seduced by that villa in an olive grove. But you don’t want to pay double what you might pay in two or three years. It can take a very long time for markets to find their new equilibrium. Particularly in Europe where foreclosure and bankruptcy processes are much more complex and drawn out than in the US.

Over in Europe…

Firstly it’s important to understand that Europe (or these PIIGS) certainly isn’t a homogeneous market. Tuscan villas, for example, are predominantly owned by wealthy Italian families. The house may have been in the family for generations and is likely debt-free. The owner won’t sell unless he absolutely has to.

In the Algarve on the other hand…Irish people bought villas on golf courses at inflated prices with 100% mortgages from developers who are now bankrupt. This buyer in many instances is not making his mortgage 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 mortgage book would need to be written down. We see a similar situation on some of Spain’s costas.

A Tale of Two PIIGS…


So, we have places like Spain and Portugal’s tourist costas where British and Irish bought at inflated prices with finance. Many bought as investors in the final breaths of the bubble. Germans have also bought in some of these areas but they tend to be less leveraged and they bought as a second home they would use. The are less likely to be distressed. In these areas there can be major oversupply problems. There was too much construction — many of it poor quality or half built.

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 in these alerts because there are much better deals to come.

In many ways these markets mirror what has been happening in Ireland with two exceptions:

1. Fire sales haven’t really started the way we are seeing with the auctions in Ireland.

2. The economic outlook in Ireland is very bad. But there is a vibrant and booming multinational export sector. There is no bright spot to the economies of Spain and Portugal and the Spanish banks might be the time bomb that’s too big to fix.

Estimates put the total of Spain’s excess supply and distressed inventory as high as 2 million units. Much of this inventory is along the touristy costas. Unemployment is topping 21%. If you are under 25-years-old there’s a 46.2% chance you are unemployed. In a dramatic shift young people are clambering to get visas to work in countries like Chile and Brazil.

There has been no genuine effort to move this inventory of 1 million-2 million units (depending on who’s guesses you believe). Spanish banks have offered finance of up to 100% for some buyers of distressed properties on their books. But the prices offered just don’t make any sense — they tend to be between 70% and 100% off peak prices. On the open market these units would have to be discounted by at least another half to sell. My point is we have no idea, nor does anyone else.

Before we will have any sense of how far prices will fall we need a market. This inventory will have to be dripped to the market. In Ireland we have been able to get a snap shot picture of the market through the fire sale auctions. They tell us that prices will likely be 70% to 80% off peak prices if you need to sell today.

Driving across Dublin from the International Financial Services Center last weekend I visited a dozen condo buildings that are complete and now controlled by our “bad bank” NAMA. In the coming months these buildings will be sold. The buildings I visited alone hold a multiple of the inventory that was sold in ALL these fire sale auctions. That’s a lot of inventory to be added to an illiquid market. This will put further downward pressure on prices. That’s why I believe Ireland is only a buy if you find and can bid uncontested on one of those nuggets.

In Spain and Portugal they haven’t even got to the first phase of recognizing the problem. The market first needs to be tested through a vehicle like these fire sale auctions we have in Ireland. That will give us a starting data point. Then we can guess how far prices will be pushed down as this excess inventory is absorbed.

Don’t hold your breath about Spain or Portugal growing their way out of their problems. Don’t hold your breath for a surge in demand for second homes from northern Europeans. The British were always the biggest buyers here and they have their own challenges.


The other PIIGS are places like Tuscany and Sicily in Italy…Granada in Spain…and for simplicity let’s lump France’s Provence and the Cote D’Azur in here, too. Leverage and distress is much less of an issue in these markets. There’s isn’t this oversupply problem. While prices rose dramatically in the boom, the construction frenzy we saw elsewhere wasn’t permitted.

If you have your eye on a Tuscan vineyard and/or remote Spanish hacienda you might be wondering what a glut of condos on the Costa del Sol has to do with you. My point is that when this inventory hits the market (and it has to sooner or later) it will drag all prices down. Sure, the prices of condos on the Costa del Sol will fall further but everything will be affected.

This is a time for keeping your powder dry. Prices are only heading in one direction for the moment. We have been waiting for the opportunities to come.

Get Ready for the Property Opportunity of a Lifetime…

Two years ago I told you about a strong opportunity in Granada, Spain. Since then I have run the rule over more than 100 deals…and passed each time. Our patience is being rewarded as the deals are getting better. It’s frustrating though that we have to wait so long. But when the opportunity comes we’ll be ready to act. It might just be the opportunity of a lifetime. The real estate markets of Europe’s most attractive second home markets were in disarray before this current crisis engulfed us.

A story/urban myth about a major US developer and investor goes as follows: As a real estate crisis took hold he gathered with a golden circle of developers and bankers to figure out how they could re-energize the market and save their businesses. To start, they traded tales about how bad things were. Our friend stood up and put on his coat. When asked where he was going he replied “to the beach, call me when all this is over”. Sometimes doing nothing is the best action we can take.

The first quarter of next year I plan to be a very good customer of Irish budget airline Ryanair. I’ll be making multiple scouting trips to Spain, Portugal, Italy…and Greece once we see what will happen around their default.

Stay tuned…go to the beach and wait to hear from me when it’s time to act in Europe. I’m hoping it will be in the not-to-distant future.


Ronan McMahon
for The Daily Reckoning

P.S. If you do come across a fire sale that you feel is just too good to pass up, remember my golden rules of buying distressed property. Only buy quality…the creme de la creme. Don’t ever buy in a half-built project. And don’t buy in a project where there isn’t a functioning and funded HOA with enough owners contributing to maintain services.

The Daily Reckoning