December 2007 news review

Spanish Property News

Spanish property market downturn
Stock market punishes Spanish developers
Spanish housing overhang
Market downturn forces investors to drop prices
Las Vegas in Aragon?
Dubai-style artificial island in Valencia?
Demolition orders suspended in Catral, Valencia
UK revenue to launch another attack on offshore banking
Spanish mortgage news


Spanish Property Market Downturn

December brought plenty of fresh evidence of a downturn in the Spanish property market.

Figures from the property register reveal that there were 188,256 property transactions in the third quarter of 2007, 15.97% lower than in the same period in 2006. It looks like 2007 will end with the Spanish property market shrinking by 12% to 13%.

Resales were down 20% in the quarter, and sales of new properties down 10%, so the contraction appears to be hitting the resales harder than new developments. However, this is misleading, as many of the new property sales recorded today were sold off-plan over a year ago, when the market was stronger. The order books of developers are a better guide to the state of the market for newly built properties, and by this measure the market is in trouble. According to the G-14 group of leading Spanish developers, sales are down 30% since August, having fallen 15% in the first half of the year. Unofficially I have heard that developer’s sales are down 40%, with some down 70% compared to a year ago.

A fall in the number of transactions tells you that demand is falling at the present level of prices. But the supply of property for sale is still growing, so you would expect Spanish property prices to fall. According to the most recent figures available from the government Spanish property prices are still rising, though at a slower rate than before. Average Spanish property prices rose by 5.3% over 12 months to the end of September 2007, with prices rising in almost all regions. However, the Government’s figures are notoriously unreliable, if not downright misleading.

Figures from the Spanish property portal paint a different picture. According to Idealista, resale property asking prices fell last year in Barcelona and Madrid – Spain’s most important cities and real estate markets. Asking prices fell by 2% in Barcelona, and 0.3% in Madrid, the first time asking prices have fallen in these cities since Idealista started tracking them in the year 2000. Asking prices in 17 of Spain’s provincial capitals were all down, or at least below the rate of inflation, implying that asking prices for resale properties in all the main Spanish cities fell in real terms. Even so, these figures only relate to asking prices, and when it comes to asking prices in Spain, many have still not come to terms with the reality of the market.

Sign of a downturn is also apparent in the number of planning approvals issued last year. According to Spain’s College of Architects, planning approvals fell by 23%  to 574,294 units in the year to end October, with the detached properties falling 40% to 88,250 (down from 146,733), and apartments falling 19% to 485,868 (down from 601,175 in the same period of 2006). The total number of planning approvals in all 2006 was an astonishing 865,561 units.

Falling planning approvals means fewer properties will be built, which means fewer construction jobs, which means rising unemployment in the construction sector. This trend is already apparent from the latest unemployment figures, which show a jump of 12% in the number of jobs shed by the construction sector in December. The G-14 group of leading Spanish developers claims that residential construction is down by 40% this year, and that 400,000 construction sector jobs will go over the next 2 years, as a consequence of the downturn. The G-14 forecasts that housing starts will fall to around 490,000 units in 2008.

That the Spanish property market has peaked is beyond doubt. The big question is what comes next: soft landing or train wreck? I will be publishing my thoughts on this question shortly, but in the meantime you can have your say and cast your vote here.

And finally,  the Spanish financial website El Economista reports that opportunistic foreign funds are waiting until the summer for the downturn to pick up speed and create big discounts on Spanish properties. The credit crunch is  already forcing over-indebted developers into distressed sales of real estate assets. The vultures are starting to circle overhead, in the anticipation of a train wreck.


The Vanishing Share Price of Spanish Developers

The share prices of developers quoted on the Madrid stock exchange have plunged between 15% and 50% since the end of November 2007, with many of them falling an average of 15% in the first 4 days of January 2008 alone. At least we now know what stock market investors think about the outlook for the Spanish property sector.

Developer stocks could do no wrong in 2006, when the rose between 100% and 490% on the back of Spain’s real estate boom. The developer Colonial rose 348% in 2006, and Astroc – a classic case of a speculative stock – rose an astonishing 487% in 2006.

By February 2007 the stocks of Spanish developers had reached an all time high, despite abundant signals from the housing market that Spain’s property boom was living on borrowed time.

