Murcia-based Polaris World, the biggest holiday property developer in Spain, last night reached a deal with its banking creditors just before a deadline that would have forced the company to seek court protection from its creditors. The sticking point that held up an agreement was how the value Polaris World’s assets in Murcia such as land.

After 4 months of teetering on the brink of bankruptcy, Polaris World convinced 4 of its lenders – CAM, Bancaja, Banco Popular and Banco de Valencia – to buy finished homes, golf courses, land, and hotels, in return for 83 million Euros, giving the developer a much needed shot of liquidity that it hopes will tide it over until the market picks up.

The Spanish press reports that signs of economic recovery in the UK and Germany suggest that a recovery in holiday home sales will not be far behind.

This is the second time in less than a year that Polaris World has avoided bankruptcy proceedings. Las autumn it negotiated a 900 million Euros debt-for-land exchange with its banking creditors. As a result its creditors now have to work out what to do with 6 million square metres of land in Alhama, Murcia.

PW was founded in 2001 by local builders Pedro García Meroño and Facundo Armero. Armero sold out to Credit Suisse in 2006 for 500 million Euros. Meroño is now the largest shareholder, and José Luis Hernández is the company president.

PW has 7 golf developments in Murcia: Mar Menor Golf Resort, La Torre Golf Resort, El Valle Golf Resort, Hacienda Riquelme, Condado de Alhama, La Loma Golf Resort and Las Terrazas. At the top of the boom its turnover was more than 800 million Euros, with more than 2,000 employees (now down to 700 or less).

Setting aside the clients and contractors suffering as a result of the company’s financial problems, the big losers in this drama are the banks and cajas who lent the company money. All told they have agreed to swap more than a billion Euros of debt in return for assets of dubious value such as land in the Murcian back of beyond.

As a result, the average asking price of real estate in Spain finished March at 2,387€/m2, with wide variations between regions. The Basque Country has the most expensive property (3,482€/m2), followed by Madrid (€3,282/m2) and Catalonia (2,828€/m2). Regions at the other extreme, with the cheapest property, are Extremadura (1,437€/m2), Murcia (1,506€/m2) and Castilla-La Mancha (1,627€/m2).

Changes in resale asking prices are an important market indicator, as vendors tend to raise or drop their asking prices in response to demand. Nevertheless, they are not an accurate guide to transaction prices, as many vendors are still asking unrealistic prices.

Crisis not over

Asking prices have fallen by more in the past, but Idealista warn that “nobody with the slightest knowledge of the real estate market would dare to speak of stabilisation or suggest that prices might rise, much less a bounce back in prices or a return to the ‘boom’ that drove prices above any reasonable analysis.

“The factors the caused the real estate bubble to burst and that pointed towards price falls are still in place: over-supply, tightening credit conditions, and rising unemployment.”

Real estate prices rose on a quarterly basis in three regions: The Balearics (+0.5%), Asturias (+0.1%), and Cantabria (+0.1%). Prices fell in all other regions, the most in Navarre (-2.7%) and Castilla-La Mancha (-2.4%).

Cajas in Spain tend to be controlled by local politicians and their cronies. So forget the ‘efficient allocation of capital’, cajas in Spain are mainly about the pursuit of political goals and patronage. That is why they lent to real estate promoters in the boom with such alacrity; in the short term it meant more jobs, thus more votes for the incumbents (not to mention back scratching between developers and politicians). As a result the cajas are massively over-exposed to the Spanish property sector.

Now the chickens are coming home to roost. The loans are turning bad, whilst the real estate collateral is under water and sinking fast, so the cajas can’t liquidate to recoup their loans without a severe haircut.

At some point the cajas might have to start dumping real estate assets at whatever price they can get, just to scrape together some cash. Let’s hope not all at the same time, which would just drive prices down even further, in a classic downward spiral.

So thanks to reckless and politically-driven lending during the boom, the fate of the cajas is inextricably bound up with the property market. That means there may be a lot more distressed property in the pipeline, depending on how the cajas weather the storm.

If the figures are good, Muñoz has reason to be positive. A report from Marbella’s tax office shows there were 2,499 real estate sales in the first 3 months of this year, a rise of more than 200% compared to the same period last year. Look a bit further back and it appears the first quarter of this year was the best by far in the last 4 years.

Year – Sales in first quarter
2010 – 2,499
2009 – 820
2008 – 1,263
2007 – 1,602
2006 – 1,224

If correct, the figures show the market has improved by 100% compared even to the first quarter of 2006, before the ‘Malaya’ corruption scandal exploded, when the market was still relatively buoyant, just starting to come off the boil.

