Bloomberg – Vacation Homes Boom in Spain May Bust

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    • #52737
      By Esteban Duarte and Charles Penty

      March 20 (Bloomberg) — Vacation home prices in Spain, a leading indicator of Europe’s property market, may face a slump that’s worse than the real estate decline in the U.S., based on the loan terms banks are imposing on developers.

      Property magnate Fernando Martin, the former Real Madrid soccer chairman, and Barcelona-based Promociones Habitat SA are paying five times more to borrow than U.S. developers such as Centex Corp. in Dallas, according to data compiled by Bloomberg. Even UAL Corp.’s United Airlines, which was bankrupt last year, pays a lower risk premium on its loans.

      “Banks are imposing terms on real-estate firms similar to those for defaulted loans,” said David Malpica, who helps manage $5.6 billion of real-estate and distressed debt assets in Europe and the U.S. for CarVal Investor in London. “It reflects the high volatility of real-estate assets.”

      Property agents in Spain, Europe’s hottest housing market this decade, are likely to cut vacation home prices by as much as 10 percent this year, according to RR de Acuna & Associates in Madrid, which values real estate for about 40 percent of mortgages. A slowdown may have a “psychological” effect throughout Europe, said Tobias Just, an analyst at Deutsche Bank AG in Frankfurt.

      Spanish house prices averaged 276,300 euros ($368,000) in December, according to Sociedad de Tasacion, a Spanish property company. They’re twice as expensive today as in 2000, beating growth rates in the U.K. and Ireland, according to figures from the European Mortgage Federation and Irish Life & Permanent Plc.

      British, Irish and German vacationers and retirees fueled sales of 4 million homes to foreigners, according to the Vacation Homes Agency, an organization in Madrid funded by developers. Construction made Spain the biggest driver of economic growth in the euro region this decade.

      Higher Rates

      Real estate spending by foreigners dropped 11 percent during 2006 to 4.9 billion euros, according to the Bank of Spain figures released last week. New mortgages sold to Spanish families fell by 10 percent, according to the Spanish Mortgage Association. Applications declined as the European Central Bank raised interest rates seven times in the past 16 months to 3.75 percent.

      “Opening a sales office and hiring an attractive woman is no longer enough to sell houses,” said James Stuart, who has marketed vacation homes since the 1980s in Marbella on the Costa del Sol, and is the local agent for Savills Plc, the largest publicly traded commercial real-estate broker in the U.K. “I don’t know any project in default, but banks are asking for more guarantees and more sales to be agreed before lending any money.” The Costa del Sol is on Spain’s southern coastline, just across the Mediterranean Sea from Africa.

      More Vulnerable

      Spanish homeowners may be more vulnerable than Americans to defaults as interest rates rise because about 98 percent of mortgages in Spain have floating rates, according to the central bank. In the U.S., most mortgages have fixed rates.

      The Organization for Economic Cooperation and Development in January said house prices in Spain may be overvalued by as much as 30 percent. A sudden acceleration in interest rates could cause an “abrupt adjustment in which prices would plunge,” the Paris-based OECD said. A 30 percent slump could reduce Spain’s economic growth by as much as 1.8 percentage points, according to Deutsche Bank’s Just.

      Bank Risks

      Re/Max International Inc., the second-largest U.S. real- estate broker, says it cut prices as much as 26 percent on more than 5,000 homes in Spain in January. Overall in the country, prices rose at an annual rate of 9.1 percent in the fourth quarter, slowing from 9.8 percent the previous quarter and 12.6 percent a year earlier, Housing Ministry figures show. Home prices in the U.S. fell 2.7 percent last year, according to the National Association of Realtors.

      “When sales slow the first area to suffer is vacation homes and then first homes are next to get hit,” said Dani Alvarez, former head of international sales at Don Piso, a Spanish real-estate broker.

      A slump may hurt Spain’s banks. Santander Central Hispano SA and Banco Bilbao Vizcaya Argentaria SA lead banks owed 1.3 trillion euros by developers, builders and mortgage holders, according to the Spanish Mortgage Association. The 379 billion euros of loans to property firms is equal to about half of all corporate loans, Bank of Spain data show.

      Property developers pay a premium over other industries to borrow. Fernando Martin’s Madrid-based Grupo Martinsa is paying Morgan Stanley, Caja Madrid and Caja de Ahorros de Barcelona an interest premium as high as 2.5 percentage points over interbank rates, according to regulatory filings.

