The adjustment of the

Spanish Real Estate

Sector

May 2011

Although struck by the crisis,

Spain is a solid economy,

showing signs of recovery

In the closing months of 2010, the Spanish economy came back on track for recovery, with

a q-o-q GDP increase of 0.2%, that sums up for a y-o-y increase of 0.6 %.

Spain resumes an upward trend

Source: Central European Bank, Statistics National Institue, and Bank of Spain

Quarter on quarter VariationYear on year Variation

SPAIN

EMU

SPAIN

EMU

Excluding construction, the demand is recovering: Private consumption grew in 2010 at

an average of 1.2% (from -4.3% in 2009), investment in equipment grew on average 1.8%

(from -24.8% in 2009), and external demand rose up to 1.1%.

GDP forecasts confirm a positive evolution, in line with other European economies.

Sustained growth path for the future

GDP Forecasts

OECD EC IMF

Spain 0,9 0.8 0,8

Italy 1,3 1.1 1

France 1,6 1.6 1,6

Germany 2,5 2.2 2,2

Euro area 1,7 1.5 1,5

OECD EC IMF

Spain 1,8 1.7 1,6

Italy 2,0 1.4 1,3

France 2,0 1.8 1,8

Germany 2,2 2.0 2

Euro area 2,0 1.8 1,7Source: IMF, OECD, European Comission

2011

2012

GDP volume measures excluding construction

Q-o-q growth rates

GDP Forecasts

Source: Eurostat

Economic strengths and reforms lay the foundations of a sound and

rebalanced growth for the Spanish economy.

Strengths and political steps

Competitiveness

Infrastructures:

Spain has the biggest highway net in Europe and is the first European country and second in the world,

behind China, in high speed railway line miles

47 airports in which 250 airlines operate

Quality:

First european country with the highest standard of living for expatriates

2nd most valued health system in europe (HSBC Expat Explorer Survey)

Performance: 2nd tourist destination in the world by revenue and 3rd for passenger arrivals

Business leadership

The Spanish housing sector:

facts and features

Housing sector in Spain: main features

Source: Eurostat 2004

Empty or secondary housing (per 1.000

hab)

0

20

40

60

80

100

120

140

160

180

Ger

man

y

Den

mar

k

France

Gre

ece

Hol

and

Italy

Por

tugal

UK

SPA

IN

EU A

vera

ge

Source: Eurostat 2009

High proportion of ownership 85% vs. rent 13%.

Market duality: main residence 67% vs. vacational housing 33%

Italy

Sp

ain

Po

rtu

gal

Irela

nd

Fra

nc

e

Belg

ium

Au

str

ia

UK

Population by tenure status 2009 (%)

Germ

an

y

Den

ma

rk

Fra

nce

Fin

lan

d

Un

ited

Sta

tes

Un

ited

Kin

gd

om

Irela

nd

Po

rtu

gal

Belg

ium

Italy

Sp

ain

Source: Global Financial Stability Report IMF April

2011

Homeownership rate (%) Empty or secondary

housing (per 1.000 hab)

Proportion of social housing 2008

Free

market

housing

89%

Social

housing

11%

Housing sector in Spain: main features

Preference for real estate assets: 80% of total assets.

Social housing ratio below EU average : 11% vs 16%

Proportion of social

housing 2008

Main residence;

54,7%

Bank accounts;

5,3%

Pension plans

2,0%

Other

0,7%

Fixed income

securities

0,2%Investment funds

0,8%

Other real estate

assets; 24,8%

Private shares

0,9%

Jewels, works of art,

antiques

0,4%

Listed stocks;

1,0%

Freelance

bussinesses;

9,2%

business

Value distribution of total household assets

Source: Bank of Spain, Familiy Finance Survey 2008 Source: Ministry of Public Works

House price gaps (IMF 2008)

29,2%28,0%

21,8%

17,0% 16,2%

11,8%

1,7%

32,1%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

Irel

and

Net

herla

nds UK

France

SPA

IN

Swed

enIta

ly

Ger

man

y

Economic literature available estimates a range of overvaluation degree between 13% to 30%

Following IMF World Economic Outlook (April 2008), the growth of house prices in Spain

showed a lower overvaluation component than in other countries, and was largely based

on fundamentals: Demographic and socioeconomic factors (immigration, household formation)

Permanent real interest rate reduction effect, implying a permanent increase in asset valuations

Source: IMF

Price overvaluation

Source: OECD Economic Surveys: Spain 2010

Author and yearYear of

estimation

Estimated

overvaluation

BBVA - Balmaseda et al . (2002) 2002 28%

Bank of Spain - Ayuso and Restoy (2003) 2002 20%

Bank of Spain - Martínez-Pagés and Maza (2003) 2002 8-17%

IMF (2004) 2003 20%

IMF (2005) 2004 20-30%

OECD (2005) 2004 13%

ECB (2006) 2004 30%

Ayuso and Restoy (2006) 2004 29%

IMF (2008) 2007 20%

FEDEA - Sosvilla (2008) 2007 7-15%

Studies estimating the price overvaluation in the Spanish

housing market

House price gaps IMF (2008),

The housing sector has

already got through most

part of the adjustment

Construction activity is still in the process of downward adjustment.

