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June 2008

20.6.2008 - Woe For Grupo Drac Mallorca's Largest Developer

 

Grupo Drac and owner Vicente Grande, Mallorca's biggest property developer, sought protection from creditors this week in the biggest sign yet that the slowdown in the Mallorca property market is taking grip.

With estimated debts of over 600million euros, within the 14 strong company group, there is real concern across market as to the consequences of, what has become, the biggest corporate failure in the history of the Balearic Islands.

An interesting twist to the tale is that Vicente Grande owns 93% of the shares in Real Mallorca football club and is also Chairman. Only time will tell what impact the collapse of Grupo Drac will have on the financial picture of the club.

The group, established in 1995, has been at the forefront of the development boom, that characterised much of Spain and Mallorca. However, in line with so many Spanish property development companies, the highly leveraged approach adopted, and the unsustainable growth in construction and prices, has now become the Achilles heal that has brought the business to it's knees.

Apart from its Mallorca property activities, Grupo Drac have an international division with projects as far afield as Santo Domingo, Mexico, Bulgaria and Poland. 

News story provided by Mallorca Property News (www.mallorcapropertynews.com)

17.6.2008 - European Inflation Hits 16 Year High

 

Eurozone inflation has been revised up to the highest level for 16 years and the European Central Bank's main concern now is that rising wage costs could add increasingly to the pressures created by soaring oil prices.

Annual inflation in the 15-country region last month was 3.7 per cent up from 3.3 per cent in April. This rate is the highest since the Eurozone came into being in 1999 and since 1992 on a comparable basis.

It was on the back of these concerns that the ECB threatened to raise interest rates by a quarter point to 4.25% in July helping to drive the Euribor, main reference rate for Spanish mortgages, higher. The announcement also pushed the Euro higher against Sterling making it a double blow for Sterling denominated purchasers requiring mortgage finance to purchase a Spanish property

Editors Note: Sterling based purchasers should look at options to delay currency converting until the Euro starts to waeken, as is anticipated late in 2008 - 2009. Various banks are offering mortgages with euro loans backed by a Sterling deposit with the latter repaid at the client's discetion when the exchange rate picture has improved. In most cases the interest received on the Sterling deposit is greater than that payable on the associated Euro loan thus leaving the client in a positive or at least neutral cash flow position. Contact a good mortgage broker, such as The Mallorca Mortgage Business - www.mortgagesinmallorca.com - for further information.  

The ECB’s fear is that high inflation rates caused by high oil price will become entrenched by feeding through into wage settlements. The hope is that the planned increase in interest rates next month will be enough of a signal to reduce expectations about medium and longer term inflation rates. The ECB's target is for annual inflation to be  “below but close” to 2 per cent.

On a positive note details of the latest inflation data showed “core” inflation, excluding volatile energy and unprocessed food prices, rising only modestly in May to 2.5 per cent, from 2.4 per cent in April.

The main headache for the ECB faced with such a blunt tool as "central bank interest rates" is that within the eurozone, inflation rates continue to vary considerably. At the top end Slovenia inflation stood at 6.2 per cent in May, while Belgium, Greece, Spain, Cyprus, Luxembourg, Malta and Finland all reported rates in excess of 4 per cent. At the other end of the scale, inflation was just 2.1 per cent in the Netherlands.

News Story provided by Mallorca Property News (www.mallorcapropertynews.com)

 

16.6.2008 - Deutsche Bank Spanish Housing Market Report

 

A recent report from Deutsche Bank on the Spanish housing market and economic out look highlights the risks of Spain moving into recession in 2009.

The depth of the property crisis and the importance of this sector to the general health of the Spanish economy are the main reasons why Deutsche Bank feel there is a real risk of Spain moving from one of Europe's fastest growing economies into a recession next year. Highlighting public sector expenditure as the main reason why they see growth will continue this year they feel that continuing weakness of the housing market, in a sector that in recent history has contributed around 9.5% of Spanish economic output, could be enough to put the economy into reverse.

They estimate that housing starts will fall by a massive 40 - 50% during 2008, that the construction sector will not recover for around 3 years and that the crisis may be even more severe than those of 1992 and 1997. In relation to the general trend for Spanish property prices they predict falls of between 2 and 8% this year and 5 - 10% in 2009.

And the reasons behind the property / housing crisis? The credit squeeze and severe restriction of bank lending within the housing sector and sentiment within the market that prices have peaked linked to buyers delaying purchase decisions.

Coupled with the weakening demand picture Deutsche Bank highlight the "stock" of unsold properties on the market which they estimate at around one million. With underlying demand estimated at around 400,000 units per year it is estimated that it will take several years of reduced new unit output for this to be taken up, particularly where demand remains weak.

The picture painted by the Bank is not helped by the continuing rise in the Euribor, the main reference rate for Spanish mortgages. Only last week this reached a near record rate of 5.429% on news that the European Central Bank (ECB) may need to increase interest rates in the face of ever strengthening inflationary pressures.

