The Spanish home building industry is facing a familiar problem in the lack of financing for small and mid-sized developers, claimed industry insiders at a recent conference organised by the IE Real Estate Club, part of a business school, and Urbanitae, a real estate investment platform.

At the conference industry insiders from the building and investment world discussed the financing options open to Spanish developers in the current market.

Carolina Roca, General Manager of the developer Grupo Roca, and VP of the Asprima builders’ association in Madrid, warned that banks are turning off the taps to small and mid-sized developers, many of whom need 100% financing above land acquisition costs.

Banks are reportedly tightening up their lending conditions, meaning that only the biggest developers backed by international funds who can afford to finance 30% to 40% of development costs from equity can now get financing from banks with interest rates of around 2%.

If small and mid-sized developers turn to alternative sources of funding other than banks, interest rates go up to 8% or more, making the business riskier. In large percentage of cases the numbers don’t add up with such high financing costs in today’s price-sensitive market for new homes.

Unlike highly consolidated markets such as the UK and France, where big developers dominate the market, small and mid-sized players are the backbone of the home building industry in Spain. According to industry estimates (see graphic below) the top two biggest home builders in Spain have about 1% market share, compared to 19% in the UK, and 23% in France. If financing dries up for small and mid-sized developers it is unlikely that Spain will be able to deliver the 150,000 new homes each year that developers claim the market needs.

A supply shortage implies higher costs for new homes in a market where housing costs are already a political hot potato, with activists calling for legislation to control rents and clamp down on developers. The situation implies reduced competition for big developers and higher costs for new homes.