Jitters reverberate through Spanish property market

The mid-April crash in shares of Spanish development companies on the Madrid stock exchange has raised speculation about a slowdown in the residential market - and its impact on commercial real estate. Astroc led the decline and saw the value of its share price halve in just two weeks. If the residential market crashes, the commercial market will almost certainly feel some pain.

With the property market (development, construction and finance) making up at least 18% of the total Spanish economy, the biggest threat to commercial real estate is a sharp slowdown in economic activity as a result of a crash in the housing market. The chances of this happening are rated differently. The Spanish government immediately tried to offset any panic after the ‘developers crash’ on the stock market, arguing it was a ‘natural correction’ to ‘an artificial inflation’ of the stocks’ value and that the real estate market remained ‘solid’.

This view was quickly endorsed by some of the banks whose stocks were slashed in the wake of the developers’ crash. Researcher Julián Cubero of BBVA, one of Spain’s leading banks, said he is still convinced prices in the overheated housing market in Spain will gradually ease off, with rising interest rates curbing demand. But José Garcia Montcalvo, professor of economics at Barcelona’s Pompeu Fabra university, believes all signs point to a hard landing. ‘The Spanish property market operates at a far more frenetic pace than the rest of the economy,’ he said in El País newspaper. 'It will come down with a bang. Prices have already fallen significantly - developers are trying to lure potential buyers with substantial gifts - banks have sold off their property interests and construction companies have begun diversifying into the energy sector'. That says enough.The latest sign the market is slowing has come from banks, which are cracking down on conditions for new loans. A hard landing will leave most Spaniards with less valuable property and high mortgages, almost all of which are exposed to rising interest rates (99% of Spanish mortgage-lenders have a variable rate based on the Euribor index).

Rising mortgage payments will almost certainly take a large chunk from spending budgets. Reduced construction activity will leave at least half a million people out of work in the coming years, further inflating Spain’s still substantial unemployment figure. Meanwhile the central Spanish government is planning a new bill on land expropriation, which will allow municipalities to acquire any land they need at the lowest possible prices. Not a happy prospect for beleaguered developers and construction companies.