Spain holiday home funk spreads to urban assets

“In commercial real estate, if prices were to fall another 20% on current appraisals, we would find equilibrium,” said Ismael Clemente, head of Deutsche Bank property unit RREEF in Spain. Even then, anything other than the best-located assets could struggle to draw buyers if investors back off in anticipation of better assets and bigger discounts from heavily indebted property companies trapped by the credit crunch and a fast slowing market.

Some Spanish property developers have already been pushed into administration while others, including listed firms, such as Colonial and Martinsa Fadesa, are locked in talks with creditors, raising the possibility of banks having to repossess assets and sell them cheaply to recover some cash. Market sources on Wednesday said some portfolios of Spanish property company debt were trading at discounts of 40-50%.

Brokers in Spain also reported that physical assets on the coast -- land banks, works in progress, finished developments -- were being bought by opportunist US and north European funds for 20-25% less than their official valuation. One said new apartments, even in Madrid, were 15-20% down on average, once incentives such as mortgage holidays and free cars were taken into account -- a trend which has yet to show up in official house price data. Spanish house prices grew 4.8% in the Q4, the lowest rate in nearly a decade, according to housing ministry data based on new and existing house prices.

SECRECY

Despite the secrecy that surrounded transactions, as deal volumes plummeted and commercial property owners sought to offload assets off-market -- by inviting offers rather than setting a price -- the overwhelming feedback from analysts is that the physical market is undergoing a difficult adjustment. “The clear message that we are getting is that (property) yields have moved more than vendors are willing to recognize,” said Roger Cooke, head of Spain for global property services firm Cushman & Wakefield. Valuers said yields -- which measure rental income in proportion to capital values and move inversely to property prices -- were probably knocking on 5% now for prime offices in Madrid, compared with 4.5% at the end of 2007 and 4% a year ago.

Mark Clifford, head of valuations at Cushman rival CB Richard Ellis said there would probably be a “queue” of buyers at these newer levels. Several property analysts and investors interviewed by Reuters also reported growing buying interest from cash-rich open-ended German real estate funds. But some doubted the market would stabilize even at these levels or with German fund support, given the potential for weaker tenant demand as the Spanish economy slowed and for forced selling from overstretched developers. Even with yields at 5% there was still an expectations gap of up to 50 basis points between prospective sellers and buyers, Cooke said.

One source who declined to be named, with experience at a senior level at both a Spanish property developer and lender, said the full scale of the problem was just beginning to dawn on Spain due to the distraction of last month’s elections. He said Spain’s real estate industry had been in denial because of a deeply ingrained belief that the government and banks would bail them out or provide cheap financing. Despite government pledges to counter the construction slump and expected economic slowdown by spending heavily on infrastructure, swathes of Spanish real estate was now at the mercy of international vulture funds that had swooped on the Iberian peninsula. “Vultures are looking to get 40-60% discounts but they are not getting them and they are not doing deals,” said Cooke. “Whether vendors will get near to needing to offer those discounts to do bulk deals to clear I have severe doubts. But some discounting is still needed.” (Reuters)