Sunday Business Post 04.07

The Sunday Business Post:
April 2007

The recent plummeting of property stocks on the Madrid stock market spelled trouble for those who have invested in Spanish property in recent times. Diarmaid Condon reports
Anyone who owns prop­erty in Spain will have been look-ing on with trepidation over the past week as the Madrid stock market threatened to go into melt­down. Its star performers up to now - property-related stocks - took a pummelling last week, prompting many commentators to speculate that the country's ten-year property bull run could well be coming to a spectacular end. Recent poor data on house prices had meant that the stock market was always liable to overreact if there was further bad news. This bad news came in the shape of Astroc Mediter-raneo, a recent star of the real estate sector.

The company's audited ac­counts for 2006 revealed that part of its profits had come from the sale of assets to a fund controlled by its chairman, En­rique Banuelos. At the time of going to press, Astroc's shares had lost 75 per cent of their va­lue; the company was listed in June last year at €6.40 per share, rising by more than 1,000 per cent to a peak of €72.60 in February.

There have been signs for some time that listed property companies had become wary of their own market, with some of the largest real estate firms on the Madrid stock market di­versifying outside the industry. Many of them disposed of con­siderable amounts of their own property holdings last year.

Another worrying factor is the exposure of the Spanish banks to a construction sector which analysts have seen as being over-inflated for nearly half a decade. According to the Bank of Spain, from 1998 to 2006, the amount that Span­ish banks lent for property ac­tivities rose by a factor of ten, to €107 billion.

Last week, Spanish bank shares started to slide on the back of these worries and other markets across Europe also felt a chill wind, with the ISEQ los-ing about 2 per cent of its ex-change values earlier in the week. Irish banking shares also closed lower, which has been put down to fears for the bil­lions of euro that Irish inves­tors have tied up in Spanish property.

The fact that the Spanish property market is cooling is no longer news - but. as with Ireland, the question now is whether it will have a soft land­ing or a spectacular bust.
"That the boom is coming to an end is beyond doubt," said Mark Stucklin of Spanish Property Insight. "No boom lasts forever, and this one has had a great innings, with ten consecutive years of property price increases. The Spanish economy has become a bit of a real estate junkie in the boom years, so a dose of cold turkey to rebalance the economy would be no bad thing.
"A downturn might catch short-term property specula­tors with their pants down, but the rest of us will I benefit from a healthier economy in the med­ium to long term. I'm confident that buyers of quality property for long-term personal use have nothing to fear from this market - and, if anything, should see it as an opportu­nity."
The extent of the Spanish property boom has been as­tounding. The country built over 800,000 houses last year -more than France, Germany and Italy combined. House prices have risen by a stagger­ing 270 per cent over the past decade to an average price of €276,000.

Such a high rate of price in­crease is all the more remark-able when you consider that the foreign-dominated coastal markets have been in the dol­drums for much of the past half decade. However a govern­ment report released last week showed that Spanish house prices were now rising at their slowest rate since 1998.
Solicitor Tom McGrath,who is based in Dublin but works extensively in the Spanish property market, believes it is unfair to draw conclusions about the entire market from the problems which Astroc is experiencing.

"The company in question was involved in the purchase and sale of land to developers, rather than being a developer itself. There are a variety of rea­sons why its stock started to descend from a very high va­luation, including changes to the planning laws in the Valen­cia region which will impinge on its activities," he said. "I don't think it is fair, though, to draw wider parallels across the whole market from this single company."
If you own property in Spain, the best advice is to sit tight and wait out the storm. Panic selling never leads to the generation of optimum re­turns, so if you can afford to hold on to your investment it is best to do so.

The current concerns in the market may turn out to be a storm in a teacup but, even if the worst does occur and the Spanish market goes into free-fall, most markets regain most, if not all, of their lost values within a period of three to five years as soon as the shake-up is over.

If you are considering buy­ing in Spain, keep your ear to the ground - the next six months to a year could prove very interesting for buyers, if the market continues to stag­nate and sellers become more desperate to shift properties.