In late August, one of Spain's leading real estate consultancies Fincas Corral announced it had closed half of its 350 offices so far this year following the collapse of the thriving residential market. For a decade, the residential boom propelled several builders and developers into the international league, but the market has slowed down significantly in the past six months and local property companies are increasingly looking for investment opportunities outside their home country. As demand for new houses continues to decrease, investment in new development fell to 4.8% in the second quarter of 2007 from a high of 15% in the recent boom years.
In late August, one of Spain's leading real estate consultancies Fincas Corral announced it had closed half of its 350 offices so far this year following the collapse of the thriving residential market. For a decade, the residential boom propelled several builders and developers into the international league, but the market has slowed down significantly in the past six months and local property companies are increasingly looking for investment opportunities outside their home country. As demand for new houses continues to decrease, investment in new development fell to 4.8% in the second quarter of 2007 from a high of 15% in the recent boom years.
The cooling down of the residential market and its impact on the Spanish economy form a key risk for the commercial real estate sector, claims Roger Cooke, managing partner of Cushman & Wakefield Spain. But there are other issues as well: ‘The global liquidity crisis and resulting pressures in the Spanish economy are also factors to be reckoned with. Of great importance are the new conditions for finance.’ Spanish savings bank Caja Madrid said in October that the repercussions of the liquidity squeeze would be more keenly felt in Spain than had been expected. The risk of recession had ‘risen notably’, it said, adding that growth would fall to 2.7% in 2008 from this year’s level of 4%. Nevertheless, Lee Mays, director of the Spanish operations of US developer Hines, remains optimistic. ‘The Spanish economy is likely to continue to grow at an annual rate in excess of 3% in 2007 and in excess of 2.5% in 2008. This is by any standard a soft landing to the boom economy of the past ten years.’ Cooke of Cushman & Wakefield agrees. 'The forecast for Spain remains positive compared with the European average.'
Second homes
So far, the problems in the residential market have had very little impact on the commercial real estate sector, continues Cooke. 'It is a diverse issue. We have seen overbuilding in certain parts of the coast and declining demand for second homes with some foreigners looking at cheaper options such as Bulgaria, Romania or Turkey. There has been overbuilding in the market for first homes as well, but demand in this segment is still strong with sales averaging about 500,000 units a year. The problems in the residential market could lead to higher unemployment and interest rates will probably fall, but there is no great default issue. In any case, the number of unsold houses doesn’t directly impact on the commercial market.'
Indeed, the prospects for the commercial property sector in Spain remain generally good. Forecasts for the key segments - offices, retail and logistics - are positive, according to the leading real estate consultancies. In 2006, investment in these sectors reached a record level of € 9bn, up 47% from 2005, and market watchers believe that this figure may be equalled in 2007. According to Edward Farrelly, head of capital markets research at CB Richard Ellis, the Spanish office market is characterised by a high level of demand, a liquidity surplus and lack of product. Last year, a total of EUR 3.85 bn was invested in Madrid and Barcelona, or EUR 2.52 bn and EUR 1.61 bn respectively. This marks a rise of 51% and 45% from the previous year. Meanwhile yields have fallen in the past year to 4.25% for prime offices in Madrid and 4.5% for offices in Barcelona. Yields for shopping centres are slightly higher at 4.75% with industrial centres bringing in 6.25%.
By Graham Keeley and Judi Seebus
This is an extract of the Focus on Spain article in the November edition of PropertyEU Magazine. The magazine is distributed at Barcelona Meeeting Point and MAPIC in Cannes.