Over the last two years, private equity firms, hedge funds and real estate investment trusts have bought, renovated and rented out tens of thousands of foreclosed properties in places such as Atlanta, Phoenix and California’s Inland Empire. The strategy has been extraordinarily profitable, which explains why, according to Bloomberg News, Blackstone, Goldman Sachs and others are taking it on the road to Spain.
While the article does an excellent job of assessing the upside and risks for the institutional buyers, it's also worth looking at the significance this trend might have for Spain's economy, consumers and banks. Such investment should support asset values, help people with bad credit find housing and clean up the balance sheets of wounded lenders. After all, in U.S. markets, this investment has boosted home values for everyone who lives in the metro areas and has smoothed the transition away from excessive home ownership to rentership.
About 83 percent of Spaniards owned homes in 2008, according to the European Central Bank’s recent survey of household finances. Despite the brutal recession and banking crisis, many of those people probably still do -- more than two-thirds of Spaniards had no mortgage debt at all in 2008 -- but their assets are now worth far less: House prices have fallen by about 40 percent since the peak in 2007. Investor buying should therefore boost the net worth of many people suffering from years of recession and brutally high unemployment.
Outside investment that increases the supply of rental housing would also help those who have lost their homes to foreclosure. Many Spaniards have been unable to get mortgages because their credit has been ruined. Young people scarred by the experience of the housing bubble may put off buying homes until far later in life, so they too should benefit from the outside investment provided by yield-hungry American investors.
The influx of money from private equity should also help Spain offload troubled assets from its banks. Sareb, the bad bank created by the Spanish government, has been selling chunks of soured residential real estate portfolios to foreign investors at a brisk pace, although it has had a tougher time selling commercial real estate. Over time, this may help ease the credit crunch that has been strangling business investment and job creation. Getting the worst assets off lenders' balance sheets will make it easier for them to rebuild their equity and resume lending. Direct recapitalizations through the European Stability Mechanism would also be helpful, but haven't happened yet.
Spain doesn't have many good policy options available as long as it remains within the euro area straitjacket. While foreign investment in distressed properties won't cure all of Spain's problems, every little bit helps.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)