      The 4.1 billion-euro loan will help finance Martinsa’s acquisition of Fadesa Inmobiliaria SA, Spain’s second-largest real estate company, based in La Coruna. Fadesa has built properties ranging from vacation homes in the Canary Islands to golf courses near the Spanish city of Malaga.

      Loan Guarantees

      By contrast, Metrovacesa SA, Spain’s biggest real estate company, paid an interest margin of only 60 basis points last year for a loan to refinance debt from its purchase of Paris- based developer Gecina SA.

      United Airlines paid 50 basis points less than Martinsa on its loan last month, a year after the Elk Grove Village, Illinois-based company exited bankruptcy.

      “Spanish banks have been lending a lot of money to buy and build houses,” said Giuliano Giovanetti, head of sales for mortgage insurance company PMI Group Inc. “The market is now asking a premium for debt related to Spanish real estate.”

      Martinsa had to guarantee lenders it would reduce debt by selling equity within 15 months, company filings show. It also must purchase derivatives to fix its borrowing rate, said a banker involved in the deal, who declined to be identified.

      Debt Syndicate

      Promociones Habitat is paying the same interest premium as Martinsa to borrow 1.7 billion euros for its acquisition of Grupo Ferrovial SA’s real-estate unit in Madrid. Habitat must reduce debt by selling equity within six months under its contract with lenders led by La Caixa, Spain’s biggest savings bank. Martinsa and Habitat spokesmen declined to comment.

      “Banks are demanding real-estate companies cut debt or increase equity,” said Antonio Hernandez Chao, deputy head of syndication at Ahorro Corporacion Financiera in Madrid, Spain’s biggest issuer of bonds backed by mortgages.

      Banks are turning to fund managers and regional lenders to underwrite debt sales as a way of reducing their risk. London- based fund manager European Credit Management is helping Santander and Caja Madrid arrange a 3.8 billion-euro loan for Construcciones Reyal SUA, the first time a non-bank institution has underwritten a loan in Spain, Bloomberg data show.

      Mortgage Arrears

      European Credit Management, which controls 20 billion euros of debt investments, will receive an interest margin as high as 195 basis points over Euribor in addition to undisclosed underwriting fees, Bloomberg data show.

      Spanish homeowners and developers show few symptoms of distress. Housing starts are rising at the fastest pace in three years, with planning approvals up 18 percent last year to 864,000 homes, according to construction trade union Seopan. France, with a larger population, had 561,737 planning approvals.

      The biggest shareholders of real-estate companies, including Astroc Mediterraneo SA Chairman Enrique Banuelos and Grupo Inmocaral SA Chairman Luis Portillo, entered the Forbes billionaire list this year after selling shares in their real- estate companies and buying larger rivals.

      Bank of Spain chief economist Jose Luis Malo de Molina last week predicted “a gradual normalization” of the property market that wouldn’t destabilize Spain’s economy or financial sector. The slowdown in house price increases would lead to “gradual absorption” of the effects of excess valuations, he said.

      Corruption Charges

      BBVA, Spain’s second-largest lender, expects real estate prices to rise by at least 3 percent this year. Prices in the province of Malaga rose 8.6 percent last year, accelerating from 8.2 percent in 2005, according to the government.

      “The second homes market is more vulnerable to a slowdown,” said Oliver Gilmartin, senior economist at the Royal Institution of Chartered Surveyors in London. “I don’t think the slowdown is a necessarily a harbinger of wider problems.”

      Corruption charges brought against some of the country’s biggest realtors are adding to concern about prices. At least 75 people have been arrested as part of the investigation, including the mayor of Marbella, Marisol Yague.

      `Economic Impact’

      The stigma hurts firms that haven’t been accused of wrongdoing by driving investors to other regions such as Portugal’s Algarve, said Juan Antonio Ibanez, chief executive officer at Urbasa Proyectos Urbanisticos SA, which is building 140 vacation houses near Marbella.

      “For companies that are exposed to the vacation home market, what’s happening there may be a sign to slow things down,” said Mark Stucklin, the author of “Buying Property in Spain” who runs Spanish Property Insight Web site and writes a column on the market in Spain for the Sunday Times in London. “If sales to foreigners are slowing, that means there’s less building to be done and that will have an economic impact.”

    • #70215

      @dakz wrote:

      ………..”Opening a sales office and hiring an attractive woman is no longer enough to sell houses,” said James Stuart, who has marketed vacation homes since the 1980s in Marbella on the Costa del Sol, and is the local agent for Savills Plc, the largest publicly traded commercial real-estate broker in the U.K….”

      No, they just employed a shark from South Africa who was an expert at lying through his teeth when he sold to us.

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