Does that make sense? Some argue it might be the increase in VAT in July bringing sales forward, but I doubt it. So have Marbella real estate prices dropped, and confidence returned enough to give the market such a big push? Well, I hope so, but I have to say it took me by surprise. I’d heard that there was some improvement, but nothing like this. It makes me wonder.

Ángeles Muñoz, on the other hand, has no doubts. As you would expect she is using the figures to vindicate her policies, saying that Marbella will be “first out of the crisis,” in a message aimed at local and international investors.

Marbella’s new town-plan is also helping. It comes into effect this month, legalises 16,000 properties, and enables owners to “sell, mortgage, swap or use as an asset,” homes that have been frozen out of the market for years, says Muñoz.

“First you have the residential units that have been completed and are empty but close to major cities,” explains Stephen Newman, chairman of property services group Aguirre Newman in Madrid. “With these, it’s simply a question of patience and price adjustment and within 18 months to three years most of that stock will have been absorbed.

“Then you have the second category of residential units that have been completed in what are probably absurd locations – these properties represent a major headache for the banks which are forced to take them on.”

The article doesn’t say it, but many of the properties in “absurd locations” were built as holiday homes. For example golf projects in the middle of nowhere in Murcia, or those enormous blocks of flats you see on the wrong side of the motorway on the Costa del Sol.

Land is the third category, with “sharply differing value according to zoning classification, location and state of readiness for development,” says the article.

No joke. What many people don’t know is that, during the boom, the real game in Spain was land, not all those off-plan flats that ordinary punters invested in. Fortunes were made gambling with land, and many corrupt politicians stuffed their pockets in the process. But now the boom has turned to dust, land values in many areas have collapsed, and the banks are left holding the baby. Prime building land in places like Madrid, Barcelona, and the best coastal spots, still has a market, but much of the land bank is simply worthless.

On the subject of land, the government is throwing the banks a lifeline this week by extending the period developers and banks can hold land before it reverts to a rural classification. Thanks to the new rule, introduced this week by executive decree, then can now hold land for 3 years more without developing it, and without it being reclassified as rural land. That gives banks a total of 6 years before they are forced to take the hit and value land as rural rather than urbanisable.

Back to the glut and what will become of it, another expert makes the same point that the market needs to be segmented. “There is a tendency to think that there is a big problem of oversupply,” says Frédéric Mangeant, head of Knight Frank in Madrid. “This is true, but not in all zones and all categories.” He also told the FT that “developers have begun dusting off plans for small upscale housing estates on the capital’s periphery,” suggesting that the residential constructions sector is starting to see some green shoots.

Second home market bouncing back?

The article also claims that foreign demand for holiday homes is coming back to life. “On Spain’s overbuilt Mediterranean coast, heavy price reductions have also started to revive interest among Britons and other northern Europeans looking for holiday homes or second residences.”

Is this true? Well, I can see that the market is not dead in some segments and areas. But make no mistake, the mass market is still in deep trouble. I’m working on some detailed sector research so I’ll be able to tell you more in a few months’ time.

The article also reports that “Second-hand homes in sought-after areas around the country have also resisted sharp price corrections,” according to property agents. That depends how you define “sharp price corrections”. I consider an average of 25% peak-to-present in popular areas pretty sharp. To the best of my knowledge, prime holiday home prices have fallen by at least that much since the peak. I’m talking about transaction prices, not asking prices.

The situation is worst in regions where housing is much more expensive than the national average, whilst the salaries earned by young adults are similar to the average. The difference between what young adults need to earn to buy a home, and what they do earn is most acute in The Basque Country (148%), followed by Madrid (140%), and The Balearics (134%). On the other hand the difference is lower, and housing more affordable for young adults, in Extremadura (22%), followed by Castilla-La Mancha (39%), and Castilla y Leon (53%).

Despite falling property prices, and interest rates at all time lows, young first-time buyers still need to spend 60% of their monthly salary on mortgage payments, say Spain’s Youth Council.

By region, the percentage rises to 77% in The Basque Country, followed by 74% in Barcelona, 72% in Madrid, 70% in The Balearics, and 63% in Malaga. Experts recommend a ratio of no more than 33%.

The bulletin also reveals that more than half of all young Spanish adults cannot afford to leave home and still live with their parents.

A housing market that is awash with unsold new property yet shuts out more than half of young adults is totally unsustainable, especially in a country like Spain where the population pyramid is increasingly top heavy.

You don’t have to be a genius to work out how badly that will have hit the real estate business in Spain. The sector has effectively been decimated, which helps explain why unemployment in Spain is close to 20%.

The numbers show that there were 159,284 home starts last year, down 79% from 762,000 in 2006, the peak year of Spain’s real estate boom. Year on year, starts fell 51% in 2009, and 47% in 2008. Last year was the lowest figure since the Ministry of Housing started publishing these figures going back to 1992.