The turning point came in February 2007, when accounting irregularities at Astroc came to light. Investors took fright, and Astroc shares almost halved in value in the space of a few days, dragging down other housing stocks, and giving investors a cold bath. It’s been downhill ever since for the shares of Spanish developers.

Another heavy sell off came mid-December, as more evidence emerged that Spanish developers like Colonial are drowning in debt. The Bank of Spain recently estimated that the housing and construction sector is indebted to the tune of 800% of its gross value added, compared to 300% in the energy sector. The sector’s combined debt is estimated at 300 billion Euros, the equivalent of 30% of Spain’s GDP.

Banks were happy to lend astronomical sums to Spanish developers when money was plentiful, but the credit crunch and re-pricing of risk has shut down the party. When the banks turned the taps off it turned out that operational cash flow couldn’t cover debt repayments.

The Spanish developer Colonial (Inmobiliaria Colonial SA) is in particular trouble. With close to 9 billion Euros of debt, and the market going soft, it can’t meet its debt repayments now that the credit crunch has driven up the cost of borrowing. It’s the same story with Habitat (not quoted) and many other Spanish developers.

So Spanish developers are facing rising financial costs, and falling operational cash flow. Caught between the devil and the deep blue sea. There is now  a stampede to sell ‘non-strategic assets’ to finance debt repayments. The problem is they are all dumping assets at the same time, driving down asset values.

Why did Spanish developers borrow so much when there was already plenty of evidence that the Spanish property market was overvalued. Firstly, because banks were falling over themselves to lend on easy terms, and secondly, because of hubris.

So what now? More of the same, with more developers showing signs of distress. The recent collapse in share prices has broadcast to the world that the Spanish property sector is in trouble, creating a negative feedback loop that will keep investors and lenders away. Nevertheless, big boys like Colonia have so much debt that banks can afford to let them go under. It’s the small and medium sized developers with too much debt who will suffer the most.

There are, of course, some well capitalised developers building quality property in Spain. One consequence of this shakeout is that they will emerge from it stronger. From now on developers will need strong balance sheets, and a reputation for quality to succeed. In this respect, the downturn couldn’t have come soon enough.

The Spanish housing overhang

In previous bulletins I have mentioned the Spanish housing overhang, namely the surplus amount of properties on the market. Given the rate at which Spain has been churning out unattractive blocks of apartments in recent years, the existence a housing overhang should surprise no one. What is less clear is the scale of the overhang. A new report from the Spanish savings bank Caixa Catalunya gives us some idea of how large it might be. According to an article in the Spanish daily ‘El Mundo’ Caixa Catalunya estimates that there are between 350,000 and 500,000 surplus properties on the market for which there is no demand at present prices. The bank hastens to add that this does not represent a serious risk to the property sector, and that the recent decline in the number of housing starts will prevent a sharp market adjustment.

Meanwhile, the Spanish Ministry of Development (Fomento) has revealed that 475,005 new homes were completed in the first 9 months of 2007, a 9.4% increase on the previous year. We will have to wait a couple of months for the final figure on the number of new homes built in 2007, but everything points towards an all time high. The forecast is over 600,000 units, compared to the  record 585,583 new homes completed in 2006. With demand falling, and the supply of new properties rising, the Spanish property glut looks set to increase for the time being.

The little bit of good news is that planning approvals are starting to fall in response to the market downturn. According to Ministry of Development planning approvals in the first 9 months of 2007 fell to 526,977, down 22.3%  compared to the same period in 2006. Not all planning approvals lead to housing starts, so the actual number of new homes started in 2007 is likely to be lower. But as I have pointed out elsewhere in this bulletin, fewer housing starts means rising unemployment and lower demand for property. So maybe not such good news after all.

Market downturn forces investors to drop prices

It’s no secret that as late as 2005 many foreigners – largely British and Irish –  borrowed money to buy Spanish property off-plan in the hope of ‘flipping’ and making a fast buck. Though a few people no doubt made money this way, it was never as successful or lucrative as it was made out to be by estate agents who earned enormous commissions out of each ‘investor’, and who were nowhere to be seen when investments turned sour.

