Spain is a highly leveraged market and is suffering more than most from the credit crisis. The outlook is not particularly rosy either, writes Ian Cundell

The global credit crisis has generated its fair share of lurid news copy since last summer, so it is something of relief that CBRE's latest investment view on the Spanish market opens with a masterclass in measured prose: "The European Real Estate investment market cooled during 1Q 2008, in part due to illiquid international capital markets." Jonathan Hull, head of investment properties for EMEA at CBRE says more succinctly: "Everything is changing."
Rafael Merry de Val, general manager at Savills in Madrid, says that Spain is having three crises: the first is the credit crisis that is affecting all investment markets; the second is a domestic residential crisis that has seen some of the biggest names in Spain's residential sector plummet in value as building programmes larger than France and Germany combined come home to roost; finally is a general economic crisis. Consumer spending has weakened thanks to inflation and higher mortgage bills, economic growth slowed to 0.3% in the first quarter of 2008, compared with quarterly rates of 0.9% in 2007, while the OECD has cut its growth forecast for Spain to 1.6% in 2008 and 1.1% in 2009 after years of 3%-plus growth.
Investment volume in Europe, the CBRE report says, reached €37bn, down 36% on the last quarter of 2007. In Spain, €1.9bn was invested in the first quarter, but it is important to appreciate that this figure is heavily skewed by a single deal, that of the Banco Santander headquarters in Madrid and the associated portfolio. That deal alone accounted for 70% of the €2.5bn invested in Madrid and Barcelona during the first quarter.
Excluding this large deal, office investment in the first quarter of 2008 stood at about a third of the total for the same period in 2007.
Further, both the type of investor and the type of assets under negotiation have changed. Unsurprisingly, highly leveraged investors have been displaced by equity investors, with private investors accounting for a third of all office purchases in the first quarter of 2008. This is what Hull meant when he said that everything is changing: "Go back a year or 18 months and Europe was fairly homogeneous and driven by credit availability rather than the underlying real estate
market," he says.
Now, finance is more difficult to obtain for assets not generating immediate income, such as development projects. Risk perception over these type of assets may be moving investment demand towards rented buildings with prime tenants.
Prime office yields in Madrid and Barcelona have risen 25 basis points from the last quarter of 2007, and this highlights an aspect of the Spanish and other southern European markets, namely that they are slow to adjust: in London, when the credit crunch hit, yields very rapidly jumped 100 basis points (almost overnight, it seemed at the time). Spain has been slow to adjust, reflecting the relative lack of sophistication of the market in terms of transparency, but also owner price expectations regarding their property have not adapted to the new market environment, generating an imbalance between supply and demand.
CBRE reports current (May) yield levels for both markets at 4.75% with further upward movement expected over the coming months.
Unsurprisingly, national investors carrying out small and medium-sized deals were most prominent during the first quarter. Excluding the Santander deal, no other deal exceeded €100m.
The type of investor is more diverse in 2008, suggesting that the changes witnessed are allowing new players to enter the market. Almost ubiquitous elsewhere, private investors made up just 1% of total investment in the first quarter of 2007, but during the first quarter of 2008, they accounted for 32%.
It is the domestic sector that is most distressed - Spain's second-largest property company, Inmobiliaria Colonial, saw its shares suspended after losing 40% in two days earlier this year, but it was hardly alone in its woes: Llanera and Ereaga both suspended debt payments. The giant Sacyr has lost 40% of its net worth. Ironically, it is often the former owners of distressed property companies that are turning up as the private buyers of property.
This collapse in residential, says Hull, has washed through into the commercial sector.
The big picture is changing and fluid. Invesco, in its global house view, says: "...either the price correction in the UK and Spain has been over-done, or ... further price corrections are likely in a number of markets across Europe. In our view, both explanations have some validity", adding "however, the strength of the recovery will be reduced by financial and household imbalances compounded by a continued lack of confidence in the financial sector, suggesting a prolonged period of below trend growth. While all European economies will be affected, the greatest impact will be on the UK, Spain and Ireland while the Nordics and central Europe should suffer the least."