Spain 2006: A mature, transparent and tough real estate market

Author: Victoria Llavero, Gómez-Acebo & Pombo, Madrid

What started some years ago as a trickle has turned into a flood during 2006: liquidity. Local and foreign developers and investors have bought into the Spanish real estate market in a way never seen before. All products have seemed attractive and diversification has become the motto of the most active and skilful players.

Liquidity has caused singular portfolio and single asset transactions to be ruled by aggressive and well-attended bidding processes. As a result, opportunistic and long-term investors who made their acquisitions a few years ago have seen their internal rates of return overwhelm their most optimistic expectations. New transactions have lower yields, but the market tells us that they are viable as the trend is confirmed by daily practice, where every new acquisition is preceded by faster negotiations based on the strong position of sellers handling numerous offers. Experts' opinions are now, as ever, divided: some foresee a change in the economic cycle and a drastic slowdown, whereas others predict endless growth. It is not easy to say one way or the other: only time will tell.

In the meantime, Spanish medium-to-large developers have focused on concentration and radical growth through the acquisition of competitors (sometimes even larger than themselves). This process has not yet ended and might last until the second quarter of 2007. The aim of these developers is to consolidate their position, broaden their investment scope, dilute their risk and, for those who are still not there, to jump into the listed market. Traditionally attractive areas are still on top, main central business districts (Madrid, Barcelona, Valencia, Bilbao) have spread, diversity within these locations is a fact and other regions have joined a wealthy symbiosis where public administrations, investors, developers, lessees and final consumers reach their goals by creating and absorbing a high-quality offer. Not only Spain but the whole Iberian Peninsula as well as France, Germany, Greece, Eastern Europe, Turkey and Latin America are becoming operating fields for Spanish players. It should also be borne in mind that Spain has traditionally been considered an atomized market, which leads us to believe that, without overlooking such concentration and spread processes, there is still plenty of room for new investments and investors who will need to adapt to this framework by being nimble and creative.

The number and size of transactions has resulted in a transparency that inspires confidence in the foreign investor, who considers Spain to be more and more attractive, behind only the United Kingdom or France. These facts are the result of the speed at which the real estate sector has become increasingly professionalized, developing into a more mature and sophisticated market. Likewise it is a sector in constant danger: almost every year a bursting of the bubble is predicted, but this has not happened yet. On the contrary, significant growth is being maintained, although its speed has slowed somewhat.

In spite of this slowdown and the forecast increase of interest rates, the upcoming year may still surprise us with new concentration processes and yield records.