Country focus: Spain

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Spain has enjoyed a booming economy over the past 10 years, with annual growth well above the EU average. But is the fiesta about to end? Marcos Uttley del Corral of EC Harris reports

01 The Spanish economy

The growth of the Spanish economy over the past 10 years could be reasonably be described as astronomical, with an average annual growth of 4.3%, which is well above the European average.

But a slowdown in the construction sector and an increase in mortgage costs have produced a cooling in the housing market and raised the question: has the real estate bubble burst in Spain?

The rise in oil prices to close to $100 (£49) a barrel and the euro’s rise to a record high against the dollar are both having a effect across Europe. In Spain, the economy is still forecast to grow at 3.8%, 10 points higher than EU forecasts in the middle of the year. However, growth is forecast to slow over the next two years, to 2.7% in 2009 and 2.3% in 2010.

Inflation is expected to be 2.6% at the end of 2007. It is forecast to rise this year, before a marginal slowdown in 2009.

With the economy cooling, job creation is expected to fall from 3% in 2007 to 2.1% in 2008 and 1.7% in 2009.

America’s property slump is affecting all investment decisions. If America’s economy goes into recession, it will dent global and European growth.

Another danger is that Europe’s property markets could follow America’s. In Spain, where investment in construction has risen by 6% as a share of GDP over the past 10 years, a credit crunch would hurt.

With an election due in March 2008 and clouds gathering over the economy, voters may want their politicians to talk about the country’s future, rather than its past.

02 The property market

While much of the construction industry faces a slowdown, the cycles of each sector – residential, offices, hotels, industrial and warehousing – move independently of one another.

Spain had just over 865,000 housing starts last year and building completions are expected to reach 775,000 this year.

The residential market has suffered a marked slowdown in demand over the past few months, although there is still a latent demand waiting for the mortgage situation to stabilise.

The slowdown is forecast to be about 3% in 2008, with a further drop of 8% the following year.

In the second-hand market, the increase in the time it takes to sell a property is adversely affecting the ability of buyers to find and move into a new property.

The number of investors looking for a short-term profit from the residential market is gradually shrinking. The market conditions mean that financial institutions are restricting the granting of loans to developers for the purchase of land. But there is still investment in long-term loans, on the expectation of increased values in the next property cycle.

If there is one bright spot to be found, it is that although some potential developers are finding themselves unable to proceed owing to financial problems, this can smooth the path for other parties who have easier access to funds.

03 Offices, industrial and warehousing

The stock of offices in Spain is increasing and the level of office construction is running at a record high.

The number of permits issued in 2006 is expected to lead to 3.5% growth in 2007 and a similar increase in 2008, slowing to a 1.6% rise for 2009. In Madrid, office rents are on an upward path and are expected to be 20% higher by the end of this year.

By the end of the current financial year, Madrid will have 10.75 million m2 of office space, and Barcelona will have 5 million m2. Investment in offices during the first quarter of 2007 was *1.4bn (£1bn) in Madrid and *1.2bn (£800m) in Barcelona.

The demand for warehouses has been following an upward trend for the past four years, but the shortage of warehouse space has adversely affected the distribution industry and has hampered its ability to operate efficiently during 2007.

The shortage of suitable space has, in turn, led to a rise in rents for industrial units and the forecast is that rents will probably increase further in both decentralised areas and in established prime areas.

The unsatisfied demand for distribution units means that procurement through turn-key contracts has become extremely important. Workload in the sector has now increased and it is likely that supply and demand will converge in 2008.

04 Retail

The retail sector is at full capacity and, thanks to projects planned over the next two years, Spain will be at the forefront of European countries providing maximum shopping areas per capita.

Fifteen new shopping centres are in the pipeline, which, along with the refurbishment and enlargement of nine others, are forecast to provide more than 850,000 m2 of floor area.

Investment in the sector in 2006 was at a record level of *4bn (£2.9bn). Interest rate rises and lower consumption forecasts have led to an assumption of low yields of 4-4.5%, but investment funds are still pushing money into shopping centre developments.

05 Construction industry

Output in the construction industry this year is forecast to increase by 4.5%, compared with 2006.

Within the Spanish economy, the industry is dynamic, although there are signs of an imminent slowdown.

The value of output will be more than *160bn (£115bn) for this year.

The construction sector is one of the key industries in Spain, employing about 13% of all workers.

The companies in this sector have a total turnover of *30bn (£22bn), which represents 53.6% of the total turnover of the Spanish economy for 2006.

This is an increase of 19.2% compared with the previous year.

Within this figure, *26bn is from Spain’s domestic trade, with the remainder accounted for by international construction activity.

06 Construction costs

Inflation in the construction sector increased 3.9% in June last year compared with June 2006. Most of the year-on-year increase is owing to the rise in costs in the building sector, which is up 4.5% in the year to June.

In comparison, inflation in the civil engineering sector was running at a much lower level: just 1.8% higher for the year compared with the previous year.

Materials were the main driving force behind the inflation of construction prices.

Materials’ prices increased by 5.1% over the past year, with prices in the building sector up 6.25%.

The civil engineering sector, meanwhile, saw materials inflation of 1.4%.

Labour prices have remained fairly stable over the past six months, with little movement at all since May and an increase of 1.4% over the past 12 months.