After a decade of the highest economic growth in the eurozone, Spain has entered its first recession in 15 years. The slump was expected to last only a year to 18 months, but it has turned out to be deeper and longer, forcing Spain’s government to retract its optimistic predictions made before the national elections last March.
Despite signs of a cooling housing market, in the run-up to the elections, Spain’s socialist government predicted that the gross domestic product (GDP) would grow by 3.1% in 2008, eventually overtaking Germany, Italy and France. President José Luis Zapatero, in an interview, denied lying about the scope of the crisis before the elections. “At that time we were just in a deceleration process, according to the international forecasts. I did not lie. I was wrong, perhaps, but I did not lie,” he said.
The government has revised its earlier growth forecasts and now believes the economy will shrink by 1.6% in 2009. The government also doubled its earlier debt forecast for 2008 from 1.5% of the country’s GDP to 3.4%. It upped this year’s debt forecast from 1.9%, predicting that Spain’s debt would reach 5.8 % of the GDP in 2009. The collapse of the construction boom together with the global financial crisis has pushed unemployment to 3.2m, the highest in the EU. Spain’s finance minister Pedro Solbes expected a rise in the jobless rate to 15.9% in 2009 and 15.7% in 2010. However, the government believes the worst will be over by the end of this year and that growth will reach 2.6% by 2011.
The roots of Spain’s crisis are, in part, home-grown. Consumption was one of the big drivers of growth, causing household debt to triple over the past decade. Spanish banks are being attacked from all sides. Developers’ bad debt owed to the banks and cajas, Spain’s regional savings banks, has jumped from 0.58% to 3.45% in a year, leaving banks with a €315bn exposure to the property market, according to DTZ research. This month, listed property developer Nozar, carrying €4bn of debt, became the latest developer to join the growing list of property companies that filed for administration, which is 423% larger than in 2007, according to DTZ.
Spain was the venue for the largest administration of 2008 when developer Martinsa Fadesa filed for voluntary bankruptcy in July, with €5.1bn of debt. It was swiftly joined by others including Restaura in September and Habitat and Grupo Tremón a month later. Many of the developers that escaped administration have ceded control to their lending banks as they renegotiate billions of euros of debt.
Developers keep prices up
But despite the dire situation, financially stretched builders are refusing to lower prices on their properties, making Spain’s assets too expensive for foreign investors, who are more inclined to prefer the UK. Yields have moved out by 50 basis points in London in the third quarter, roughly double that of Madrid.
The picture in Portugal is similar. Banks have stopped lending and the country’s economy has hit the doldrums. While retail has dominated Portugal’s investment market for the past few years, shopping centres bore the brunt of the financial downturn in 2007, according to CBRE. However, Portugal never experienced excessive growth, as Spain did. The government expects the economy to contract by 0.8% this year, before returning to 0.5% positive growth in 2010.
So far, the Portuguese letting market has held up relatively well. Office take-up in Lisbon reached the highest quarterly volume ever recorded for the second time in a row in the third quarter of 2008. The figure was boosted by the letting of 62,000m2 in Office Park Expo.
