Developers stuck with vacancies due to overbuilding

Story by Jessica Mendoza

Now is the best time to buy. It’s the real estate broker’s maxim, even when every statistic points in another direction. Those are also the words of Setareh Mohregi, director of the Costa del Sol office of Gilmar Real Estate Consulting.

Foreign demand has begun to rise again, she said, with investors coming from as close as Germany and France, and as far away as China.

“They know Spain is recovering,” Mohregi said.

That might be hard to believe if you’re walking through PAU de Vallecas, a neighborhood on the southwestern edge of Madrid. A once-coveted plot of land sits empty and unused, the grass dry and yellowing in the late spring heat. In downtown Madrid, restaurants, souvenir shops and banks are open for business, with crowds gathering at every crosswalk. Here, the streets are almost deserted. For rent and for sale signs, reflecting the plummeting prices of property, dot the landscape.

Empty, unkempt lots are a regular sight in Pau de Vallecas.

Empty, unkempt lots are a regular sight in Pau de Vallecas.

“People have moved away,” said Cristina Gomez, 38, who has lived in the area since 2007 and owns a local grocery store. Neighbors left because they couldn’t afford to pay off or continue renting their apartments, she said through a translator. Some units have always been empty. And since 2013, she added, many businesses in the area have closed.

This dichotomy is becoming Spain’s reality: Wealthy foreigners, professional investors and the domestic upper class are resurfacing as buyers of property in metropolitan areas and along the coast, providing the nation’s real estate market with its first signs of growth since 2008. But Spain’s so-called ghost towns – urban developments built during the construction boom of the 2000s – are as undesirable as ever.

“It’s a tale of two markets,” said Mark Stücklin, a Barcelona-based property specialist and founder of the consulting website Spanish Property Insight. The wealthy are buying again, though they’re more cautious than before the crash, he said. The majority of Spanish citizens, however, can’t play the market – not with the country’s unemployment rate hovering at 26 percent today. A huge chunk of the population can’t even afford to rent apartments, said Stücklin.

It’s hard to imagine that less than a decade ago, Spain was in the midst of a real estate boom. Jobs, especially in construction, were plenty.

Spurred by opportunity, immigrants streamed into the country, and by 2007, more than 2 million homes had at least one resident born outside Spain, according to the National Institute of Statistics, or INE. A rise in local potential buyers also contributed to the robust market: Between 2001 and 2011, the number of Spanish citizens between 25 and 35 years old increased by about 72 percent.

At the same time, interest rates were dropping and credit limits were rising. Housing demand soared.

José Hernández Garcia, 38, a lawyer and professor from Madrid who specializes in urban and administrative law, worries for the future of his country.

José Hernández Garcia, 38, a lawyer and professor from Madrid who specializes in urban and administrative law, worries for the future of his country.

“It was like a fever,” said José Hernández Garcia, a lawyer and professor from Universidad Carlos III de Madrid who specializes in urban and administrative law. “The prices increased, the interest rates decreased … there were plenty of offers of credit from banks.”

Developers, sensing their chance, built more than 3.6 million new homes between 2002 and 2008, far exceeding demand, according to data gathered by RR. de Acuña & Asociados, a Madrid-based financial consulting and brokerage firm.

During that period, housing prices rose from about 930 euro, or about $1270, to more than 2,000 euro, or about $2,730 per square meter – an increase of 124 percent, according to Ministry of Housing statistics.

In 2008, the bubble burst. Over the next year, more than one million people lost their jobs, and the unemployment rate jumped from about 9 percent to 17 percent, according to the INE. Thousands of people were evicted from their homes.

Recovery from the crash has been slow, but signs of progress started to show in the last half of 2013. Spain reportedly began to benefit from the bailout money it received – more than 40 billion euro or $56 billion – from the European Commission and the European Central Bank in 2012.

“Spain has turned the corner,” the International Monetary Fund said in a statement last month.

Over the last year, the report said, the Spanish economy has grown “at the fastest pace since 2008.”

Real estate sales have been up 14 percent in the first three months of this year against the last three months of 2013, according to a report from the Spanish Property Registrars, a national association of notary publics.

And there was a 2 percent increase in mortgages in March compared to the same period last year, according to the INE.

“Things are going better,” said Mohregi of Gilmar Real Estate Consulting.

But that optimism doesn’t mask the reality, said Juan Villén, managing director for mortgages at the Madrid real estate website Idealista.com. He expects it could take as long as a decade for a full recovery to take place.

“We believe that it will get better, but we still have road to cover,” he said.

This development in Pau de Vallecas, built during the boom years, stands now half-empty.

This development in Pau de Vallecas, built during the boom years, stands now half-empty.

In Madrid and on the coast, he said, the recovery has been faster than in rural areas and on the outskirts of cities, where abandoned apartment buildings serve as reminders of the crash.

The majority of the sales reported by the Registrars are in tourist and urban areas: In the first quarter of 2014, the capital had the highest recorded number of overall housing purchases – more than 13,000. Next came Barcelona, with almost 8,000; and then Alicante, a historic Mediterranean port city in Valencia, with more than 5,000 in sales.

Meanwhile, abandoned and underpopulated urban developments remain as they were when the market collapsed. Many of these complexes were so poorly planned they were built without electricity or water, said Fernando Rodriguez, project manager for RR. Acuña & Asociados.

Those that were sold are now worth far less than their sale price, he said.

“It’s extremely problematic,” Rodriguez said. “[Large portions] of supply are in places with no demand at all.”

He offers a glaring example: In Valdeluz, in Guadalajara province, a 9,500-unit complex with a golf course is only 15 percent occupied.

“How can we recover those areas? We cannot,” Rodriguez said.


Click here for graphics illustrating the oversupply of housing in Spain leading up to the bubble, and the concentrated nature of the real estate market recovery.

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