Spanish stocks take a cold shower

The Spanish stock market continued its recovery on Wednesday opening with an overall increase of 1.38% after having risen another 1.69% on Tuesday. The large interest rate cut on Tuesday by the Federal Reserve helped stocks globally out of their free fall. On Monday the Spanish Bolsa saw the worse drop in years with the Ibex-35, Spain's main stock market index, closing at 12,625 points, for the first time since 2006 below the 13,000 points. The Ibex index, which now comprises only 33 groups instead of its usual 35, reached an historic high in early November of 15,945 points, only to lose more than 20% of its value in the first two weeks of 2008.

With the Spanish economy slowing down, and the funding costs for investments biting harder, prices are falling and investment activity is stifling in the country. In November construction dropped by 3.9% month-on-month, the biggest fall in Europe, which on average dropped 0.2%, according to new data issued by Eurostat.

Henk Brouwer, analyst at the Dutch financial institution AEK, said that the current correction in prices, which is mostly affecting the residential and office sectors, is just a readjustment to normal conditions after years of inflated valuations in an overheated market. 'For quite some years construction activity has been extreme in Spain, and the country is now facing oversupply', he says.

Spanish listed real estate firms are caught in a three-way squeeze between the end of a 10-year property boom, fears of a recession in the US, and a global credit crunch. On Monday all major listed groups registered a fall by at least 4.69% (Parquesol) to a maximum of 12.99% (Renta Corporación). The only exception to the downward trend was Spain's second-largest real estate firm, Colonial, which advanced in Madrid trade on rumors that US giant GE Real Estate was considering a takeover of the Spanish group. The Barcelona-based firm closed 1.33% up on Monday at EUR 1.52 per share. Colonial, a rising star in the Bolsa until mid-2006, lost no less than 68% in value in the last six months as investors continued to shun highly-indebted firms. Colonial shares tumbled to an historical low of EUR 1.30 in mid-January from EUR 4.99 at the beginning of 2007.

The fall in prices of Spanish listed companies is likely to unleash a wave of consolidation in the country's real estate sector. With share prices becoming more attractive, Henk Brouwer expects that foreign equity-backed investors and financial institutions will increasingly invest in the troubled Spanish market. In the last two weeks Citigroup and ING declared a 4.5% and 7% stake respectively in Metrovacesa, the largest property group in Spain. On the same lines takeover rumours have swirled around Colonial, whose market value more than halved from EUR 6.5 bn six months ago to about EUR 2.6 bn.

On Tuesday, Colonial announced its board was to meet the following day to discuss a possible 'unsolicited' takeover bid expressed by GE. The move by the US investor comes following the announcement made in mid-January by Gecina, a leading owner of Paris offices, that it had held 'exploratory talks' with Colonial. For the Spanish company, a merger with another group would ease its plan to reduce debt, which now amounts to a striking EUR 8.9 bn. With its share price as low as EUR 1.5 per share, Colonial may now become the focus of a bidding war between the two groups.

Analysts seem to agree that the Spanish firm would welcome a bid from an investor with a solid financial position such as GE. 'Equity-backed investors now are probably in the best position to make a bid. They can refinance their deal now that banks are not very keen to give out financing', Brouwer said.