Note that, last year, social housing and private housing starts were almost equal, on around 80,000 units (to put it another way, they built almost as many council houses as private homes last year).

In the boom years social housing starts were almost insignificant, despite, or perhaps because of the dramatic rise in property prices. The government is now making a big deal of its commitment to social housing, trumpeting last year’s parity between social and private housing starts, despite the fact that, year on year, social housing starts actually fell.

You might also wonder why the government is building any new properties when there already is such a huge glut of newly-built homes languishing on the market in search of a buyer. Spain does not need more new homes, it just needs existing homes to be cheaper, not to mention a more efficient rental market.

Finally, the figures also show that there were 425,228 new homes finished last year, down 33% from 633,228 in 2008, and still way too high for the market.

Ibiza Old Town and Port

I’ve been bearish about the Spanish real estate market since 2004, and was expecting things to go pear-shaped 2 years before the boom started to show the first signs of exhaustion. Being a Cassandra for so long I started to think I was the only mug who didn’t understand the market, whilst everyone else got on with making money from it. But I was always going to be right in the end, if only because real estate markets are cyclical, and always have been.

But now, for the first time in 6 years, I think we are on the threshold of the buying opportunity of the next cycle, particularly when it comes to real estate in Ibiza. Property markets are cyclical, remember, and this time is no different. The time to buy is now, during the bust, when everyone else is trying to sell, not during the boom, when everyone else is buying.

And don’t let the headlines about Spain’s real estate market crash fool you if you want to buy real estate in Ibiza. Many parts of Spain do indeed have serious problems with a property glut and a lack of diversified demand, but Ibiza is not one of them. Sure, it’s a buyers’ market, and prices and transactions have fallen, but on the other hand Ibiza has a worldwide brand name, a unique positioning, no good substitute, and demand that is to a certain extent inelastic. Demand for Ibiza real estate may be a niche, but it’s an affluent, geographically diversified niche devoted to what Ibiza has to offer. Taken together with a relatively manageable inventory of new homes on the market, Ibiza is in much better shape than most other parts of Spain, at least as far as the real estate market is concerned.

The opportunity today, as I see it, is in the prime and A-grade segments, where thanks to the economic crisis and property crash you can now find attractive homes in superb locations for very reasonable prices. The worst of the crisis appears to be over, and most European economies are growing again. Many affluent Europeans are bound to be interested in a prime property in Ibiza, which means those properties are never going to be given away, and prices might not go down much further.

Les Terrasses de Cala Tarida

Take Les Terrasses de Cala Tarida, for example, and smart new development of apartments with communal gardens and pools in the South West of the Island. An outstanding development just a couple of minutes walk from one of Ibiza’s best beaches, Les Terrasses de Cala Tarida has been selling briskly throughout the economic crisis, and over half the flats have now been sold. Why? Because it’s formula of price, location, and quality is just right. It ticks all the right boxes, including amazing sea views towards breathtaking sunsets, gross rental yields of up to 10%, and mortgage financing of up to 80% for EU nationals. And crucially, it is being offered at prices approximately 20% below comparable asking prices in Ibiza, and way down on the prices it could have sold for 3 years ago.

3 years ago, when the market was more buoyant, Cala Tarida would have sold in the 350,000 – 550,000 Euros price range, compared to 230,000 – 360,000 today. It is now excellent value for money. I think people will look back on in 10 years time and say “that was the time to buy”.

Sea View from Cala Tarida

For more information see the Ibiza real estate guide by Spanish Property Insight

• There is no damp or infestations
• The electrical installations are in perfect condition
• This place never gets flooded
• Taxes and maintenance costs are low
• It’s a quiet area
• They are going to build a golf course here
• Your sea view is safe

Valencia-based Bancaja, the savings bank in question, is desperate to shift some of the properties it now owns. By offering free mortgages it hopes buyers will be tempted to take many of those properties off its hands. The offer only applies to homes that belong to Bancaja or one of the developers it has financed, which is the key to understanding this promotion. It’s bad business for banks to be lending money for free, but if it means getting properties off the balance sheet, well, it might be a price worth paying.

If inflation picks up, as many expect it to, this offer represents a nice little discount for buyers. Assume inflation of 4% p.a: A loan of €200k would only worth around €177k in real terms after 3 years. Of course if they are using this promo to try and flog over-priced property then you wouldn’t be getting such a good deal after all.

For the time being at least, Spanish lenders are doing everything they can to avoid dropping their prices to where the market really is. Doing so would mean recognising losses on their loans, which they can’t afford to do. So, in the meantime, mortgages for free.

It’ll be interesting to see if any other Spanish lenders follow suit.