Re: For Spain, Real-Estate Outlook Appears Bleak


Relevant article in today’s Wall Street Journal

By WILLIAM BOSTON | Special to the WSJ

Amid all the uncertainties facing European real estate in 2011, there is one abiding belief: Spain is headed for more pain.

It is tempting to think the time is ripe to get back into Spanish property. After all, Madrid office rents have fallen 30% since the peak in the third quarter of 2008. And capitalization rates are at about 6.5%, 2.25 percentage points wider since the third quarter of 2007, representing an erosion of commercial-property prices. The capitalization rate measures the annual return of income-producing properties.

But private-equity investors, property analysts and even Spain’s prime minister agree that the decline in the Spanish economy and weakening of property markets isn’t over yet. Rents still are falling and even if a few recent deals have been done at slightly lower cap rates, prices aren’t improving.

“There could be some opportunistic deals, but I’m not sure we’ve seen the peak of the crisis in Spanish property yet,” said Ralph Winter, founder of private-equity group Corestate Capital AG.

In a survey of 154 real-estate professionals by property analysts at J.P. Morgan Cazenove, 77% of those polled predicted Spain would be the worst-performing property market in Europe in 2011. The best performers are expected to be the U.K., Germany and France.

Mr. Winter, whose firm has more than €1.5 billion ($2 billion) in assets under management, is looking for opportunities to buy distressed property around Europe. While real estate in Spain fits that bill, Mr. Winter said it still is too soon to invest in Spanish property.

To be sure, there still are some deals getting done in Spain. Just before the year’s end, an affiliate of New York-based W.P. Carey & Co. completed the €80 million sale and lease-back purchase of the headquarters of Distribuidora de Television Digital SAU. As part of the deal, DTS agreed to remain a tenant in the building for 20 years, illustrating the kind of secure rent income that investors require to do deals in Spain.

“It is true that the fundamentals of the market are still very weak and rents will adjust further, but these deals have the security of long leases and, therefore, are immune to short-term adjustments, said Adolfo Ramirez-Escudero, executive managing director of capital markets at CB Richard Ellis Group in Spain, an adviser to the buyer on the deal.

But the outlook is bleak. Spain’s real-estate industry still is recovering from a decade of overbuilding, fueled by low interest rates, a robust economy and an influx of British snowbirds seeking second homes on the Spanish seaside. When the subprime-mortgage crisis hit in 2007, Spain’s property bubble burst, leaving developers with big loans and about one million unsold, newly completed homes on their books.

If that wasn’t trouble enough, Spain has been swept up in Europe’s debt crisis, with speculation rife that regardless of the Spanish government’s austerity measures, Madrid won’t be able to escape a bailout by the European Union. That has raised the cost of borrowing and caused mortgage lending to come to a standstill.

In October, the number of Spanish home mortgages issued was down 24% from the same month a year ago, according to data published last week by Spain’s National Statistics Institute. Home sales fell 18% in October to the lowest level on record, according to the data. The Bank of Spain estimates that Spanish banks have nonperforming or at-risk property loans of about €181 billion on their books.

Relief can come only from economic recovery. But Prime Minister Jose Luis Rodriguez Zapatero told Spanish lawmakers last month that it could be years before Spain fixes its economy.

Edward Farrelly, head of Spanish property research at CB Richard Ellis, remains bearish on Spanish property, but said some investors might begin to come back to “pre-empt the expected recovery of the market in 2012.” That scenario is subject to a number of significant risks, however.

For one, a weak economy means higher unemployment, which damps consumer spending and hits shopping-center landlords. As the economy slows, companies require less office space, and that causes vacancies to rise and puts pressure on rents. And with the existing surplus of up to one million new, unsold homes in Spain, banks are unwilling to lend for mortgages unless the loan will finance the sale of a home that already is on the bank’s books.

“I am not very optimistic about the Spanish property market,” said Mr. Farrelly. “The general economic situation is weak. I expect office rents to continue falling next year, and there are still a lot of problems to be worked out in residential property.”

Another risk, said Mr. Farrelly, is a consideration by the Spanish government to try to boost the economy by creating incentives for home builders. If the plan were to go through, Mr. Farrelly said, it could have a short-term impact on the economy by boosting construction but at the cost of creating a new residential property bubble.

“I don’t think they will go through with it,” said Mr. Farrelly. “But it is a risk.”