Those with property in Spain will have been looking on with some trepidation over the past week as the Madrid stock market threatened to go into meltdown. Its heretofore star performers, property related stocks, took a dreadful pummelling late last week and early this week prompting many commentators to speculate that Spain’s ten year property bull run could well be coming to a spectacular close. 

 

Recent poor data on house prices had meant that the stock market was susceptible to over-react if there was evidence of further bad news. This news came with a vengeance in the guise of Astroc Mediterraneo, a recent star of the real estate sector. The company's audited accounts for 2006 revealed that part of its profits came from the sale of assets to a fund controlled by its chairman Enrique Bola-ńos. At time of going to press Astroc's shares had lost 75% of their value since the announcement. The company was listed in June last year at €6.40 per share rising more than 1,000% to a peak of €72.60 in February. There were also accusations of stock dumping made against the company and recent changes to the planning laws in Valencia will make it far more difficult for the company to realise the profits it had previously envisaged.

 

There have been signs for some time that listed property companies have been becoming slightly wary of their own market with some of the largest real estate companies on the Madrid stock market diversifying outside the industry with many of them disposing 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, from1998 to 2006, the amount that Spanish banks lent for real-estate activity rose by a factor of ten to €107 billion. Spanish bank shares started to slide on the back of these worries and other markets across Europe also felt a chill wind with Dublin’s ISEQ losing about 2% off its exchange values earlier in the week. Irish banking shares closed lower which has been put down to fears for the billions of euro Irish investors have tied up in Spanish property.

 

Cooling in the Spanish market is not really news at this stage, most industry bulletins over the past couple of months have been speaking of a downturn in the Spanish property market, with scenarios ranging from a silky landing to a ‘perfect storm’. Mark Stucklin of Spanish Property insight says; “That the boom is coming to an end is beyond doubt; no boom lasts forever, and this one has had a great innings, with 10 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 get off the 'bricks' and re-balance the economy would be no bad thing.” He continues; “A downturn might catch short-term property speculators with their pants down, but the rest of us will 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 a staggering 270pc over the past decade to an average price of €276,000. The market began to slow sharply late last year which is now showing signs of leaving somewhat of a glut on the market. The price increases are all the more remarkable when you consider that the foreign dominated coastal markets have been in the doldrums for much of the past half decade.

 

A government report released last week showed that Spanish house prices are rising at the slowest rate since 1998. From the outside the property sector landscape looks remarkably similar to that currently being experienced in Ireland. Spain has also been warned that its over-reliance on the construction sector was not good for the health of its overall economy and that this could well lead to problems when this sector hit a downturn, as would currently appear to be the case in both countries.

 

Of the stock market jitters Stucklin says; “Property companies were still falling by 1 or 2% on Wednesday last, though calmer than the previous day. The news flow is all talk of the end of the boom and the bursting of the bubble, of course the authorities say it is just a normal and healthy correction.”

 

Solicitor Tom McGrath says that those on the ground are looking at this as a part of the process of the cleaning up of the Spanish market which has had ongoing problems with corruption in the past. “The company in question,” says McGrath with reference to Astroc, “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 rumours of corruption and changes to the planning laws in the Valencia region which will impinge on its activities.” “I don’t think it is fair though,” he continues, “to draw wider parallels across the whole market from this single company.”

 

“The media is very quick to paint Spain as a corrupt country,” says McGrath, “but it is a country that is dealing with its problems and, contrary to popular perception, the legal system in Spain is actually very strong. This, of course, presumes that those buying there actually use this system.” A number of well respected indicators back up McGrath’s opinion with the Index of Economic Freedom ranking Spain at a very respectable 27^th, considering its market to be mainly free and the Jones Lang La Salle Real Estate Transparency Index rating the country in a very commendable 18^th position.

 

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. This may all turn out to be somewhat of a storm in a teacup. Even if the worst does occur and the property market goes into freefall, most markets regain most, if not all, their lost values within a period of three to five years once the shake-up is over.

 

If you are considering purchasing 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 start to become more desperate to sell.

 

Diarmaid Condon is an independent overseas property consultant with significant agency experience.

He can be contacted on his website on www.diarmaidcondon.com.

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