Developers will prosper as recovery comes to Spain’s dislocated housing market after the 2008 crash
By Brian Betel
It’s a tremendous time to be a residential developer in Spain even as 400,000 to 500,000 new homes remain on the market unsold.
Such glaring contradiction stems from the Spanish property market’s calamitous crash in 2008, triggered by the Global Financial Crisis, and following a well-chronicled, debt-fueled construction boom. It left the country’s housing market in a state of extreme dislocation that presents highly attractive investment opportunities – reflected, for instance, in the enthusiastic reception for the IPO of Neinor Homes in late March.
Spain’s economy should finally return to its pre-crisis levels later this year after emerging from its second recession in the second half of 2013. Gross domestic product will probably expand by about 2.7% this year after 3.2% in 2016, creating a solid foundation for the housing market’s recovery. Unemployment is falling and consumer confidence is improving, supported by low inflation and interest rates that are giving Spaniards more purchasing power for their rising incomes. Banks are starting to lend again, with mortgage approvals rising by 14% last year and by 20% in 2015. The six-year slide in property prices and low borrowing costs means that now is probably the most affordable time to purchase a home in Spain in more than 15 years.
Housing transactions rose by about 14% last year, underpinned by the regions of Barcelona and Madrid, with strength also coming from Málaga and Alicante. The Spanish Housing Price Index rose 4.5% last year and CBRE projects that it will rise by about 5% in 2017. These positive figures must be placed in the context of how far the market fell and for how long it languished after the severe beating it took during the crash. Considerable obstacles block the market’s return to normality, chief of which is its dysfunctional supply pipeline.
On the face of it, Spain appears to have new homes aplenty to satisfy buyers’ demand until at least 2020. The reality, however, is very different: about half of the inventory dates from the boom times and will probably never sell because of its poor quality, location and questionable legality. The crisis caused a dearth of development in the most dynamic cities, where job creation has been significantly above the country’s average, creating an acute shortage of new or refurbished homes for these buyer-demand recovery times.
The precipitous slump in property and land prices devastated Spain’s developers, leaving few survivors. Mounting insolvencies triggered a wave of foreclosures by banks and other lenders, estimated at €200-300 billion of non- or sub-performing loans. Creditors currently own a significant portion of the country’s zoned development sites with full connection to services. Few, however, are inclined to proceed with the projects planned for these plots, leaving the way clear for those well-capitalized developers to unlock them.
As banks write down loans to repair their balance sheets, a process aided by the creation of Spain’s “bad bank” in 2012, development plots are trickling onto the market. Land prices fell as much as 90% during the crash, highlighting the depth of distress of Spain’s financial system and offering an attractive entry point for taking on projects. Meanwhile, competition for business is so fierce among construction companies that the fixed-price turnkey contracts on offer will ensure that developers can lock in attractive returns.
At ASG, positioning ourselves as a first-mover in residential development has been one of our main strategies for Spain. We are targeting sustainable locations in supply-constrained cities, such as Madrid, Barcelona, Málaga and Alicante, where there is significant demand for primary and secondary homes, from domestic and international buyers, at a variety of price points. Our local team has sourced nine projects across Spain to date for our two latest funds through off-market transactions with private vendors, banks, insolvency administrators and through its network in Spain’s provincial markets. The projects themselves vary from urban infill developments to change-of-use strategies for existing commercial space and we are in the process of closing additional acquisitions.
Spain’s residential market bottomed out in 2014 and is in the early stages of recovery, offering compelling opportunities to generate returns in the country’s leading cities – well away from the unsold ghost town developments of the boom-to-bust years.