CNBC Business | Valencia

Valencia

Shaky times ahead?

Stormy waters

Huge investment in Valencia’s port region has boosted the city’s status. But will Spanish real estate turmoil bite, asks Mark Faithfull?

OMINOUS CLOUDS? Costa Del Azahar Peniscola The run-up to Spain’s elections in March could have been distilled down to one familiar mantra: “It’s the economy, estúpido.” After a decade of phenomenal growth, fuelled by a run-away real estate market, Spain is feeling the cold chill of the global credit crunch as dark clouds shadow its once booming economy.

GDP growth was 3.7% last year but Credit Suisse believes this will fall to nearer 2.4% this year, although this remains above the 1.5% average EU growth forecast for 2008. The credit crunch has done most of the damage in a country where companies are typically highly leveraged. Interest rates on the Euro Interbank Offered Rate (Euribor) have risen to 4.3%, inflation is the highest in a decade and unemployment is the highest since 2004 – indeed half of Spain’s 80,000 property agencies closed last year, leading to the loss of 100,000 jobs. Almost a quarter of Spain’s working population is employed in construction. “The figure of 24% has to be seen in the context of the sector’s tremendous growth in recent years. Based on initial estimates, both Credit Suisse and the Spanish construction association are forecasting a drop of 40% in construction activity in 2008,” warns Adrian Zürcher, Credit Suisse global equity strategist. “According to estimates from the construction industry, 400,000 jobs are at risk.”

This will resonate particularly for those areas gambling on economic buoyancy for regeneration – none more so than Valencia, a city and region that has predicated rapid growth on bringing the America’s Cup and a new European Formula One Grand Prix to its once neglected port area. But mortgage bad debts doubled in the region last year, admits Valencia’s regional government, La Generalitat, which saw 301 cases in 2006, but over 600 in 2007.

That said, the situation is more complex than the figures suggest, counters Martin Dell, of Spanish-based property portal Kyero.com. “National figures show that the market is flat but you have regions going up 20% and others going down 20%,” he says. “A lot is being made of distress sales but mostly people are putting their homes on the market and sitting tight. It’s those who, for example, bought two properties offplan with the intention of flipping one to pay for the second outright who have been caught, because as the properties complete they can’t afford to buy them.”

The uncertainty has not come at a great time for Valencia, a striking city on Spain’s western coast for which global sporting events and the City of Arts and Sciences project by architect and native son Santiago Calatrava have brought international attention, while a NATO base and an under-construction business centre for Siemens have brought jobs to the city.

Overseas buyers accounted for 15% of residential purchases in 2007, compared with 10% nationally and 16% for Malaga and Murcia. Kyero.com rated Valencia as Spain’s fifth hottest market and the second hottest region – after Andalucia – last year. Building work on new apartments, at 11,500 a year in a city of only 1 million people, has been frenetic. But speculation – and Spain’s notorious corruption – have produced some urban and coastal blight.

CULTURAL ICON The City of Arts and Sciences by
architect Santiago Calatrava, one of Valencia’s stylish attractions In February a UN report rounded on housing policy in Spain, and the fact that local councils have been dependent on granting building licences and other real estate deals for their income. The report warned that speculative buying has put Spain bottom of the European list for access to housing, with 20.9 million homes for 14.1 million families. Once second homes are discounted, there are over three million empty apartments, 15% of the total.