(Adds CBRE researcher comment in ninth paragraph.)
Oct. 5 (Bloomberg) -- Catalonia and Andalusia, two of Spain’s largest and most indebted regions, are trying to sell $1.3 billion of real estate by the end of the year as the country tries to slash its budget deficit and keep borrowing costs from ballooning.
“We put the cream of the crop in the portfolios to ensure the sales are completed,” Jacint Boixasa, director of assets for Catalonia, said in interview in Barcelona. “Our target is to sell 550 million euros ($742 million) of real estate by year- end, which is relatively little time.”
Spanish regions, which control more than a third of public spending, will play a pivotal role in the nation’s effort to cut its deficit to 6 percent of gross domestic product this year from 9.2 percent in 2010 as the country tries to avoid following Greece, Ireland and Portugal in requiring a bailout. In August, Moody’s Investors Service put Spain’s credit rating on review for a downgrade, citing the worsening finances in the regions.
Catalonia is trying to find buyers for 37 properties including the Barcelona stock market on Paseo de Gracia, Spain’s fourth-most expensive commercial street, as well as the Catalan Agriculture Ministry on Gran Via. Jones Lang LaSalle and Madrid- based real-estate consultant Aguirre Newman are advising the government on the sales.
Andalusia hired BNP Paribas SA to help raise at least 400 million euros selling 76 properties including the cultural department in Granada and youth centers in Malaga, according to the region’s treasury department. The government will pay around 30 million euros a year to lease the buildings after the sale
“We have 10 non-binding offers -- mainly from Anglo-Saxon investors -- for the entire portfolio that exceed our target,” Manuel Sanchez Galey, general director of finances for Andalusia’s treasury department, said in an interview in the regional capital, Seville. “I am completely confident we will close the deal on time.”
He declined to identify any of the bidders because the process is confidential. A spokesman for BNP Paribas in Spain wouldn’t comment.
Office property investment in Madrid and Barcelona, Spain’s biggest markets, dropped 56 percent in the first half from a year earlier to 276.6 million euros, according to Aguirre Newman, a real-estate broker based in the Spanish capital. Prime office rents in Madrid declined to 27.09 euros a square meter in July from 27.50 euros in January and slipped to 16.80 a square meter from 17.05 euros in Barcelona.
“It’s unlikely that a large-scale portfolio sale will be completed on time, due to the volatility in financial markets and restrictions on funding,” Patricio Palomar, head of research at CBRE Group Inc. in Spain said in an interview. “It’s possible that equity could be raised for one portfolio, but unlikely it can be done for both.”
Some individual assets owned by the regions may be bought by private investors who don’t require funding, he said.
Catalonia and Andalusia, whose economies match the size of Portugal and Ireland, have 38.5 billion euros and 13.5 billion euros of debt respectively, ranking them the first and fourth- most indebted of Spain’s 17 regions in nominal terms, according to data from the Bank of Spain. Both regions have included the future proceeds from the property sales in their 2011 budgets. Valencia and Madrid are the second and third most indebted.
“We have to get this right,” Sanchez Galey said. “We are carrying out the first sale of regional government-owned real estate ever on this scale. People will be watching closely.”
Template for Regions
The sales may pave the way for other debt-laden regions, Palomar said. Last year, public-sector property sales in Europe totaled 1.1 billion euros, or 7.5 percent of all disposals by building occupiers, with Sweden, the U.K., Germany and Italy representing 75 percent of the total, according to CBRE.
“Spanish administrations have traditionally been buyers not sellers of real estate, so there are a lot of assets that could be sold,” Palomar said in an interview in Madrid.
Selling so much property in just a few months will be challenging said Vanessa Gelado, vice president of Drago Real Estate Partners Ltd. The company took part in Pearl Group Plc’s 2.04 billion-euro purchase of 1,152 Banco Santander SA branches in 2007.
“They are working against the clock,” she said in an interview. “It’s not impossible for them to do it, but the calendar is very tight.”
The debt burden of Spain’s 17 semi-autonomous regions’ surged to a record 133.2 billion euros, or 12.4 percent of gross domestic product, in the second quarter from 11.6 percent in the previous three months as tax revenue from real estate and land sales dropped.
All the regions except Catalonia pledged to limit their deficits to 1.3 percent of gross domestic product to help cut the national budget gap, currently the third highest in the euro region after Greece and Ireland.
Following local elections last year, the incoming government of Catalonia said the 2010 deficit was 60 percent wider than its predecessors had acknowledged. It plans a deficit equal to 2.7 percent of GDP this year, more than twice the national government goal.
Fitch’s downgrades of the regions could affect their property sales because the governments themselves would be the tenants in most of the properties offered.
“The credit rating of the tenant who is going to occupy your buildings is very important as it has a huge impact on the cost of your financing,” Gelado said. “Rating cuts aren’t good news.”
Though investors tend to favor government tenants because of the steady income they generate, buying Spanish state property may be less attractive than it was five years ago, said Simon Martin, head of research and investment strategy at Tristan Capital Partners, a London-based real estate investment company with 2.8 billion euros of assets under management.
Martin said he isn’t looking to invest in the assets being sold by Catalonia and Andalusia.
The buildings Catalonia sells will be rented back by the regional government for a maximum of 37 million euros a year with leases of 20 years or more, according to Boixasa.
Catalonia’s Boixasa said the properties on offer are a competitive investment as other assets are hurt by economic concerns and Europe’s sovereign debt crisis.
“Stock markets continue to fall,” he said. “Fixed income is returning less and less, companies and countries keep having their ratings cut, so what investment options do I have?”
The Euro Stoxx 50 index has dropped 25 percent and more than $6 trillion was wiped from equity values globally this year as political leaders struggle to contain a debt crisis that has Greece teetering on the edge of a default.
Investors demand a yield of 1.96 percent to hold German 10- year bonds, considered the safest debt in Europe. That is 29 basis points up from the 1.67 percent yield of the bunds on September 22, the lowest since at least 1992, according to Bloomberg data.
“Regional governments are guaranteeing the rents and I find it very hard to believe that a regional government could default,” said Gelado. “But in the post-Lehman world where anything can happen, you have to ask yourself whether it could.”
--Editors: Ross Larsen, Jeff St.Onge.
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