Complex Made Simple

The fabulous Spanish property bull market will continue in 2020!

Spain’s political impasse will have no real impact on the fabulous bull market that has seen apartment prices

No less than 640,000 new homes were built in 2007 but a mere 40,000 were constructed in 2018 The golden visa program and political crises in Latin America, Egypt and the Arab world has attracted a tsunami of foreign investors Spain is a resurrection template for stricken brick and mortar property markets, busted developers and zombie banks

So Pedro Sanchez will remain Prime Minister of Spain after this weekend’s election, though the Socialists will not obtain a parliamentary majority in the Cortes and three million Spaniards voted for Vox, the political heirs of Francisco Franco’s far right nationalists. However, Spain’s political impasse will have no real impact on the fabulous bull market that has seen apartment prices in, say, Madrid’s Salamanca district rise 20 – 25% since mid-2017, despite the fourth Spanish election in four years.

The macro ballast behind Spain’s property bull market is intact. No less than 640,000 new homes were built in 2007 but a mere 40,000 were constructed in 2018. Spain has a housing shortage of at least 180,000 units per annum. The golden visa program and political crises in Latin America, Egypt and the Arab world has attracted a tsunami of foreign investors. Emirates Airlines flies every day from DXB to Barajas Airport. So my strategy remains – Hola mi hermosa preciosa Madrid!

The post-Lehman plunge in the Spanish property market was an epic bloodbath. After all, in 2006-7, at the height of the go go property bubble, developers built more villas, condos and high rise towers in Spain than in Britain, France, Italy and Germany combined. I remember being dissed by a major Spanish developer’s chairman at an investor dinner in Montreux, Switzerland when I suggested that the dark clouds on Wall Street could trigger a bear market in Spanish brick and mortar. Two years later, the developer who pooh poohed the idea that house prices can ever fall in Spain was bankrupt and his projects on the Costa de Sol and Valencia were seized by a housing bank (caja), which failed in turn.

Spain, Iceland, Dubai, Ireland and Florida experienced the biggest, most protracted property market crashes in the world in 2008 – 2010. Excessive debt, as usual, was the kiss of death for overleveraged developers in Spain – and the reckless banks who financed their madness amid a sleazy daisy chain of corrupt deals with brokers and regulators. The Spanish economy plunged into deep recession between 2009-13, as youth unemployment rates soared to 40% and dozens of housing banks (cajas) failed en masse.

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Yet Spain enacted painful banking and labour market reforms, benefited from the plunge in the Euro after the ECB’s Mario Draghi fired his monetary bazooka and slashed banking leverage ratios amid structural reform/fiscal austerity and rewrote its laws to attract institutional investors. Spain is a resurrection template for stricken brick and mortar property markets, busted developers and zombie banks (a rose, by any other name, stinks just as bad as a banksters worthless property loan books funded by retail deposits!). No wonder I felt big time déjà vu when I scanned the deal flow in Madrid and Barca in 2016.

I knew the omens for Spanish property had changed when I saw the world’s savviest investors gravitate to its depressed even distressed market by mid-2014 after the Spanish government had nationalized several caja banks amid a financial panic. Blackstone’s Jon Gray nibbled in the Madrid office tower market. The smart money on Wall Street, like Phil Collins, sniffed restructuring “in the air”. Apollo’s distressed debt dealmakers were picking over the (literal!) rubble of busted Spanish projects from desperate banks. Apollo even acquired the Botin clan’s Banco Santander’s property affiliates. I was not surprised to see George Soros and John Paulson bid for the property firm Hispania Activos’s IPO, unknown to any Gulf investor. Blackstone and Goldman Sachs acquired multi-family buildings and shopping centers in the Spanish provinces and Portugal at rock bottom prices.

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When Spanish undeveloped land prices on the Costa del Sol/Costa Brava began to rise in 2014-15, I knew the worst was over and began my winter trips to Madrid. Sevilla and Valencia to hunt for deals and roam the exquisite, haunted palaces of Andalucia and Castile. “Viva España” was remains my cri de coeur in Spanish property. Friends in the Gulf who bought apartment buildings and villa projects from Sareb, Mariano Rajoy’s “bad bank” in 2013-14 have doubled or, in one case, even tripled their money in Spanish property. In real estate, success is not about location but timing the property cycle at the point of maximum macro pessimism when the supply-demand equation is just beginning to turn. Lord Rothschild said it best “buy when there is blood on the streets – and de facto bankrupt banking system dumps busted developer’s project as if it were deep discount leprosy.

Financing property developers in Spain’s major cities has been a mucho dinero winner for a close friend who is the CEO of the private office of one of Britain’s top commercial property billionaires in London. The Banco de España under pressure from the ECB, has made developers ineligible for bank financing unless they presell 50% of a development project, making it possible to earn 15% Euro returns on developer financing with first charge on a project. The ghosts from Spain’s property “lost decade” can make serious money for those who are plugged into the world of the cognoscenti and smart investors steeped in the Madrileño developer deal flow, as two Sindhi hombres from the Bur Dubai textile market will be with me in 2020.

Fast forward to the autumn of 2019, Spanish property prices have risen at least 30 – 40% from their 2009 lows on the index but an entire generation of young Spaniards face a chronic housing shortage. I see Venezuela and Mexicans taking advantage of Spain’s cultural/education facilities to relocate their family from Latin America’s political and criminal narco trafficante chaos.

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I expect Argentina will be next as Juan Peron himself spent his exile with Isabelita in Madrid. Egyptians, Pakistanis, even Gulf nationals have bought property in Spain to take advantage of the “golden visa” as a path to EU citizenship. Mandarin Oriental chose Gaudi’s lovely Barcelona for its first standalone luxury residence in the world, though I am nervous about the risk of Catalan secessionism. Madrid and the Balearics are now some of the hottest property market opportunities in the world. I try to spend two weeks in Madrid and Sevilla every second January – sunshine, flamingo, Moorish palaces, the Prado and Thyssen art museums, side trips to Toledo and Ronda and Marbella – this is the vida loca yo quiero absolutamente!

Spain is no longer at dirt cheap levels, as it was in 2012-13 when I first wrote about it in the UAE financial press. Palme de Mallorca prices even exceed pre 2008 levels. Prime Madrid prices have risen 15 – 18% since early 2018 but are still vastly lower than Paris or Berlin, let alone vastly inflated pre-Brexit West End of London.