The game was not limited to foreign buyers on the coast. The Spanish daily ‘El Mundo’ reports that Spanish investors in the interior are also losing money on speculative off-plan investments. Speculators who can’t sell on before completion either lose their deposits, or pay the 10%+ completion costs and take on a mortgage. Mortgages are now significantly more expensive that even a year ago, and rental yields are negative. As a consequence many Spanish investors are now dropping prices, and undercutting the developers they bought from.

According to the article,  in Valdeluz, a new development in the province of Guadalajara (Castilla La Mancha, to the East of Madrid), an investor is selling 1-bed apartments for 150,000 Euros, compared to the developer’s list price of 240,000 Euros. These apartments cost 120,000 Euros just 2 years ago.

Las Vegas in Aragon?

The regional government of Aragon – a landlocked region in the North East of Spain – has announced plans to create a Las Vegas style pleasure city including 32 hotel casinos, 5 parks, a race track, a big convention centre, a bull ring, and various golf courses with residential complexes. With an cost of 17 billion Euros, and an estimated 25 million visitors per year, the first phase will be inaugurated in the spring of 2010. It will be located in Los Monegros – home to one of the most uninspiring landscapes in all of Spain.

Dubai-Style Artificial Island in Valencia?

Plans to build a Dubai-style artificial island off the coast of Valencia have been unveiled by the Spanish developer Redis 6. The plan is so farfetched I can’t help thinking it’s just a publicity stunt, but I’ll tell you what the plan is anyway.

If it ever gets off the drawing board it will be called ‘La Luna de Valencia’, or ‘The Moon of Valencia’, and will be located just off the coast of Valencia City, half a kilometre north of the America’s Cup port installations. Round like the moon, which I can only assume the promoters have been barking at recently, this artificial island is supposed to resemble in some way the surface of the moon.  The fantasy includes residential property, luxury hotels, restaurants, schools, museums, sports centres, hospitals, a 9-hole golf course, and much more, all set around canals and a marina. On the property side there will be apartments blocks, semi detached homes, and luxury villas with helipads, not to mention some council housing, as required by law. I read somewhere that the smallest apartment will be 40m2 and cost prices start at 300,000 Euros, so it’s a bargain too. There is also lots of guff about bioclimatic construction, renewable energy, eco-friendly waste management, and energy efficient transport systems, For some strange reason they are trying to pitch it as in some way good for the environment, which it clearly isn’t.

Considering the problems many buyers in Spain have had getting a property on terra firma built, snagged, and handed over with licences and utility connections in place, it’s hard not to be sceptical about the wisdom of buying property on a man-made island, where the potential for problems is many times greater. Of course such trifles never deter overseas property investors – just look at Dubai.

It’s not as if Spain is so short of housing that building artificial islands is the only solution. In reality there is a housing glut on the coast, so I can’t see how this project makes any social, economic, or environmental sense. Not that it matters much, as the Moon of Valencia has next to no hope of getting past Spain’s coastal law (ley de costas), or the outcry that would emerge from many quarters if it was given the go ahead in defiance of the law.

In all likelihood the Luna de Valencia project it is just one of those hypes that emerge at the decadent end of a boom, and then disappear without a trace.

Demolition orders suspended in Catral, Valencia

Decision brings festive cheer to Catral home owners

By Dave Jones of

A TOTAL of 40 demolition orders issued against illegal homes built in Catral’s countryside have been suspended, the regional government revealed this week.
In October last year former regional planning boss Esteban González Pons stated that 1,270 properties had been constructed without planning permission on land not designated for building.

The proliferation of illegal building led the Valencia government to strip the local authority of town planning powers and to vow to put order in the rogue municipality.

The explosion of the Catral crisis left hundreds of British home owners fearing for the future of their properties.

And the situation became more serious when demolition orders were sent to an unspecified number of households earlier this year.

However the announcement that orders have now been suspended will bring festive cheer to some.

In a written statement sent to CB News a regional government spokesman said:

“The demolition orders have not been annulled, they have been suspended.

“This is a possibility which is foreseen in article 532 of the ROGTU law.

“There are 40 houses affected by this and the same action is being taken for properties which have been constructed inside and outside El Hondo natural park.”

At the same time the Torrevieja-based consumers’ association AECU, run by Honorio Fernández, announced that eight home owners who have bought properties inside the boundary of El Hondo natural park will now face court charges.

