The Spanish Property Market

'The Spanish Property Market – is the fiesta over for the time being?'

Imma Vall, Associate at Property Market Analysis (PMA), has been analysing the Spanish Property market for the past 5 years, and she demonstrated to us in her talk at our lunch on 10th December 2009 her mastery of the subject, giving us her ideas with flair and humour – but it was a bit like being a cheer-leader at a wake!

Spain has suffered more than most in the current recession, with unemployment approaching 19%, economy decline of 3.8% and running, and profound Budget deficits – it almost made an Englishman feel he was well off and should be thanking Alastair Darling. Imma had no doubt, therefore, that the fiesta was indeed over; it was now the time of the hangover which she could see lasting for 2 years at least. Addressing commercial property, there was an over-supply of offices and retail, with many prestigious schemes being mothballed whilst part-built – ghosts that may haunt the Spanish skyline for some time to come. For built-out vacant office space, lettings were a triumph for the letting agent, and of only partial value to the landlord as rent levels have tumbled c 20% and rent-free periods of 1 year in a 5 year lease were not uncommon. In retail, the larger Spanish companies were surviving, but their life-support comprised closure of units in Spain and reliance on foreign units; it was not uncommon for new shopping centres to open with 40% occupancy – 60% would be a dream. Consequently developers are in trouble across the board.

Against this depressing back drop at the 'real' level, there was a surprisingly ebullient investment market for anything of quality -- prime site, good tenant. Beyond that, darkness, but, for the farsighted the outline of genuine value. However, if you need finance, no way! Bank lending is effectively unavailable; even for a good client and a bank wishing to help, there is no possibility of syndication, and thus no deal. To those at the lunch, this was something of a surprise, as our impression was that Spanish Banks had come out quite well from the 'credit crunch'.

Looking to the future, Imma reminded us that the Spanish property market has always been more volatile than most. In large part this has arisen from the economic dominance of construction companies – give them money they will build, without much apparent consciousness of market cycles. In answer to a question, she thought that this might continue to be true in the future – a cautionary thought for a putative investor. However, for commercial space, particularly offices, Spain now had a considerable price advantage; present value levels, anyway in good locations, should, in principle, only go in one direction, but the date of going was not in next year’s diary. Nevertheless, we should not forget that Spain is often the point-of-entry of choice for the burgeoning South America economies.

Several questioners raised the problems of the Spanish Residential market. This, Imma agreed, is in greater gloom than commercial property, with a profusion of its own mothballed ghosts. There was little chance of the Government acting as ‘white knight’ because politicians have chosen to demonise residential developers. A 4-year recovery profile seemed the most optimistic possible.

Not the happiest of lunches, then, but in the best of company, and with a talented guide to the body under dissection – No! Not as bad as that! It will come back to life. Really! And perhaps the best time to buy a corpse is just before it revives.

Michael Mallinson