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Writing has been on the wall for years over Spanish housing bubble

By Mark Mulligan in Madrid

Published: April 25 2007 03:00 | Last updated: April 25 2007 03:00

As investors in the Spanish stock market watched their shares tumble yesterday, no one could say they were not warned.

Analysts, commentators and the country's central bank had been saying for months that, after a three-year rally, shares looked overvalued. Driven by merger activity, excess liquidity and strong corporate results, market capitalisation among the main Ibex 35 groups has climbed to three times book value compared with fair value of 2.7 times, according to Bedlam Asset Management in London.

The index yesterday lost 2.7 per cent to 14,578.7, with construction and property groups such as Sacyr Vallehermoso, FCC, Inmocaral and Metrovacesa leading the sell-off. Small-cap companies were also hit.

Astroc, the Valencia-based property developer blamed for the panic, suffered a 9.5 per cent decline for a cumulative 70 per cent fall in the past seven trading days.

Despite a business model built on land re-zoning rules in the Valencia region, the company has attracted some of Spain's most important individual and institutional investors since its initial public offering last year. Their panic selling, triggered by alleged accounting uncertainties, is driving the share price closer to its IPO level of €6.40, compared with a record high last month of €72.60.

That property stocks should lead the declines is "a chronicle of a death foretold", says Víctor Torre de Silva of the Instituto de Empresa business school in Madrid. "Spain's property bubble has been building for more than 10 years."

The oversupply of new homes is a problem. For the first time in more than a decade, observers forecast insufficient demand from domestic and overseas buyers for the 800,000 residences started last year. The steady rise in European interest rates is also starting to squeeze Spanish households.

They have also been piling up consumer credits to furnish their homes and put a new car in the garage, leaving banks vulnerable.

Although most still have almost negligible delinquency rates, Miguel Angel Fernández Ordóñez, the central bank governor, last week urged them to speed up diversification of their loan portfolios. Banks were caught up in yesterday's sell-off, with Santander and BBVA, the two biggest, losing about 2.5 per cent apiece.

"Based on consensus forecasts - which look too optimistic - the Spanish equity market needs to fall 11 per cent to be fair value, let alone cheap," says Ian Mc-Callum, chief investment officer at Bedlam.

Spanish construction groups saw the writing on the wall two or three years ago. Their response has been to diversify while shedding domestic property development and portfolio interests.

Citigroup yesterday identified FCC and Sacyr Vallehermoso as the most ex-posed to a collapse in dem-and for new homes. Both have been trying to reduce that exposure.

Sacyr first bought a 33 per cent stake in Eiffage, the French rival it is now trying to take over, and then 20 per cent of Repsol YPF, the Spanish oil and gas group.

While analysts can see the logic in such diversification, they say the company has become a symbol of Spain's other great vulnerability - the heavy debt load carried by its listed companies.

"Not only is [the market] expensive but the explosion in corporate and consumer debt - up 58 per cent and 254 per cent respectively over the past two and 10 years - represents a massive risk to the future returns on equity," says Mr McCallum.

Copyright The Financial Times Limited 2007

http://www.ft.com/cms/s/523b0cea-f2c9-11db-a454-000b5df10621.html