La Mancha's Manhattan

Dark clouds over ‘La Mancha’s Manhattan’

A forest of construction cranes still surrounds Francisco Hernando’s vast residential complex in Seseña, just half an hour’s drive from Madrid, but with the bursting of the Spanish property bubble, Mr Hernando’s plan to build a “Manhattan in La Mancha” looks like a Quixotic dream.

At the height of Spain’s building frenzy, Mr Hernando, a rags-to-riches real estate tycoon, obtained planning permission to build 13,500 new homes in the sun-baked plains of Castile. There were to be 280 blocks of flats built around lush gardens, swimming pools and a lake, even though Seseña suffers from water shortages every summer. The residential complex was billed as one of the largest in Spain, and would be marketed to young families who could not afford the cost of living in Madrid.

Mr Hernando, who declined to be interviewed, is being investigated for alleged corruption in the planning process for the Seseña development. He stood to make a fortune by transforming 180 hectares of scrubland into a dormitory town for Madrid commuters. The international credit squeeze, however, may have dashed those hopes.

Of the 13,500 planned flats, only 2,500 have been sold. Another 2,500 are being completed, but it is not clear whether the new owners will want to move in.

“Property prices are falling, and some of the new owners are trapped in negative equity,” says Manuel Fuentes, mayor of Seseña. “It is likely that many buyers will prefer to lose deposits rather than take up mortgages larger than what their houses are worth.”

Mr Hernando’s property group is still marketing the Seseña development, but falling property prices and tougher credit conditions are driving many real estate developers out of business.
Spain’s four largest real estate groups have reported a 60 per cent fall in off-plan sales.

Completed house purchases, meanwhile, fell 27 per cent in January compared with the same month a year ago, according to the national statistics institute.

Many small and medium-sized builders and real estate groups are going bust. Asprima, a property developers association, estimates house prices will fall 8 per cent this year, following a boom decade in which property values more than doubled. Real estate developers complain that banks have cut off their credit. As a result, they forecast only 300,000 new homes will be built in Spain this year, compared with 760,000 in 2006, when the construction boom was going strong. Asprima estimates the construction sector will shed 700,000 jobs by the end of 2009.

The fear is that if the property slump deepens, it will drag down the financial system with it. Spanish banks have €303bn ($477.5bn, £240bn) in outstanding loans to property developers, €153bn to construction companies, and a mortgage portfolio totalling €618bn. Together, these loans account for 60 per cent of total credit at the end of 2007, according to the Bank of Spain.

Although the ratio of bad debts is low, at only 1 per cent of total loans, it is rising. Regulators are putting pressure on banks to set aside more reserves against impaired loans.

The housing slump is also eroding the government’s fiscal surplus. Spain ended 2007 with a budget surplus of 2 per cent of gross domestic product – about €20bn – which Pedro Solbes, finance minister, said would be spent on reactivating the economy. In the first two months of the year, however, the surplus shrunk to 0.8 per cent of GDP as a result of a fall in value added tax receipts and a steep rise in benefit payouts.

Oversupply crisis

For years, many Spaniards believed that nearly all northern Europeans were wealthy and that most wanted a holiday or retirement home in the sun.

An estimated 80,000 property developers were operating at the peak of the residential housing boom four years ago, when entire villa and apartment developments were being sold off-plan within days. These days, according to a report this week by Aguirre Newman, the same estates can take an average of 50 months to shift.

Years of rampant price inflation have eroded Spain’s competitive edge, while over-development along some parts of the coast, along with a series of corruption scandals, has dulled the allure of owning property in the country. The credit crunch and property market downturn in countries such as the UK have turned what might have been a gradual decline in sales into a hard landing. However, talk of a crash is overdone, according to some.

“This is not a crisis of demand,” says Gaspar Lino, general manager of Marbella-based property developer Peninsula. “There are always people interested in buying a quality product at the right price.

“This is a crisis of oversupply, made worse by the credit crunch. Banks have gone from one extreme – of lending to virtually anyone – to the other almost overnight.”

Peninsula is weathering the downturn well. Mr Lino says sales at its three main residential estates – in Granada, Jerez and the Canary Islands – are down about 40 per cent on the same time last year. He knows of other developers struggling against a 90 per cent drop. In the notoriously blighted Murcia region, finished developments are sitting without a single sale.

Source: The Financial Times