Spain head in sand not helping

For those with a property to sell in Spain, a recent report brings more doom and gloom to the Spanish markets. With the countryside littered with part-finished developments, and the Spanish government having been snubbed by most world governments recently regarding the recent summits to discuss the “financial crisis,”  the news keeps getting worse and worse. What many do not seem to realize or accept is that the Spanish property crisis is almost entirely home grown. Massive over-building combined with extremely lax regulations on developers, estate agents and mortgage brokers caused this crisis, not the world credit crunch. With what appears to be half the local government officials in Spain either already in jail or on the way, it’s about time Spain woke up and smelled the horse manure. Sticking one’s head in the sand and blaming it all on the “credit crunch,” is not going to resolve anything.

Spanish property prices need to fall by 23% to bring housing affordability back to its long term average, and return the market to normality, argues a new report out today from property consultants Aguirre Newman.

The report asks how much average Spanish property prices have to fall to bring the cost of housing in line with the long term average of 30% of household income.

Assuming mortgage financing of 70% for 30 years with a rate of Euribor (4.5%) plus 0.5%, for a property of 75m2 and a disposable annual household income of 21,259 Euros, the report concludes that prices must fall by 23%.

The report focuses on primary housing, so the conclusions do not necessarily apply to prices for second homes, especial in coastal areas. Second homes are a luxury that tend to suffer more than primary housing in economic downturns.

Whilst identifying over pricing as the main problem, the report also points out that the market is under added pressure from the credit crunch and falling consumer confidence as unemployment rises.

With the property market paralysed by high prices, Aguirre Newman expect a trend towards renting over buying, should property prices not fall.

To date renting has been an unpopular option in Spain, with less than 8% of households renting, compared to 35% in other European countries. Aguirre Newman recommends legal and fiscal changes to stimulate the rental market.

The report forecasts that rents will increase just above inflation, making rental property investments worthwhile with the right legal and fiscal changes.

London based property developer, MInerva, lost more than half it’s already reduced value on Friday after the Dubai government withdrew its takeover offer. The offer was made through a wholly-owned government subsidiary, Limitless. Limitless made an offer of 160p a share for the company before the summer, but talks broke down on Thursday night after an agreement could not be reached

The lenders were said to be seeking assurances on a number of issues including cash and management, as well as the terms on debt. In a statement, Limitless blamed that decision on being unable to obtain third-party consents on satisfactory terms and reserves the right to make another offer. The decision has raised questions about the future of the company, which is heavily exposed to the struggling City of London office market through two large, and almost entirely empty, on-site developments. Considering the bid was considerably higher than the share price, one wonders what the lenders are playing at, and the market reacted badly on the news, prices falling 45½p to 35p a share.

Minerva has previously said that it did not require the takeover to carry on, and on Friday its management refused to comment, although Its lack of income and high level of debt has worried investors, who hoped that the Dubai government would have provided the resources to see the company though a difficult period for developers.

Minerva’s schemes are fully funding and the company has some cash reserves of (£117.4m), although there is about £30m of short-term debt relating to its Croydon retail development, which is struggling to find an anchor tenant and unlikely to find one in the current climate. Another one bites the dust? Or will Mr Brown step in with a government handout - Unlikely in this case.

Observatory Hill, Sydney, Australia

With the credit crunch continuing, and luxury real estate developments collapsing around the world, it is good to see a robust development continuing as planned. Observatory Hill on Sydney’s waterfront is one such example.

For our money, Observatory Hill is one of the most attractive new developments in Australia currently. The Penthouses in this luxury development are priced between A$1.075 to A$2.5 per square meter. Offering spectacular views of Sydney’s skyline and harbor. This waterfront development is selling fast, despite the current economic climate, and high-end condominiums are holding their prices far more than mid to low-level property in similar positions.

This one is available off-plan, and scheduled for completion in 2009, when settlement will be due. Foreign buyers must follow certain rules when purchasing property in Australia, and this development comes with FIRB approval. For a more detailed look see -requirements for non-residents when buying property in Australia.

More details are available here - Observatory Hill, Sydney waterfront development.

Large discounts from property developers, dropping prices and a dwindling amount of transactions might be frightening away the individual investor, but seem to be attracting more groups of international investors in the Chinese property market

Jones Lang LaSalle, an International real estate service provider said recently that some international groups have raised substantial capital for China property funds and are now deploying the money, while others are moving capital from less vibrant markets in North America and Europe.

The credit crunch and falling property prices are providing foreign investment groups with a good incentive to enter the market.

Blackstone, one of the largest US private equities, recently purchased  a $160 million  commercial project in Shanghai the first time the company invested in China’s property market. Other international funds also looking for mature real estate in the top cities.

“We have received lots of inquiries from investors in the United States and Europe interested in investing on the mainland following a downward adjustment in property prices,” said Malcolm Tam Yuk-cheung, a financial advisory leader at Deloitte China Real Estate Industry.

“They are looking both at opportunities to acquire a stake in a property company and to directly invest in projects,” he said, adding these investors typically target an average 15 percent internal return rate before leverage.

Mergers and acquisitions in China’s real estate market are expected to reach a five-year high this year. Tam Yuk-cheung expects mergers and acquisitions deal values to grow 5-10%.

Dealogic, investment bank data provider, said the value of merger and acquisition deals involving mainland property last year was $21.01 billion, the highest since 2003. By June this year, 171 deals worth $15.29 billion had been announced, up 142 percent from the $6.31 billion spent on 123 deals over the same period last year.

“We will definitely strengthen our presence in Beijing by acquiring more projects from other players this year,” said the Zhang Xin, CEO of Hong Kong-listed SOHO China.

At the end of May, SOHO acquired local firm Kaiheng, which owns a commercial and residential project in Beijing.

China’s bigger developers, with cash to spare are actively acquiring the smaller, cash-poor ones to gain access to new markets and greater land holdings.

Chinese governmental policies which try to limit short term speculation in the residential property market, tighter monetary policy and the plummeting stock market are all contributing to the current situation.

“It is more difficult for developers to obtain bank loans, and new regulations have impeded some previous financing strategies such as utilizing the pre-sale of units to finance land payment and the latter stages of actual construction,” said Ben Christensen, head of research for Jones Lang LaSalle Beijing.

Initial public offerings by fast-growing Chinese property firms have been extremely popular in the last couple of years, but interest fell sharply this year when Evergrande, a Chinese developer, failed to sell its IPO. Several developers have since postponed planned listings.

Jason Leow, deputy CEO of CapitaLand (China) Investment Co Ltd, said the number of local developers contacting CapitaLand for “cooperation” has increased rapidly this year. “There are some small developers which would like to sell their projects and some listed real estate firms that acquired a lot of land parcel last year but find it hard to develop them now due to the credit crunch.”

Though international groups are eager to gain greater exposure to the Chinese property market, they continue to be cautious when conducting due diligence on potential partnership opportunities.

Leow said CapitaLand will be “very careful” in conducting mergers and acquisitions. “In a market that’s now seeing a big shift from investment-orientated buying to self-use buying, we will be more careful about the location and quality of our products.” Domestic developers are increasingly willing to lower land and asset prices as well as their own valuations to entice investment from international groups.

But according to Chu IP Pui, director of Kerry Development (China) Ltd, the current price for mergers and acquisitions is not “attractive enough” compared with the company’s land reserve bought five years ago.