28 September 2017 – Financial Times
When Juan Velayos left his job at the accountancy firm PwC to become chief executive of Spanish housebuilder Neinor Homes two years ago, some people thought he was crazy.
Construction companies in Spain once built more residential homes every year than the rest of western Europe combined, fuelled by cheap debt. But a 35% slump in prices after the 2007 financial crisis left much of the sector bankrupt.
Spain still has half a million new unsold homes, many in surreal empty cities that have become monuments to a speculative property bubble that brought down the country’s banking sector and the wider economy.
“The markets at the time were sceptical about the opportunity [in Spanish house building],” says Mr Velayos. “They were sceptical about the momentum for residential. They were surprised we were buying land so aggressively.”
But Neinor, created by US private equity group Lone Star in 2014, has become a success story, one of the country’s first residential homebuilders able to rise out of the ashes of the ruined sector and build again.
Six months ago Neinor Homes became the first to float on the Madrid stock exchange, with Lone Star selling 60% of the company, which was valued at €1.3bn. Its share price has risen by 13% since then.
“We knew there was an opportunity because the Spanish economy was growing again and for nearly a decade there had been practically no new residential homes built,” says Mr Velayos.
“Residential construction activity in Spain is finally back,” says Adolfo Ramirez-Escudero, chief executive of the Spanish arm of real estate service firm CBRE. “The demand is there and companies are building again.”
Many of these companies are also now considering initial public offerings. Two people with knowledge of the deal say that Aedas is considering a listing this year. Aedas declined to comment.
This comes as the wider Spanish property market seems to have turned a corner. House prices fell by 35.2% from 2007 to 2015, according to property site Idealista, but are up by 3% this year and rose by 2% last year.
Analysts say this is set to continue as Spain’s economy continues to grow at about 3% a year — one of the strongest in the eurozone.
“The scarcity of new housing in some places and the impulse of demand, supported by employment growth, point to new price increases,” says Jorge Sicilia, the chief economist of BBVA, the Spanish banking group.
Investment into Spain’s property market has come in stages, starting with international funds run by Goldman Sachs, Cerberus Capital Management and Blackstone, which bought bad loans and apartment portfolios as early as 2013.
This was followed by the creation of real estate investment trusts — known in Spain as Socimi — which shortly afterwards started looking at the commercial property and rental markets.
Four big Spanish Socimis — Axiare, Merlin Properties, Hispania and Lar España — are already up and running. Combined profits for the four groups in the first quarter of 2017 were up 50% from the same period last year.
But the return of the residential building sector on top of commercial suggests that the market is maturing and returning to normal after a decade of crisis that saw big players such as Reyal Urbis and Martinsa Fadesa file for bankruptcy.
“In commercial and residential property, everyone has the same thesis,” says Fernando Ramirez, head of investor relations at Merlin. “Spain is recovering and property is still cheap.”
The return of Spanish construction is good for the wider Spanish economy, particularly job creation. The construction sector once employed more than 2.5m people, compared with just 1m after the crash.
A rise in house prices is also positive for the banking sector, which has benefited from the influx of institutional money that has pushed up the prices of their portfolios of distressed property assets and provided a market to sell.
However, the story is not all positive.
Spain’s biggest listed construction groups such as ACS or Ferrovial are unlikely to benefit from higher property prices, as they are focused on large infrastructure projects, which are still in short supply as the government holds back on spending.
The recovery is also concentrated in big cities such as Madrid, Barcelona and Valencia, as well as the tourist hotspots such as Málaga and the Balearic Islands. In much of more rural Spain, the recovery has not happened.
This is partly due to the overhang of half a million unsold new houses in parts of Spain. “In Madrid and Barcelona, there is nowhere near enough houses and demand is outstripping supply,” says Fernando Encinar, the chief executive of Idealista.
“If you drive 40km from Madrid through to Valdeluz there are still thousands of empty properties and that market is a long way from recovering,” he says.
Mr Velayos adds that while the market is coming back, the country is a long way from the pre-financial crisis boom — adding that the frothy exuberance of those years is unlikely to return.
In effect, the market is developing on a different model from before the financial crisis, with building financed by equity rather than debt. “The days where the builder and the buyer were both 100% debt financed are long gone,” he says.
Original story: Financial Times