Madrid office rents have fallen 30% since the crisis began, but still rents have risen, which shows just how much prices of commercial property have been eroded in Spain. But still the consensus indicates that investors should be waiting for a little while yet before pouncing on the bottomed market.
77% of the 154 real estate professions who took the J.P. Morgan Cazenove survey said that Spain would be the worst performing market in 2011, while Germany, France and the UK would be the best.
“There could be some opportunistic deals, but I’m not sure we’ve seen the peak of the crisis in Spanish property yet,” said Ralph Winter, founder of private-equity group Corestate Capital AG.
Corestate manages 1.5 billion Euros worth of assets, and is currently looking for investment opportunities in distressed property in Europe’s established markets. Spain surely meets that criteria, but it is still to early to invest in Spain says Winter.
Deals are being done in Spain though, but not your average deals; investors are asking for more than a reduced price to take the plunge. For example, New York based W.P. Carey and Co recently completed an 80 million Euro purchase and leaseback of Distribuidora de Television Digital SAU’s headquarters, but only because DTS agreed to a 20 year term on their tenancy contract.
According to Adolfo Ramirez-Escudero, executive managing director of capital markets at CB Richard Ellis Group in Spain, an adviser to the buyer on the deal, such long tenancies are becoming commonplace. This, he said is because with the fundamentals so weak and rents likely to fall further, securing long term tenancies gives the landlord a certain level of immunity to short-term imbalances.
Weak, bleak, meek and painful are words that keep coming up when talking about the Spanish property market. The sub-prime mortgage crash popped the Spanish bubble in 2007, but its bang was louder than most because of the massive overbuilding that had been going on throughout the noughties, as Spain build more properties than the UK, Germany and Italy put together. According to estimates Spanish developers were left with 1 million properties on their books when the crisis crippled demand.
Now, the problem is being worsened because Spain has become embroiled in the EU sovereign debt crisis. This has become a vicious cycle, whereby a country looking like it may need a bailout, instantly and continuously increases the likelihood of it being forced into asking for one, because it raises the cost of borrowing at the sovereign level.
Furthermore the mortgage market is increasingly constricted, with a 24% drop in the number of mortgages issued in October 2010 compared to the previous year. At the same time, unsurprisingly home sales fell 18%, leaving them at their lowest level since records began. And the banks still have about 181 billion Euros of troubled loans on their books according to the Bank of Spain.
Put simply, only the economy getting back onto its feet can pull Spain and its property market out of the deep hole it is in. But Prime Minister Jose Luis Rodriguez Zapatero told Spanish lawmakers last month that it could be years before Spain fixes its economy.
It is easy to see why investors are quite happy to wait, isn’t it?