Friday, August 28, 2009
Dear Reader,
After a decade of runaway demand and floods of cheap money in Spain, the Spanish real estate developers took their eye off the ball. They took on more debt and risk than they should have. They overpaid for land. They over built.
It was quite the party on Spain’s costas. Today there is the mother of all hangovers. There are no buyers. The market has stalled. There isn’t enough space to house redundant cranes. They are being scrapped or auctioned off and shipped to China. Banks control 50% of the real estate that is on the market. A sense of fear pervades….this is classic crisis investing territory. We can profit…or just buy our Spanish dream home for cents on the euro.
Crisis investing means buying when everyone else wants or needs out. At an aggregate level, markets overreact and overshoot both on the up and downside. Assets become mispriced.
In Spain banks lent to developers to build. Developers built in anticipation that there would be no problem selling their units. They thought the good days could never end. Then everything stopped. Credit and financial crises combined with major oversupply. Sales dried up.
Today, banks need to purge their loan books. Developers want to lick their wounds, move on and live to fight another day. Forced sell offs are happening…as I say banks are now the biggest realtors. There are deals to be done. We can get in for cents on the Euro. In some instances, the banks who sell us discounted real estate will provide 100% financing.
Spain isn’t the only market where this situation exists. But it has my attention right now, as the reasons why Spain is desirable as a place to vacation or retire are the same as they were three years ago. Last year Spain greeted just under 60 million foreign tourists (only France fared better). Beach, golf, skiing and culture can all be on your doorstep. The only difference to three years ago is the price tag.
Exciting times. We need to keep our heads and focus on quality however. I’m looking for places that will be the first to recover—the most desirable and those with intrinsic value. Simply follow my three golden rules.
-Buy quality (location, construction, amenities and fit-out)
-Don’t take on any construction risk…buy completed units
-Don’t take on any project risk…make sure the condominium is functioning
Half-built projects dot the coast. I’m not interested. I’m looking for high quality, completed units where the condominium is functioning. I’m focused on areas like Granada and high-end destinations on the Costa del Sol. Granada has intrinsic value and hasn’t experienced over building to the same extent as some of the costas. The most desirable parts of Marbella and Malaga will be the first to recover once some demand recovers.
If you have an interest in Spain, you should pay attention to the crisis opportunities in the areas I’ve mentioned. You can buy quality assets here for cents on the euro. Now is the time to be looking.
Members of Real Estate Trend Alert are already in the game—I shared my favorite Spanish crisis investment with them two weeks ago, and I’ll be making more recommendations in this market soon.
Ronan McMahon
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