Sunny times in Spain
With #Week4 coming to an end, some interesting data came out of Spain, showing how the real estate market there has held up much better than its European peers. Investment volumes last year, while down from previous highs, have declined less than in Germany, with pricing similarly supported – yes, yields have gone out, but again to nothing like the same extent. The rain in Spain falls mainly in Northern Europe, it appears.
The immediate causes of this outperformance are two-fold. Firstly, having been one of the worst-hit markets by the global financial crisis, Spanish real estate – and the lenders that underpin it – underwent perhaps the biggest transformation of all European markets. It was painful, but the banks learned their lesson, and are nowhere near as overextended as they were in 2008. Developers too became more circumspect in their ambitions. Less than 6% of Spanish bank exposure is to commercial real estate, and lending deals above 50% LTV are rare.
In parallel, the cost of living crisis hasn’t been quite as pronounced on the Iberian peninsula as elsewhere. If much of the cause of inflation in Europe was rising gas prices, Spain was well insulated from the worst of it: its gas network isn’t connected to the European pipelines supplied from Russia, and so was broadly able to continue as before, importing its needs from US and Middle Eastern suppliers through sea terminals.
Add in an economy that has less heavy industry (and so a lower gas requirement), alongside a more temperate climate, and price rises were less intense than in other countries; inflation peaked at 10.7%, but came back down much more swiftly than in many places. A booming tourist industry has also seen Spain swing back into a current account surplus, further strengthening the economic outlook.
More than anything, this shows how real estate markets are rarely uniformly bad everywhere. From offices in London, Paris and Frankfurt, it is easy to see challenges and assume it is a similar picture everywhere. Take a look further afield, and things suddenly look much brighter.
At Innesco, one of our mantras is “speak to the world”, and it is perhaps stories such as this that illustrate it best. Few industries are as global as real estate, so it pays to understand what is happening where. Your next opportunity could depend on it.
Have a great weekend.