Bloomberg News

Spanish Commercial-Property Investment to Decline to 10-Year Low

October 27, 2011

Oct. 27 (Bloomberg) -- Spanish commercial real estate is attracting the lowest level of investment in a decade and a turnaround could take more than a year as Europe’s sovereign debt crisis and a financing shortage choke the market.

A total of 1.25 billion euros ($1.8 billion) of offices, shopping malls, hotels and warehouses changed hands in the first nine months, 52 percent less than a year earlier, according to data compiled by Savills Plc.

“Unless there’s a huge deal in the last quarter, we will be looking at the worst year in terms of investment volumes since 2001,” said Gema de la Fuente, head of research at the London-based broker’s Spanish business.

Investors are shunning Spain after banks made it harder and more expensive to borrow money following a surge in bad real estate loans. With a 21 percent jobless rate, Europe’s highest, Spain is struggling to meet a deficit target of 6 percent of gross domestic product this year as growth slows and the threat of Europe’s sovereign-debt contagion increases.

Ten-year Spanish yields are 321 basis points higher than German bunds of similar maturity, down from a euro-era high of 418 basis points on Aug. 5 and an average of 15 basis points, or 0.01 percentage point, in the first decade of monetary union.

Failed Deals

“Pressure on Spanish sovereign debt is pulling back investment,” said Ismael Clemente, managing director for Spain and Portugal at RREEF, Deutsche Bank AG’s real estate investment arm. “A lot of the big property deals that have come up this year have been canned because of lack of financing.”

Clemente said sales of large portfolios of commercial real estate in Spain are unlikely to pick up until the economic outlook improves and banks clean up their balance sheets.

Pending deals include property portfolios with a combined value of $1.3 billion owned by the regional governments of Andalusia and Catalonia, and real-estate assets owned by Banco Santander SA, which has a total of 8.3 billion euros of properties on its books.

There won’t be a recovery in Spanish real-estate investment until the country’s economic situation becomes clearer in 2013 or 2014, said Ramiro Rodriguez, an analyst at BNP Paribas Real Estate in Spain. He also cited structural reforms, the expected change of government and banks cleaning up their balance sheets as reasons why the market won’t improve soon.

A poll earlier this month by CBRE Group Inc. of 600 real estate investors showed that 73 percent said the outlook for Spanish real estate will improve in 18 months.

“That’s not good news,” said Patricio Palomar, head of research at CBRE in Spain. “They are saying they see no improvement in the short term.”

Falling Rents

In the second quarter, the vacancy rate for Madrid office space was 13.4 percent, according to BNP Paribas Real Estate. Average rents stood at 15.3 euros a square meter, down 3.2 percent on the year and 4.7 percent from the previous quarter. Rents for prime offices fell 3.5 percent on the year to 27.5 euros a square meter, down 33 percent from a peak of 41 euros a square meter in the second quarter of 2008.

In Barcelona, Spain’s second-largest city, vacancy rates reached 14.4 percent and average rents fell 3.8 percent from the year ago period to 13.5 euros a square meter.

“When we will see light at the end of the tunnel is the crux of the matter,” de la Fuente said. “Though economic indicators for this year and next are positive, we have already seen them downwardly adjusted as the year progresses.”

--With assistance from Todd White in Madrid. Editors: Jeff St.Onge, Andrew Blackman.

To contact the reporter on this story: Sharon Smyth in Madrid at ssmyth2@bloomberg.net.

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.


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