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20 January 2015 – Bloomberg
The view from the top floor of the Madrid headquarters of the Otis Elevator Company is that a recovery for Spanish real estate is at last in sight.
“We still need one more year to see clear growth in new building, but the outlook is improving,” said Bernardo Calleja, chief executive officer of Zardoya Otis SA, the company’s Spanish unit, in an interview in Madrid. “We will be selling more elevators in Spain in 2015 for sure.”
Calleja’s job running a company that has built and services a quarter of Spain’s stock of about a million installed elevators gives him a unique perspective on the state of Spain’s real estate market as it emerges from a seven-year slump. Spain went through a building boom before the European financial crisis, with the ensuing credit crunch sending housing starts tumbling 96 percent in 2013 from their peak in 2006.
Zardoya (ZOT) Otis is still relying on increased investment in building refurbishment and modern elevator equipment to drive sales. However, new residential building is starting to pick up in cities such as Madrid, Barcelona and Bilbao, said Calleja.
That’s good news for a company whose annual earnings have been dropping since 2010 and whose revenue from new equipment installations are down 75 percent from 2007 levels. Sales of elevators at Spain’s biggest supplier of the machines rose 14 percent in 2014 compared with the previous year, said Calleja.
Spanish history and housing policy put in place in the era of dictator Francisco Franco has made Spaniards among Europe’s most prolific apartment dwellers. As much as 65 percent of the Spanish population lives in apartments compared with 54 percent for Germany, 14 percent for the U.K. and a European Union average of 41 percent, according to Eurostat.
Elevator Country
The result is that Spain has more than 19 elevators per 1,000 inhabitants compared with about 11 for western Europe as a whole, about three for the U.S. and five for China, according to an August 2014 report by Credit Suisse.
Zardoya Otis maintains and services about 250,000 elevators in Spain out of a total of 1.9 million worldwide for Otis Elevator, a unit of United Technologies (UTX) Corp., the world’s leading maker of elevators, escalators and moving walkways.
A burst of growth engineered by Franco as he opened up the economy at the end of 1950s helped swell migration from the countryside to cities where new arrivals needed housing.
Encouraging home ownership was a key goal of the technocrats linked to the Catholic movement Opus Dei that Franco entrusted with running the economy as they sought growth while keeping Spain as a socially conservative country, journalist John Hooper wrote in his 1986 book “The New Spaniards.”
Legal Change
In 1960, Franco passed a law that encouraged investment in new buildings that could be sold for individual apartments. It was one of the legal changes that shaped the dense new barrios of housing blocks that fringe the historic hearts of Spanish cities, said Juan Antonio Modenes, a researcher at the Center for Demographic Studies and Geography department at Barcelona’s Autonomous University.
“The Spanish model of housing is not something historical — it’s really quite recent,” said Modenes. “There was migration to the cities and people bought apartments because the supply was already there.”
As high-rise apartment construction gathered pace, so did demand for the elevators made by Zardoya Otis, created by the 1972 merger of a company founded in Bilbao in 1919 and a unit of Otis. The firm thrived during a Spanish property boom that drove an eightfold increase in real estate-linked lending from 2002 to a 325 billion-euro peak in 2009.
Wave Down
The company learned the hard way that their ride up with the building boom had a flip side: It had to take the wave back down when that market slowed.
The bust that followed put more than 1 million people in the construction industry out of work. Housing starts fell to 29,232 in 2013 from a peak of 664,923 in 2006, according to Spain’s public works ministry.
Shares in Zardoya Otis, which trade on the Madrid stock exchange, are down about 60 percent from their 2007 high as revenue fell by a fifth between 2008 and 2013. The shares closed 2.5 percent higher at 9.60 euros yesterday.
The outlook for new elevator sales is starting to improve for Zardoya Otis as Spain emerges from its construction slump, said Gonzalo Sanz, an analyst at Mirabaud.
Still, the recovery in real estate looks patchy at best.
Home sales in Spain jumped 14 percent in November from a year earlier, according to the National Statistics Institute. While sales of used homes jumped 42 percent, sales of new homes — the sort that might need a new elevator — slid 21 percent.
Not Easy
It won’t be easy for Zardoya Otis as Spanish apartment administrators still lack funds to invest in elevator maintenance while weak inflation makes it hard to raise prices, said Sanz, who has a sell rating on the stock.
Calleja likes to point to features of Spain’s housing stock that may generate revenue in the future, such as the fact there are still 700,000 buildings of three levels or more that don’t have elevators. Their owners may tire of taking the stairs as they get older, he said.
Real growth will come when economic conditions improve enough to make Spaniards revert to their entrenched habit of buying the apartments they live in, said Calleja.
“Residential housing is the real motor of growth and it was the reason why we had such high growth for so many years,” he said.
Original story: Bloomberg (by )
Edited by: Carmel Drake