Spanish property sector prepares to rival Portugal market.jpg

Spanish property sector prepares to rival Portugal market

Why the Government should encourage prudent inner city redevelopment plans rather than provide cash injections to construction developers

By CHRIS GRAEME [email protected]

According to the Portuguese Association of Estate Agents (APEMIP), this year will be the worst year that the real estate sector has faced since 1990.

In that year, 170,000 properties were bought and sold (urban, country and mixed-use) and this year the association is already predicting less than 195,000 sales, a 7% drop on 2010 and 5% on 2009 (205,285 transactions).

It has often been stated by politicians that Portugal, unlike Spain, did not suffer a property bubble caused by excess supply, poor evaluation of demand and simple speculative greed surrounding land.

That certainly isn’t true. On a much smaller scale, many over-eager developers and construction companies, most national but some foreign too, were quick to jump on the band wagon in the boom which started in Portugal in the 1990s and continued, with the odd blip, until the economic and financial crisis in 2007, and 2008 brought it to an end.  That slowdown has continued with the world recession, the tightening of credit loans by banks, dramatic fall in demand and overall consumer fears generated by the sovereign debt crisis in Europe and the United States.

In the last few days, the Spanish government has announced plans to tackle the severe problems facing its housing market.

It, more than any other country in Europe save perhaps Ireland, staked so much of its economic success on the buoyant housing market it enjoyed during the same 15-year period, from second and holiday homes aimed at tourists and retired foreign nationals, and from its own citizens.

The authorities there have announced that they will temporarily halve sales tax on new homes to 4% to try to stimulate its construction sector and, as a consequence, its flagging employment market.

It hopes that by doing so it will not only create jobs – Spain has some of the highest unemployment rates in the Eurozone (20%) in some of its regions – but also create an impetus to kick-start the rest of the economy.

The question is, should Portugal follow suit and invest money in the property markets in a similar but “exceptional” measure?  To answer that question, the situation in Portugal needs to be looked at closer.

The country is virtually bankrupt, its Government certainly is, which is why it can no longer get loans on the international markets at reasonable rates and why the ‘Troika’ had to step in earlier this year.

Certainly with so much empty property built as a result of speculation up and down the country, and many badly thought-out schemes in the luxury tourist development and retail shopping sectors up and down the country, the argument that the Government needs to give grants or stimulate the economy through tax benefits to build more properties, roads, railways and public works projects is not a sensible one given the current budgetary situation in which both central and local government is cash-strapped and the fiscal system is barely getting enough taxes as it is to cover an estimated €2 billion black hole as a result of creative accounting and nationalising the BPN bank.

However, there may be some argument for tax incentives or grants for well-placed inner city housing restoration and refurbishment schemes for properties in mixed use developments for purchase at subsidised rates or rental to encourage the young and those on limited income back into Portugal’s deserted city centres.

According to estimates from APEMIP, which represents real estate companies and professionals, more than 3,000 properties have been handed back to the banks in the first half of this year alone, a phenomenon that has arisen for two main reasons: mortgage default/ arrears and developers that ran out of money or couldn’t sell or realise enough from their assets to pay back the banks.

One thing is for certain – the Portuguese banking system is not going to be rushing to provide mortgages to families or loans to developers without an exceedingly good and convincing business plan, considerable down-payment and evidence of collateral.

The figures speak for themselves – there has been a 34.3% reduction in mortgages granted by banks since January according to Bank of Portugal statistics and a 20.9% fall on the same period in 2009.

Luís Lima, the President of APEMIP, says that the national real estate market has succeeded in anticipating contractions in demand for properties since 2000, adjusting its supply accordingly. This isn’t the whole problem.

Many families were encouraged to take out loans well above their means to service them not only in terms of property but also in terms of furnishing, holidays, cars, credit card facilities and even store cards. In other words, there is now an increasing failure to honour commitments to the banks when things got tough.