A Viewpoint on the Spanish Property Bust

A Viewpoint on the Spanish Property Bust

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After a fortnight of tumult for Spanish Property Developers, commentators are taking stock of the situation.

Last week news headlines were taken by the plummeting stock price of the Valencian property developer Astroc Mediterraneo, which fell 65% and reflected a now sensible price earnings ratio of approximately 19. Astroc’s recent fall is really the second part of a downturn that began with a worldwide plunge in share prices in late February when Astroc stood at approximately 70 euros a share. The price dropped to 45 euros in a single day and then stablilised until mid April when it began to fall once more.

According to Nomura, shares in Spain’s 10 top property developers have lost about 7bn euros in the second half of April. The scale of losses has prompted business and government figures to issue statements designed to reassure the markets. Such a loss naturally raises questions about the causes of the decline and how long the setback to shareholders and holiday home owners is likely to last. Property investors will want to know if the downturn is a harbinger of problems spreading to other parts of Europe or the world.

More diverse companies, such as Acciona (infrastructure, logistics, real estate and waste disposal), for example, have registered much smaller losses. Although Acciona shares have lost value since the middle of April, they are still well into positive territory compared to a year ago and the same goes for banks such as Banco Santander and BBVA.

There has been comment that the levels of corruption (in the planning process, for instance) have undermined the Spanish property market. However, corruption has been well covered in the media and it seems more likely that the uncovering of further corruption is going to result from the financial problems of developers rather than to be a cause of these problems.

The basic causes of the property downturn in Spain are the oversupply of holiday properties and the rising cost of borrowing. Diana Choyleva of Lombard Street Research is quoted as saying that over-investment has reached a gigantic scale. The mortgages on Spanish properties are overwhelmingly variable rate and the cost of borrowing in the euro zone has been rising steadily with increases at roughly two monthly intervals taking the base rate from 2.5% to 3.75% in the last 12 months.

Commentators with an in-depth understanding of the Spanish market seem to be expecting stagnation or a possible drop in property prices for a period of 18 to 24 months. Martin Dell of Kyocera forecasts discounting by developers leading to weaker prices and longer for sale times for owners reselling. Areas that are likely to be affected include the Costa del Sol and the district inland around Antequera, the Costa Brava and the Costa Daurada.

Estate agents and property advisers tend to agree that the best value properties are to be found in regions which have just benefited from infrastructural improvements that are bringing improved access by road and air or districts that are about to see such improvements. More competitive prices are to be found in inland Catalunya, the province of Tarragona and, in the south, around Cordoba and inland from the Gulf of Cadiz.

Although the current fears for the Spanish market will clearly be seen in the context of the sub-prime mortgage worries in the US and signs of speculation in places like Dubai, property owners and investors are really facing different sets of circumstances in different countries. Some property markets such as Australia and Northern Ireland are showing robust growth, though it remains to be seen if the Northern Irish property market is going to display the resilience of the market in London and the South of England in the longer term.

Have you invested in Spanish property? Or are you an agent or developer? Tell us about your experience and what your expectations are on recent happenings.

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