FT: Overhoused, overindebted and overpriced

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    Overhoused, overindebted and overpriced
    By Mark Mulligan

    Published: May 5 2007 03:00 | Last updated: May 5 2007 03:00

    The alarm bells are well and truly ringing for investors over Spain’s property market.

    After the recent sell-off of Spanish property and construction stocks, investors are waiting to assess the fall-out of a housing market downturn in the country not just for sector stocks but the wider economy.

    Although it is hard to pinpoint the magic moment at which the supply of new homes suddenly overshot expected demand, there have been signs for at least a year that the country has become overhoused, overindebted and overpriced.

    Estate agents on Spain’s Mediterranean coast long ago noticed that speculators were moving out of the market, leaving it mainly to committed first and second home buyers.

    A consequent crackdown on municipal corruption began to weed out a lot of the operators who were using borrowed money and inside information to buy rural land earmarked for urban rezoning.

    Demand from sun-starved northern Europeans, already flagging because of the high prices, took another hit from the graft scandals.

    Some analysts also believe the tipping point for many prospective buyers came early this year, when real interest rates in Spain moved into positive territory for the first time since the country’s adoption of the euro in 2002.

    However, the clearest early warning signs that Spain’s 10-year property boom was drawing to a close came from the construction companies. These first diversified into domestic infrastructure development during the last Spanish housing slump, in the mid-1990s.

    This time round, groups such as Ferrovial, ACS, Sacyr Vallehermoso, Acciona and FCC have concentrated on infrastructure management, heavy engineering, energy and municipal services, while investing heavily outside Spain.

    Ferrovial and ACS shed their real estate development businesses last year, while FCC has plans to float Realia, its 50 per cent- owned property business.

    Sacyr’s battle for control of Eiffage, the French construction group, is actuated as much by its desire to run APRR, a prized toll road in the Paris area, as by its wish to become less Spanish.

    Similarly, Metrovacesa’s €5.5bn purchase in 2005 of Gecina, a French rival, was part of a two-pronged strategy at Spain’s largest real estate group aimed at reducing its domestic exposure while increasing its stock of commercial rental properties.

    Despite being in the middle of a messy carve-up between warring shareholders, the company recently paid £1.09bn (€1.59bn) for the iconic HSBC tower in London, confirming its drive out of Spanish real estate development.

    The fact that real estate groups accounted for half the 10 initial public offerings on the Madrid Bolsa last year was further proof, if it were needed, that the housing market was cooling.

    The groups listed with the same objectives: to tap investors during a buoyant share market while positioning themselvesfor consolidation in the sector.

    By subjecting themselves to the discipline of market rules, they also sought to distinguish themselves from the estimated 10,000 mainly project-based property developers in a country where real estate and corruption are synonymous.

    The strategy paid off quickly for Riofisa, one of the newcomers, when it agreed to be taken over this year by Inmocaral, one of the main drivers of consolidation in the sector.

    Parquesol, which today celebrates its first anniversary on the market, could be absorbed into Inmobiliaria.

    San José is another large property developer looking to diversify and enlarge its portfolio as a cushion against rougher times ahead. However, all this merger and acquisition activity was fuel for the companies’ share prices. Exacerbated by small free floats and unrealistic hopes about the sector’s prospects, the shares, in some cases, soared well beyond rational valuations.

    The bubble burst when Astroc, a Valencia-based developer, produced accounts that raiseddoubts about its asset base and business model. The shares plunged 65 per cent in five days in a waveof panic selling that dragged the rest of the sector with it.

    “The Astroc factor has been the detonator for the correction, given that it was trading at prices that were much higher than the value of assets, during a period in which the outlook wasn’t so bright,” says Bruno Silva, sector analyst at BPI in Madrid.

    The end of Spain’s housing and infrastructure boom could have serious consequences in a country where construction accounts for about 18 per cent of GDP.

    “A house price correction will not only be bad news for the household sector’s ability for further debt take-up,” says Lombard Street Research.

    “It will also hurt incomes and employment significantly, given the economy’s high exposure to construction and real estate.”

    Copyright The Financial Times Limited 2007

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