Spanish real estate – a time of change – DLA Piper

The downturn in Spain’s residential real estate will significantly affect many developers in the sector, says Enrique Isla, head of real estate at DLA Piper in Madrid.

The wider impact of the slowdown in Spanish residential real estate is that many developers will be significantly down on their end of year forecasts, says Enrique Isla, head of real estate at DLA Piper in Madrid, a situation that may cause financial difficulties for many.

‘The Spanish residential real estate sector is experiencing its first drop in activity after a decade, during which we have seen growth in excess of 10% per annum. This deceleration is most pronounced in the second home market where high prices, corruption scandals, and alarmist news reports have combined to significantly affect demand,’ he says.

The most vulnerable developers will be those that embarked on excessive corporate acquisitions, and who are now highly leveraged but have failed to adequately diversify their product portfolios, he believes.

‘The slowdown in sales, interest rate rises, restrictions on access to bank finance, as well as a lack of liquidity of land portfolios has combined with the over-indebtedness of many Spanish developers.’

Inevitably developers will need to be more selective when undertaking new residential developments, he suggests, in order to avoid repeating mistakes such as an over-reliance on land price increases during the construction phase.

But where some see chaos others see opportunity, says Isla. The downward trend is now leading investors with a higher risk profile to take positions in Spanish real estate.

‘We have already advised funds of this type entering the market, among them Doughty Hanson which has acquired 50% of the Aranco Real Estate Group. Such funds business plans see them injecting much sought after capital, with the aim of obtaining substantial gains in the next cycle change.’

For many domestic developers however, domestic exhaustion is prompting them to embark upon international expansion. ‘The preferred markets to date appear to be Poland, Romania and Hungary, but others are also looking within Western Europe – notably France, Germany and the UK – while others are inevitably looking to the Americas – Brazil, Mexico and Panama.’