Earlier this week I was at a real estate conference in Doha (Qatar) and I must say it was a very inspiring environment. There is a lot of optimism in the GCC countries about their development, not unlike Spain ten years ago. One of the speakers, the CEO of a company specialising in affordable housing, said that the demand in Saudi Arabia for houses is estimated at 800,000 per year, whereas the supply is around 200,000 per year. I mention specifically this example because of the importance of real estate on the development of the Spanish economy in the last decade.
So, if we were all happy and growing ten years ago, what happened? Why did the tide change? Was it the moon? Or was it supply and demand which caused the tidal wave that hit us? Or was it a political tsunami?
First, let’s go back to residential development in Spain in the later part of the last century. In 1991, the total number of available houses was around 17.2 million, for a population of 38.8 million people (2.3 people per house). From 1990 to 1996, on average licences for 230,991 new residential units were issued. In 1997, a new law on land use was approved which resulted in an immediate increase of production: average licences in 1997-2002 increased to 379,029 per year. By 2001 the rate of population per house was down to a rather low 1.96. This was partly because a lot of the newbuilds were in holiday destinations. When, in 2002, interest rates dropped, thanks to the euro and very low US interest rates, building really took off and reached 737,186 licences in peak year 2006.
Meanwhile, prices had gone far beyond the reach of normal people, but this was solved by extending the lengths of mortgages from the “normal” 15 years to 30-, 40- or even 50-year maturities. Meanwhile, banks kept financing the development of more houses. But as always, the party ends at some time. In 2008, only 268.000 building licences were issued and in 2010, the number was down to 91,645. By then there were around 24 million houses available, only 1.91 people for each house. Again, partly this low rate is explained by second houses.
So how did some of the banks like Bankia get so involved in this? First, obviously they lent too much money to developers and new home owners. But mainly it was because they made the rather interesting decision to swap the loans they had given to project developers for the land and the projects these developers owned. This decision was based on the faith that real estate never drops in value. It was also a practical decision in the sense that it avoided to show any loss on loans in the accounts.
So how big is the hole? Last week, Bankia announced that it needs €19bn. Is that all? We should do an audit of all banks, but that is beyond me. So let’s do some simple numbers: the population is currently around 47 million and assuming a ratio of 1.96 people per house of 2001, this leads us to an estimate demand for 23.9 million houses. There are now 24.6 million houses, thus the hole is somewhere near 0.7 million houses. If you want to get an idea of the hole expressed in Euros, around €75,000 per house is a safe bet. I come close to €50bn with this. You would have to add the land value to that.
Is there any good news? Yes, there is! The good news is that these statistics are unevenly spread around Spain. For instance, in the Metropolitan area of Barcelona, the ratio of population per house has remained stable from 2001 to present at 2.7 people per house. In this area of around five million people, in 2011 only 4,107 licences for new houses were issued, while average yearly demand is at least 10,000 houses. So there is clearly a shortage in the making and therefore an interesting investment opportunity. Anyone interested? Give me a call.
Maarten de Jongh is managing partner at Spanish advisory firm Norgestion.
PS: I simply can’t finish this without citing two interesting comments last week by the Spanish government. On Monday, Mariano Rajoy, the prime minister, said that he “doesn’t think that the decision concerning Bankia has any influence on the interest rate of Spanish bonds”. Meanwhile, Mr Garcia-Margallo, minister of foreign affairs, said that the bond market developments of last Monday might be influenced by the behaviour of the supporters of Athletic Bilbao and FC Barcelona during the Cup final on the Friday before.
I finished my last article asking what else the Spanish government can do to reduce its credibility. It seems that they are already followers of my articles and have taken up the challenge. More news will definitely follow.