The residential construction sector in Spain is showing the first signs of recovery, reports a recent article in the Spanish press. According to the article, developers would now rather build homes than sit on empty plots, though financing is still an obstacle for them.
Last year was an unmitigated disaster for developers, if you judge them by the number of new homes they built. There were just 110,000 planning approvals in 2009, down 56% on the year before, and a far cry from the 900,000 plus at the peak of the boom. Planning approvals last year were the lowest level in half a century, says El Pais.
But now developers say they might be seeing some light at the end of the tunnel, at least according to El Pais . I should point out that recently, El Pais have been doing their best talk up the housing market. Lots of talk of green shoots where others would argue there is nothing but a wasteland.
So where is the evidence that residential construction activity might be turning a corner? Well, the article lists a handful of developers like Afirma, Realia, Vallehermoso, and Altamira - Santander's real estate division - who are all starting to work on some new developments.
Are you out of your mind?
El Pais asks why anyone in their right mind would want to start building new homes when there is a glut of around 1 million unsold new homes already on the market.
The problem, it seems, is one of distribution. There are lots of new homes in places where nobody wants to buy, but a shortage in prime areas where there is plenty of demand.
If true, that would be a good reason to start building in prime locations. But there is more to it than that. "The market for new developments is very bad, but the market for land is infinitely worse," explains real estate expert José Barta, quoted in the article. "They are trying to convert something that is totally illiquid - land - into something a little more liquid - apartments," explains another expert. Added to which, accounting rules mean that provisions for an inventory of unsold homes are less onerous than provisions for land. So developers have good reasons to start building, even if they can't sell the homes when they are finished.
Drop your prices or else
The article also reveals that developers and banks are starting to get real about selling. The policy is sell as quickly as possible, even if it means dropping prices. "Sensible companies that want to survive have to reduce their prices at least 25%," said last week Miguel Bayón, president of the developer Realia.
All these factors, along with interest rates at record lows, are getting the sector going again, says El Pais. The developer Realia sees it this way: "We are going to start developments in Seville and Valencia of 160 homes in total. We have seen that there is potential demand from buyers if they can get financing and we don't want to miss the boat when the residential market recovers completely."
Money still too tight to mention
But getting financing is still a big problem for developers. "We could be starting 100,000 homes more a year if they gave us credit," says Pedro Pérez, President of the G-14 group of Spain's biggest developers (some of which, like Martinsa-Fadesa, are in court administration). No surprise, then, that the developers with the some of the biggest building plans belong to the banks.