Credit crunch adds to Spanish sector’s vulnerability
Financing costs in Spain’s real estate sector are expected to soar following debt market investors’ rejection of the terms of a €7 billion credit line to the country’s fourth-biggest construction company. Fears that the local housing market might be set for a downturn were blamed for the deal’s failure.
Barcelona-based Inmobiliaria Colonial was forced to accept a higher level of interest under a revised agreement in July following a failed attempt by bookrunners to syndicate the credit to capital markets investors.
According to Colonial, the loan is part of a programme to refinance debt, which stands at 64% of the company’s total assets, that was largely raised last year to finance the purchase of Inmobiliaria Colonial by the smaller Grupo Inmocaral.
The credit is the third Spanish real estate deal this year to hit difficulties. In February, the distribution of two credits totalling more than €13 billion of debt to construction companies Sacyr Vallehermoso and Acciona, both based in Madrid, was delayed because of what bookrunners then described as market noise.
"Fundamentals such as surplus housing supply and higher interest rates have been indicating a slowdown in the Spanish real estate market for quite some time now," says Ewan Macaulay, an industrials analyst for the region at Fitch Ratings in London. "And the current global concerns about the credit cycle will only compound the problem for the likes of these companies out there trying to raise capital."
Earnings at Spanish real estate companies have been buoyed up in recent years by double-digit growth in house prices.
But after annual house price increases of more than 15% in the first half of the decade, performance has fallen off dramatically in recent months, with some regions posting price falls.
Dealers say that a less favourable credit climate, with higher interest rates and less cash coming into the Spanish market, might slow down recent efforts by the sector to diversify into areas less correlated to house prices fluctuations, leaving them vulnerable to a crash.
Spanish real estate companies have been attempting to diversify their income streams by buying dividend-rich equity financed by cheap debt to offset a possible house price downturn.
In the past year, Sacyr and Acciona used loans they had raised to buy large holdings in Spanish energy companies. Sacyr bought a stake in national oil company Repsol and Acciona became involved in a legal battle with Germany’s E.On to take control of Spain’s Endesa, which it finally won. In 2006, construction company Ferrovial bought British Airports Authority, which owns several UK airports.
"There has been a quite unprecedented merger and acquisition boom in the Spanish real estate market and some of these deals are very highly leveraged," says Macaulay. "Under tighter credit conditions, these companies may be less able to raise new finances, which could be problematic in one or two years when some of this acquisition debt needs refinancing."