(LONDON) Spanish property developers, having enjoyed what once seemed an unstoppable boom, could face a severe mauling unless they bow to more realistic pricing as the economy slows and banks rein in lending.
The true value of real estate is a growing bone of contention as more debt-doped property firms get into trouble, leaving creditors and opportunistic buyers to squabble over assets, as in the on-off takeover saga engulfing property firm Colonial.
James Preston, who heads the Madrid office of European property funds firm Rockspring, sees international banks and investors losing confidence in the absence of an improvement in property market transparency in Spain.
‘It can only prolong the pain and result in a protracted, ‘U-shaped’ recovery,’ he said. ‘It is doing a disservice to this market which is at the aperitif stage of a very long, foul meal.’
‘I don’t believe valuers are marking to market, full stop,’ Mr Preston said. ‘And I don’t believe valuers are reflecting the reality for any property company, quoted or otherwise, in particular in relation to land banks.’ Such scepticism is shared by other real estate experts.
‘Spanish property values are lower than people think,’ said JPMorgan analyst Harm Meijer here.
Mr Preston sees a parallel, in terms of lack of transparency, with the US sub-prime crisis, which has so far led to banks writing off up to US$160 billion and resulted in a global debt logjam as confidence in the value of mortgage-related debt collapsed.
Spain’s relatively conservative banking industry bears few US sub-prime scars. It churned out 31.6 billion euros (S$66.9 billion) in residential mortgage-backed bonds in the second half of last year, as other markets seized up, according to Moody’s. But it could yet face more trouble as an unprecedented construction boom – accounting for almost a fifth of Spain’s economic growth – slows sharply.
Across Spain, unemployment is rising faster than anywhere else in Europe. Consumer confidence is at its lowest level since Spain’s last housing crisis, in the early 1990s, according to Eurostat and Bank of Spain data.
It is not just smaller-scale builders of coastal holiday homes or speculative owners of land banks with dubious planning rights that may be vulnerable, though these are seen by analysts as most overvalued in the current climate.
Several Spanish property developers have filed for creditor protection in the last few months, while Barcelona-based Habitat last week staved off bankruptcy at the eleventh hour by refinancing 1.6 billion euros of debt.
Some of Spain’s biggest property firms – including Colonial, Metrovacesa, Martinsa Fadesa, and Realia – have also bulked up on debt, which until recently was paid back with steady cash flow in a rising market.
Unlike in the United States and other parts of Europe – where there is a clearer demarcation between housebuilders and commercial property landlords – these firms have both housing and commercial property and so are exposed to any weakness.
The Bank of Spain has said Spanish homes may be up to 30 per cent overvalued. The government, which faces general elections on March 9, expects house price growth to ease to low single digits but not turn negative. But it is no longer just housing which could be a problem.
Commercial property – pricey by regional standards – could suffer too since a slower economy will undermine corporate demand for space and drag on rental growth.
Office rental yields – a valuation measure which moves inversely to price – are 4.5 per cent in Madrid and Barcelona, a percentage point less than in London’s City district, according to data from CB Richard Ellis (CBRE).
CBRE says yields in Spain’s top two cities have risen about a quarter percentage point since the third quarter of 2007. But the correction has been more acute in Britain, which like Spain is coming off one of Europe’s biggest, longest property booms.
Office, industrial, and retail property valuations in Britain have been cut by 13-14 per cent since the summer.
Source: Reuters (Business Times 6 Mar 08)