Spanish Property Bargains Abound, But are they Safe?
Spanish property is going for a song, a sad sad song of depression and woe, but also a cheap song, a very cheap song indeed. Undoubtedly the kind of prices you can currently buy Spanish properties for makes them bargains in the true meaning of the word, but are they really bargains; are they safe or will their value plummet further in the event of an EU collapse. We have all heard of the PIIGS, Portugal, Ireland, Italy, Greece and Spain lumped together because of their huge volumes of sovereign debt coupled with severe recession (Greece, Ireland, Spain) or low growth (Italy, Portugal), giving them less ability to pay it back. Well, Spain is the second biggest of the PIIGS and after Portugal became the third country to need a bailout from the EU, Spain was set to be the fourth – from Greece, to Ireland to Portugal the contagion was spreading up the GDP chain. This was no shock though, because Portugal’s need for a bailout had long been regarded as inevitable by all but Lisbon. Thank fully, whether or not Spain will need a bailout is looking far less inevitable, indeed, recently developments have begun to make this outcome less and less likely. Thank fully because the sheer size of the Spanish economy would almost certainly lead to more severe consequences for the EU, starting from the doubts as to whether it could actually afford the bailout in the first place. These fears certainly had the potential to bring about their own worst outcome, but so far this has not been the case. The very next day after Portugal requested assistance, Spain successfully sold a three year bond, earning 4.1 billion Euros of a target 3.5-4.5 billion at yields lower than the last comparative sale. The bonds sold at an average yield of 3.568pc, compared to 3.592pc at the last 3-year bond auction the month before. "That should allay any contagion fears," said Peter Chatwell, rate strategist at Credit Agricole. Since then Spanish bond prices have had their ups and downs, until December brought a new wave of confidence in debt. Spain was not in a sovereign debt crisis like Greece for example, its banks were the problem and the worry that their debts would become so unmanageable as to become a sovereign crisis. So, when the ECB agreed 489 billion Euros worth of three-year loans to the regions banks just before Christmas it staved off this possibility and sent Spanish borrowing costs into a constant decline. Further help has since come from Greece and the EU agreeing the second bailout package in a last-ditch diplomatic effort last month. Following the decision the yield on ten year Spanish bonds fell 5 basis points to 5.11%, and arguably more importantly at the moment the spread on German Bunds (the extra yield investors demand for taking Spanish bonds instead of German Bunds) fell to as little as 308 basis points, the narrowest since Feb. 8. This surge of positivity was followed on Feb 29th with the second ECB recapitalisation of European banks. This time the regions banks borrowed 529.5 billion euros for an unlimited period at rates as low as 1%. Last Friday, 2 days after the ECB money-drop Spanish 10-year bonds were trading at 4.853 per cent, down from 4.970 per cent. Five per cent was the level that Spanish borrowing costs found after the last round of ECB loans, and now they are falling again, showing that investors may now believe that Spanish bank debts pose no sovereign threat, meaning an end to the contagion in Europe. So on the face of it, it does seem like we are safe to start snapping up some of those Spanish property bargains. However, just below that there lies a vicious circle of irony. The banks’ biggest problem is the level of toxic loans and repossessed properties on their balance sheets. So, if property investors go on a spree and buy up repossessed property and attached debts then they will likely be the cause of their own success, while at the same time if too few people feel this burst of confidence then those staying away will force the outcome to be negative. According to recent data from the Bank of Spain, foreign property purchases increased by 27.8% in 2011 compared to 2010. So it seems that investors are feeling increased confidence that Spain can avoid the contagion and thereby help the EU back out of crisis. However, at the same time debt isn’t the only thing Spanish property buyers have to be aware of. Owners in the Andalucían town of Albox, Spain, are once again facing lengthy court battles to try and avoid the demolition of their homes. Worse, according to John Hillen of local protest group AUAN, "the homes were constructed with planning permission from the local council in 2002 and possess all of the necessary paperwork". This is a side of Spanish planning law that all investors should be aware of to cover all the bases.
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