The falls in Spanish property stocks this week were triggered by the collapse of the price of Valencia residential developer Astroc. This company´s shares rose from their initial public offering price of €6.40 in May 2006 to a peak of around €72 on 26 February this year. But since then, they have fallen back to €15. This appears to have been prompted by three factors:
- The disclosure of the sale of assets to the President and main shareholder, Enrique Banuelos, who has a 52% stake in the company,
- Steps taken by the Valencia local authority to tighten building laws, and
- Rumours that certain investors were seeking to sell their shares.
At the same time government figures indicate that the red-hot Spanish housing market is slowing down, with house prices rising only 7% in the last year, after several years of much stronger growth, largely driven by low interest rates and expansion in the construction industry.
This slowdown, in the face of gently rising interest rates, might have brought off a soft landing for the housing market.
While the Astroc affair is self-contained, it has caused other stocks to fall. Metrovacesa, with a market capitalisation of €9 billion, is down 5% this week, Inmocaral (€6 billion) is down 12%. However, both these stocks saw their share prices soar in 2006, up 150% and 372% respectively. The reasons for such stellar growth include struggles for control among powerful shareholders, aggressive expansion ambitions, speculation by private investors, and with some desperate covering of short positions adding fuel to the raging fire.
It had been clear for some time that the pricing of Spanish property stocks had lost touch with fundamental reality, and most professional property equity investors had disposed of their Spanish holdings. The last Spanish property shares held by Henderson were, for instance, in the shopping centre developer Riofisa. These shares had been bought in an IPO in July 2006 at €18 and sold in February this year, after an offer from Inmocaral of €44.31. This latter company had also previously acquired Inmobiliaria Colonial, buying a controlling stake from La Caixa.
Our view of the potential worst-case scenario is as follows: the underlying residential market could suffer from a loss of confidence among those private individuals who have bought houses and apartments as investments. This could in turn be followed by banks calling in loans, resulting in a hard landing for house prices that dents consumer confidence, which would have much more serious - and wider-reaching -implications. There has already been a knock-on fall in the shares of Spanish banks and constructors, for example.
There is however no reason yet to believe that the effects will be this extreme, and for the time being we welcome what we consider as a necessary correction to an overheated market.
The commercial property sectors remain in good shape, with strong demand and limited new supply in the Madrid office market. We also believe that rental growth and further yield compression in the Spanish retail sector will give double digit returns this year, unless the housing market situation deteriorates to the point of affecting retail rents.
Patrick Sumner, April 2007
