Spain comes out of the rain

When the history of the great financial collapse of 2008 is finally written, one of the most potent examples of an economy over-reliant upon its construction and property sector will be seen to be Spain. After 10 years of phenomenal expansion in the early noughties it became the world’s eighth largest economy, the boom in construction created around 600,000 jobs alone. In this time, although it had a population that is one-fifth smaller than the UK, it built five times as many houses, and prices went up 200% between 2001 and 2006. What could go wrong?!

Then came Lehman Brothers, sub-prime lending and the global crash. Almost overnight Spain joined Ireland, Greece and Portugal in the economic emergency ward.

Spain was the European equivalent of the Marie Celeste of construction

From building 800,000 homes in a year - more than France, Italy and Germany combined - new completions dropped to more than 100,000. Once completed no-one was buying. In the resort and coastal areas huge numbers of empty and unsold villas, had “For Sale” signs that gathered dust and resort schemes became ghost developments. Spain was the European equivalent of the Marie Celeste of construction, a moribund economy that was only kept on life support by German intervention with over a quarter of the working population unemployed.

Now some six years on, things are beginning to turn around, the cranes have returned to the skylines of Madrid, Bilbao and Barcelona and it is not just the football teams that are enjoying success on the European stage, construction is back. Don’t take my word for it. George Soros is the most successful hedge fund manager of all time. Where George jumps, others follow and he has just invested $127m dollars in a new Spanish property vehicle called Hispania, a REIT which will shortly be listed on the Spanish stock market.

The reason for this sudden interest and optimism in the market is because property values still remain around 30% lower than their peak when the bubble burst, but there is confidence that the economy is coming back to life. In some parts of the dusty, empty coastal areas the drop in prices is more like 70% which represents a huge bargain. According to Savills, investment in the property market jumped from £320m to £850m last year alone. 

In terms of property and constructions contribution to Spain’s real estate gross domestic product (GDP) outlook in the country, Oxford economics forecast the sector to move from contributing what was a negative -11.1% in 2010 to a positive 1.6% growth this year and next. A huge jump in percentage terms.

This change in outlook has attracted a massive influx of hedge fund investors and worldwide sovereign funds from Germany, the US, Qatar and China all buying various hotel, retail and commercial portfolios which has ignited the recovery in the commercial property sector as well as residential distressed assets.  

There is a renewed interest in the economy as a whole and confidence is beginning to return. This renewed optimism is not just pumping up residential property but also affecting the commercial sector, business is back in Spain. Both Ford and Citroen have seen Spain as having favourable new employment laws and potentially lower overheads costs in terms of moving production from other parts of Europe. Vodafone just paid €7.2bn (£6.1bn) for the country’s largest broadband and cable TV outfit, Ono, as a key element of its European development strategy. In the finance markets, Moody’s and Fitch have both recently upgraded Spain’s credit rating. Meanwhile yields on Spanish bonds (regarded as a key indicator of investors’ comfort with taking a risk) are now at their lowest since 2006.  

The re-emergence of the Spanish construction sector also provides the UK industry with yet another competitor for its skilled labour force

So what does all this mean for us in the UK?  In the macro sense, had Spain not made it out of the recovery room and instead collapsed, it would have been far worse than a Portuguese, Irish or Greek breakdown. An economy the size of Spain imploding would most likely have dragged the rest of Europe into the abyss with it. The recovery is good news in that respect but buyer beware, Fitch, the ratings agency, still thinks that in certain areas of Spain property prices are likely to continue to fall until 2015. The recovery is still very fragile. 

From a selfish perspective, the re-emergence of the Spanish construction sector also provides the UK industry with yet another competitor for its skilled labour force. Who can forget the ‘Auf Wiedersehen Pet’ days of the eighties where craftspeople upped tools and travelled to Germany to experience a climate that was not all together more appealing than that of the UK but was a country that guaranteed work. Spain is a much more appealing prospect for a brickie desiring a tan or a plasterer wanting some beach time. With wage rates normalising across Western Europe, and everywhere just a cheap ‘EasyJet’ ticket away, perhaps we should welcome the return of the Spanish construction sector with cautious rather than unbridled joy. If the acquisition of skilled labour is the next challenge for our recovery - another competitor has just come back from the wilderness.

Richard Steer is chairman of Gleeds Worldwide