 

Editors Note:

Of interest to property owners and buyers will be the relative performance of the housing market at a regional rather than national level. With both the supply and demand side factors varying quite significantly across the country the outcome for the market is likely to be quite different. While some mainland coastal regions have experienced huge speculative construction booms, driven in part by Europe wide investor interest, and leaving a legacy of empty units, other areas have seen a more balanced supply and demand picture that should ensure the picture is one of a "soft landing" rather than full blown crash. In this respect Mallorca and the wider Balearic Islands are likely to be one of the regions best able to ride out the storm.


News story provided by Mallorca Property News (www.mallorcapropertynews.com)

16.6.2008 - Spanish Property & Economy Update

 

The Spanish business school presented last week it's annual report on the Spanish economy putting forward another downbeat view of life both generally and specifically for the Spanish property sector. Discussing the spectre of negative equity they suggested that 10% of all Spanish mortgage holders could be in negative equity by the end of the year.

In line with many market commentators the report put forward the view that price falls of between 20% and 30% could be expected putting huge pressure on owners of property purchased within the last three years, particularly where high loan to value ratio mortgages were agreed. With many mortgages granted in recent years arranged to cover 120% of purchase values, (to assist with purchase costs etc) many mortgage holders will move deep into negative equity.

With the Spanish economy slowing and estimates rising for unemployment levels, mortgage defaults look set to increase making negative equity even more painful for home owners forced to sell their properties and further weakening sentiment in the sector.

The report concludes that while the slump in the general economy may bottom out by the end of 2009, the Spanish property market may not see light at the end of the tunnel until 2012

 

2.6.2008 - Mallorca Property Market Update June 2008

What is the latest news on the Mallorca property market and what are the prospects for the rest of the 2008 and 2009?

On the demand side recent figures from the National Institute for Statistics (INE) indicate that demand for property in Mallorca and the wider Balearic Islands fell by 49.8% in March when compared with the same month in 2007. This fall compares unfavourably with the Spanish national average of -38.6%. Although 2008 included the easter period, reducing the number of working days and thus number of sales registered, the fall is considerable.

Further data from the INE, relating to new mortgages, reaffirms the weak sales picture. Mortgages granted have also fallen heavily, in this case by 46.2%, only surpassed by Valencia, Navarra and Castilla - La Mancha.

Interestingly however the average value of mortgages granted increased by 3.5%, situating at 201.000€, the second highest in Spain behind Madrid (228,000€), suggesting that the weak demand picture has not yet filtered through to reduced property prices.

Developers in the Islands of Mallorca, Menorca and Ibiza maintain that underlying demand exists but that the severe restriction on bank lending is the fundamental problem undermining completion of transactions.

On the supply side the Balearic Islands appear to be performing a little better.  Data on the number of available / unsold new properties, when compared with total units constructed between 2005 and 2008, stands at a fairly modest 11%. This compares with an average of 34.4% across Spain as a whole, an incredible 51% in the region of Valencia, 50.1% in Murcia and 24% in Andalucia. As previously reported Mallorca did not suffer to the same extent from the uncontrolled speculative development boom seen across many of the mainland coastal regions, including the 3 previously mentioned.

So what does this mean in practice and most importantly the outlook for the market and prices? Logic dictates that a fall in demand of 50% should be reflected in a weakening of values. That said it needs to be clarified that this contraction on the demand side has less to do with a fall in underlying demand than a severe tightening of bank property lending, exacerbated in the Balearic Islands due to the relatively high value of property in the region. In support of values is the relatively strong supply picture, at least in relation to available new build units.

The big uncertainty is the outlook for bank lending conditions, how long the crisis will continue and whether the restrictions will worsen. On top consideration needs to be given to not only the wider bank interest rate margins, resulting from this financial crisis, but underlying central bank base rates, particularly in Europe, and any associated deterioration in mortgage repayment default levels. At present the latter is not a major problem in the Balearic Islands but with pressure on employment levels expected in the months ahead, along with continued high interest rate levels, some increase in default levels can be expected.

If the economic / financial outlook remains uncertain, as most commentators expect for the rest of 2008 and into 2009, it is likely that some weakening of general market values will now take place. This "adjustment" is likely to be in the order of -10%. It is however very important to emphasise that this is a view of the whole market and not any individual property. Each case needs to be analysed individually and the asking price considered in its own right. Some properties have already been priced to sell in the current market while others , particularly those which were historically over valued even before the downturn, may need to fall by much more than 10% to reflect a fair open market value.

Critical is research and careful analysis of any individual property, it's price, location, re-saleability, quality etc. The advice is either do your own or ensure you buy through a reputable estate agency or professional intermediary such as a Chartered Surveyor (see www.mallorcacharteredsurveyors.com or www.novipropertymallorca.com)