Santander Real-Estate Fund obtains permission to freeze payouts affecting thousands of investors.

Sources: Financial Times: Santander fund seeks to halt redemptions; Diario Expansion: The ending of the real-estate funds’ era; Banif Inmobiliario leaves 3.200 million Euro unpaid affecting almost 50.000 investors. Diario El Mundo: Santander asks for suspension of its real-estate fund’s reimbursement; The Spanish Stock Exchange Commission approves Santander’s petition.

On March 4, the Spanish Stock Exchange Commission gave regulatory permission to the Spanish bank Santander to freeze payouts for the next two years from its main real-estate fund, Banif Inmobiliario, due to lack of liquidity after investors sought to withdraw 3,053.5 million Euros at once. Since the total equity of the fund is currently 3,200 million of Euros, the withdrawal represents 96.8 % of the vehicle’s capital.

More than 43,200 investors of the real-estate fund will be affected by this decision because their money will be “trapped” for two years. This exceptional decision by the Stock Exchange Commission is provided for in a regulation issued in 2005 on real-estate funds. These funds usually lack of liquidity to start because the sale of a real-estate is not as easy and quick as the sale of other assets. For this reason, the actual regulation requires management companies to maintain 10% of their total equity in liquidity in order to satisfy the refund petitions of their clients.

This is the first time that the Spanish Stock Exchange Commission has received such a petition from a fund like Banif Inmobiliario, which is backed by the biggest bank in the Eurozone by market value. Santander Banif Inmobiliario currently has a negative profitability due to the real-estate crisis in Spain. In fact, at least a million of new houses remain unsold. Combined with the haste of its clients for reimbursement, this has resulted in an avalanche of refund petitions that the entity simply cannot satisfy.

As a result, between March 9 and May 5, 2009, and again in February 2011, Santander will only make reimbursements from the 10% of liquid equity required by the 2005 regulation, prorated among all the refund petitions received until February 27, 2009. From that point on, the entity will try to sell residential assets to increase its liquidity. Santander holds that this strategy will assure an equitable distribution among its clients while avoiding to sell real-estate at a loss. The bank has stated that if it cannot fulfill its reimbursement obligations in two years, it will close down the real-estate fund permanently.

Some analysts suggest that this situation could mean the end of the real-estate funds in Spain. In fact, Santander’s downfall was preceded by that of Spanish bank BBVA, which plans to liquidate BBVA Real-Estate Fund in 2010 by reimbursing its clients with 95% of its total equity. While there are no hints of similar situations arising in other real-estate funds, analysts are not ruling out the possibility of a chain reaction.

Questions:
1) The regulation concerning real-estate funds was issued before the real-estate crisis. Do you think that, due to the present situation, the Spanish Government should enact new regulations in order to deal with the foreseeable avalanche of new petitions from the investors of the real-estate funds?