Rents in Spain fall on real estate glut

Source : Business Times – 23 Jul 2009

Owners who need to sell their property but can’t are being forced to lease

Arancha Ibarra considers herself one of the lucky victims of Spain’s housing collapse.

After struggling to find a buyer for her renovated two-bedroom apartment in Madrid for two years, she found a tenant for 750 euros (S$1,540) a month, becoming one of the 1.5 million second-home owners thrust onto the country’s rental market.

The number of properties for rent in Spain climbed 55 per cent in the past two years to 3.3 million, the highest since the Ministry of Housing started collecting the data in 2004. Rents in cities, including Madrid and Barcelona, are falling for the first time in seven years with declines of as much as 8 per cent, according to Madrid- based property research firm Idea lista.com.

‘Those who need to sell but can’t are being forced to lease,’ said Fernando Encinar, co-founder and head of research at Idealista.com, Spain’s largest real estate website with 308,000 listings for rent and purchase. ‘We haven’t seen this number of properties for rent since the 1950s.’

Spain built about 29 per cent of new homes in the EU from 2001 to 2007, even as it represented just 9 per cent of the population. The resulting glut of 1.5 million unsold houses and apartments sparked the end of a decade-long real estate and construction boom that accounted for about 20 per cent of the country’s gross domestic product in 2007.

The ensuing housing slump has tipped the economy into the worst recession in 60 years with the unemployment rate climbing to 19 per cent, the highest in the EU. Home sales fell by more than a third in the 12 months through May, the latest government data show.

Rents in Madrid and Barcelona jumped 28 per cent and 56 per cent, respectively, in the five years to 2008, driven by a jump in house values. Home prices rose 120 per cent from 1997 to 2007, pricing many Spaniards out of the market.

This year, rents declined 4.2 per cent to 12.3 euros a square metre in Madrid and 8 per cent to 12.6 euros in Barcelona, Idealista reported.

After two years of trying to sell her 70 sq m air-conditioned apartment in Madrid, Ms Ibarra rented it after receiving just one offer of 162,273 euros, 33 per cent below her asking price.

‘The rent barely covers the mortgage, but doesn’t pay the council tax and maintenance,’ she said during an interview in Madrid. ‘It was the best price I could get and I can’t afford to sell at a loss or leave it empty.’

Owners of vacant homes also have to pay a yearly tax that is equal to 1-2 per cent of the property’s value.

Spaniards are not the only ones saddled with empty homes. The nation’s banks lent about 318 billion euros to domestic real estate companies and also were forced to accept billions of euros of real estate assets in exchange for cancelling debt with insolvent developers, according to Fernando Rodriguez de Acuna, president of RR de Acuna & Asociados, a Madrid-based industry research company founded in 1980.

‘Those assets are sterile, or constantly falling in value, so the banks have to get them off their books or else they will damage their balance sheets in coming years,’ Mr Acuna said.

Banco Santander SA, Spain’s biggest bank, together with its consumer unit Banco Espanol de Credito SA, has 4.1 billion euros of property assets after taking real estate from failing developers.

Santander put 1,800 homes up for sale in January and sold 500 of them as at May, a company spokesman said. He declined to provide a breakdown of the bank’s residential and commercial real estate assets.

Banco Bilbao Vizcaya Argentaria SA, the Spanish lender that bought 490 million euros of real estate in the first quarter, forecasts that the amount will will climb to one billion euros by the end of the year. Caja Madrid, the country’s second largest savings bank, has about 600 homes for rent and is offering as many as 1,500 for sale at discounts of as much as 40 per cent.

Mr Acuna estimated that the slump in the Spanish residential property market will last seven years, prolonging the recession until 2013.

‘Recovery is going to depend on when people can purchase homes again, which in turn depends on employment,’ he said during an interview at his office in Madrid.

Mr Acuna estimated that the economy will contract by 4 per cent in 2009 and 2010, by 2 per cent in 2011, and one per cent in 2012. Growth will be zero or minimal in 2013, he said.

The Spanish government has forecast that the economy will shrink by 3.6 per cent this year and 0.3 per cent in 2010, and then grow 1.8 per cent and 2.7 per cent in 2011 and 2012.

Unemployment in Spain may reach 20.5 per cent by the end of 2010, according to estimates from the European Commission.

‘Redundancy is having a huge impact on home sales, hence many people are turning to renting,’ said Ben May, an economist at Capital Economics Ltd in London.