The eight home owners have been called to appear before an Orihuela judge on January 29.

According to Sr Fernández, the builders of the properties bought by the accused recorded their names as the promoters of the houses on town hall documents.

Sr Fernández said that as a result of this anomaly the buyers are being hauled before the courts instead of the builders.

Last year former regional planning councillor Esteban González Pons stated that he would pursue the builders who had made an estimated 80 million Euros through selling illegal homes in Catral.

At the time he said: “We are going to identify urgently those responsible for the construction of the illegal homes so we can move to embargo their capital and in this way guarantee compensation to people who have bought houses in good faith and who now find themselves with an illegal home which could even be demolished.”

To date no builder has been charged with any criminal offence over the construction scandal.

Also no further announcement has been made by the regional government on the subject of bank account embargoes.
Sr González Pons has since been replaced in his post of councillor for housing and planning by José Ramón García Antón.

The name of the department has also been changed.

It is now called the department for the environment, water, housing and planning.

UK Revenue To Launch Another Attack On Offshore Banking


45,000 people confessed to tax evasion in the UK under the HM Revenue & Customs’ Offshore Disclosure Facility.  This partial tax amnesty was offered after the Revenue forced five leading high street banks to disclose confidential information about their offshore clients.

So far the Revenue has reaped £400 million, but the final yield should be much higher since 300 people with large and complex offshore holdings were given extra time.

The next step is for the Revenue to investigate all those whose bank records show suspicions of tax evasion and who did not make a declaration under the facility.

The Revenue has also now begun a second initiative to uncover more people who have failed to declare their offshore income.  It is serving disclosure notices to around 150 further banks and financial institutions to obtain details of customers’ offshore accounts.

HMRC acting chairman, Dave Hartnett, urged UK and foreign banks to cooperate with the tax department, saying they may face “a public perception that they have something to hide” if they do not.

Tax advisers are warning taxpayers to ensure their affairs are compliant and get them in order if necessary.  Considering how successful the Revenue has already been in obtaining confidential information from UK banks, it is likely to get information from these other banks relatively quickly.

While HMRC is considering a second amnesty, this should not be taken for granted.  Even if there is a second one, it may only be open to those who did not know about the first one, and the penalties may be higher.

A UK tax resident and UK domicile should declare all offshore income, regardless of whether the money is brought into the UK or not.  This includes interest earnings from offshore banks (even if the money is retained in the account and withholding tax is deducted at source) and rental income from a Spanish property (even if the money is deposited and spent in Spain).

Non UK domiciles are only liable for tax on offshore income which is remitted, though there will be changes to this from 6th April 2008.

Spanish Mortgage News

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – rose last month to 4.79% (to be confirmed by the Bank of Spain), the highest level since December 2000.

The latest rise means that monthly repayments on the average variable rate mortgage of €150,000 at 25 years will rise €75 from €827 to €902 Euros per month, an increase of around €900 per year.  Many variable-rate mortgages reset in December, so increasing mortgage costs will be a reality for many borrowers in 2008. However, note that the average Spanish mortgage rate is now around 5.5%, which is only 1.2% above the inflation rate. So in real terms, Spanish mortgages rates are still low at 1.2%, and are probably some of the lowest in Europe. Low or even negative real mortgage rates in Spain help explain the intensity of Spain’s real estate boom, which after a decade of property price increases and a huge surge in housing starts, is only now coming to an end.

According to the National Institute of Statistics mortgage approvals fell by 10.39% last September, and according to the Bank of Spain mortgage delinquencies are on the rise, both of which are signals that the Spanish housing market is cooling. To make up for lost revenues it appears that lenders are increasing the fees they charge for mortgage approvals, further driving up the cost of mortgage in Spain.

Euribor is determined by the Euro-zone base rate set by the European Central Bank. There has been recent speculation that the ECB will lower rates in March, but with the latest inflation figures showing Euro-zone inflation running at 3.1 percent, well above the ECB’s medium-term goal of just below 2 percent, the chances of a rate cut in March are receding.

© Mark Stucklin (Spanish Property Insight)




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About Mark Stücklin

Mark Stücklin is a Barcelona-based property market analyst and consultant, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008). He can be reached by email on