Three-way squeeze

The plight of Inmobiliaria Colonial has raised fears of asset fire sales by indebted Spanish property companies, which could further hit already shaky property prices.

Colonial, whose stock lost nearly three-quarters of its value in a week after banks holding shares as collateral in derivative positions dumped stock on the market, sold over €300m worth of assets recently.

While it said these sales were part of normal activities, some analysts pointed to the three-way squeeze closing in on indebted Spanish real estate firms facing tightening credit, cooling property prices and rising interest rates.

“If everyone does this in one go, you may see an excess of product on the market, and prices may go down further,” Borja Sierra, former head of Spain for British property broker Savills , now based in New York for Savills Granite.
In contrast to the residential market, in which house prices are falling, the commercial property market has remained resilient until now. But estate agents report a correction in yields – an indication of real estate value.

Colonial, which had been the second-biggest property company on the Spanish bourse by market capitalisation until it shares dived, was the first big, listed victim of Spain’s troubled real estate sector.

Smaller Astroc saw a slump in stock value and Valencia-based developer Llanera filed for credit protection last year.
Although Colonial blamed the stock’s freefall on unwinding derivatives, the firm, alongside its Spanish peers, has been shunned by investors spooked by sky-high debt ratios in an unfavourable market.

Spanish real-estate firms have indulged in a glut of debt-funded mergers in a highly fragmented market.
“Colonial was managed not as a property company, but as a financial fund, and the news coming from the financial markets obviously affected it deeply,” said Mr Sierra of Savills Granite.

Sevillian property magnate Luis Portillo, who quit as Colonial chairman recently, built up the company in its current form through leveraged purchases of other real estate firms, a pattern repeated throughout the sector.
Colonial’s debt ratio stands at 69 percent total liability against total assets, according to Reuters data, compared to a European property firm average of around 35 percent.

“The big problem there is a combination of relatively high leverage and relatively weak property markets to which they have exposure,” said Harm Meijer, property analyst at JP Morgan.
High debt ratios are common in the Spanish real estate sector.

Commercial property
Property firms which had access to large loans and saw the value of their assets increase handsomely every year are now dealing with a sharp reversal in fortunes.

“You must remember what a seriously sharp correction these property companies are having to cope with right now,” said one London-based analyst who asked to remain anonymous.

“Not only are the values of their assets in freefall, the banks – the same people who fuelled the boom – have totally disappeared from the scene.”

Commercial property has remained resilient to residential market woes up to now, due to a lack of office buildings in big cities. But sales by real estate firms looking to improve cash flow could shake prices in this sector as well.
Estate agents said they had seen a small correction in yields in the Spanish commercial property market over the past few months.

Yields are the rental income generated by a property asset relative to its capital value and an indicator of property values. The higher the yield the lower the underlying value.

“There’s been a push on yields since the summer, and with the finance situation as it is, investors are unable to be as aggressive as they have been,” said Jason Clark at Cushman & Wakefield.
Alvaro Martin, research analyst at CB Richard Ellis in Spain, agreed.

“The market is definitely changing, we are already reporting some rises in yields which are affecting the value,” he said, although he added he did not expect a sharp correction due to a lack of prime office property in Madrid and Barcelona.