Bargains for real, or just talk?

In recent months some banks and developers have been trumpeting discounts of between 25% and 50% on much of their stock, in some cases more. But according to official statistics property prices in Spain are only down 15% from their 2007 peak. Everyone knows the official figures are a bit dodgy, but are they really that far off, or are the alleged discounts not all they are cut out to be? That was the essence of a recent article in the Spanish financial daily Expansión by J. Sánchez and R. Ruiz.

There is no shortage of price promotions being touted, for example Metrovacesa’s December promotion of 1,500 homes with alleged discounts of up to 52%, and Banesto’s November promotion of 1,200 homes with alleged discounts of 40% (Metrovacesa is one of Spain’s biggest developers, and Banesto one of its biggest banks).

But when the authors of the article asked local real estate experts what they thought of the discounts, scepticism was the order of the day. “One has to interpret these discounts and ask what levels they are calculated from,” said Ernesto Tarazona, Corporate Recovery Director at Knight Frank España.

After all, what good is a discount if it is applied to some unreal starting price? According to the experts consulted for article, in many cases today’s discounts are based on the demented valuations used at the height of the boom, arguably irrelevant in today’s straightened economic circumstances. Supporting this position is a recent report on the Spanish property market by Aguirre Newman, a consultancy, arguing that prices are still close to 30% over-valued, and the valuations used by banks and savings banks (cajas) “do not reflect true values and result in a general over-valuation of property.”

That said, you might still get lucky and get the odd bargain from a bank or caja, especially holiday homes on the coast. “There may be very specific discounts for product that is totally illiquid in areas with a huge oversupply, particularly on the Mediterranean coast, but in the centre of cities like Madrid there is no way you will find them,” explains Tarazona.

Just look at the published accounts of developers for the third quarter of this year, says the article. Their gross margins are still positive, implying that they are selling above the crazy prices they paid for land in the boom, if they sell at all, that is.

The real question is why are prices so high, even with the alleged discounts? Because neither banks nor developers are prepared to sell at a loss, explains the article. New accounting rules from the Bank of Spain may change that, but for the time being the discounts on offer are not really discounts at all, at least not compared to today’s market prices.

For my money I would say that will all change in 2010, one way or another.

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