At the end of 2010 residential investment reached a 45% cumulative

decrease from its maximum.

Construction activity shows a correction phase

Relative size of the construction sector

(Employment over total employment and residential investment over GDP)

Source: Statistics National Institute INE

4,7%

9,2%

4,7%

9,5%

13,6%

9,3%

0%

2%

4%

6%

8%

10%

12%

14%

1997 2007 2010

Residential investment Employment

Housing price variation (Base 1995)

0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Housing prices have fallen over 15.4% from its maximum in the 1st Q 2008, and

over 20% in real terms.

Rent to housing prices ratio shows narrow margin for additional adjustment

(3% to 7%)

Price adjustment

Source: Ministry of Public Works Source: Ministry of Public Works and Ministry of Economy and Finance

Housing price variation (Base 1995)

0

100

200

300

400

500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Housing / Rent Average 1997-2010

Ratio of rent to housing prices

Rent to housing prices ratio

€/m2

House prices rose less in Spain than in other countries, but the difference in the decrease

from the peaks reached is smaller.

Thus, comparatively, the degree of the adjustment in Spain is being harder than in other

countries.

International comparison: deeper adjustment in Spain

Source:ESRI, Ministry of Public Works and Department for Communities and

Local Government.

90

145

200

255

310

365

420

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

UK Ireland Spain

New housing price variation (Base 1996)

The national average may not be noteworthy, as housing market requires regional analysis

Price adjustment: regional analysis

- 16,3% - 16,9%

- 17%

- 16%

- 19,2%

- 21,9%

- 15,7%

-17,5%

- 18,4%

- 16%

- 19,7%

- 16,7%

- 21,1% - 21,6%

- 16,7%

- 15,7%

- 19,2%

- 22,2%

- 22,3%

- 19% - 21,5%

- 18%

- 15,4%

- 19,6% > -20%

-15% - -20%

Source: Ministry of Public Works

- 15%

- 15,2%

Housing price

decrease per province

1st Q 2008 – 1st Q2011

-24.5%

-20.2%

-21.2%

-16.3%

-20,99% -17,2%

-16.3%

-19.6%

-16.8%

-20.2%

-16.6%

-19.3%

-16.4%-16%

-20.3%

-22,4%

-16%

-15.3%

-15,7%

-20%

-15.7%

-15.4%

-18%

-18%

-19.6%

-15.6%

Price adjustment: new housing

(1st Q 2008 – 4th Q 2010)

Price adjustment: second-hand housing

(1st Q 2008 – 4th Q 2010)

-16%

-16%

-15%

-16.5%

-18%

-18%

-17.2%

-18%

-15%

-21.5%

-18%

-16.2%

-21.3%

-17.5%

-15%

-17.6%

-19%

-19.5%

-20%

-17.2%

-25%

Provinces where price drop from the peak is above the average

-16%

-15.2%

Municipalities over 25,000 hab. with higher new housing price drop

Calpe

-49.1%

National average: -25%

Mediterranean

coast provinces: -26% Denia

-29.8%

Castellón de

la Plana

-37.8%

Eivissa

-29.4%

Ciutadella de

Menorca

-49.1%

Puerto del

rosario

-28.9%

Mazarrón

-33.1%

Marbella

-40.1%

Estepona

-35.3%

La Línea de

la

Concepción

-34.1%

Benalmádena

-32.8%

Villajoyosa

-32.4%

Torrevieja

-30.9%

Fuengirola

-29.2%Adeje

-28.5%

Torremolinos

-28.3%

Chiclana

-28%

San Roque

-41.1%

The number of housing transactions (491,000) tends to recovery, partly due to fiscal incentives,

partly because affordability indicators are once again at historically low levels.

Housing market tends to stabilization

% y-o-y housing transaction variation

2004-2010

5,9%

-17,8%

-32,6%

-12,4%

5,9%

6,3%

-35,0%

-30,0%

-25,0%

-20,0%

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

2005 2006 2007 2008 2009 2010

Source: Bank of Spain

60

55

50

45

40

35

30

25

20

Foreign demand is starting to react to price signals: ∆ 20% aquisition by expats resident in

Spain in 2010.

Y-o-y housing transactions variation

(% Base 1996)

Affordability indicator (% of disposable

income)

Source: Ministry of Public Works

Stock reduction

Stock of unsold houses has started shrinking in 2010

Source: Ministry of Public Works

Stock reduction pathNet stock and stock variation

0

100.000

200.000

300.000

400.000

500.000

600.000

700.000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Started housing construction Finished housing construction

102,825

195,184

273,363

613,512

688,044 687,454

413,642

51,3%

40,1%

89,8%

48,3%

12,1%

-0,09%

0

100

200

300

400

500

600

700

800

2004 2005 2006 2007 2008 2009 2010

-10

0

10

20

30

40

50

60

70

80

90

100

%

Net stock %Y-o-y variation

Housing Stock: regional distribution

% stock / number of total houses % stock / total stock

0,77%4,7%

4.3% 4.1%

3.8%

3.7%

2.8%

2.6%

2.5%

2.5%

2.3%

1.9%

1,7%

1.2%0.8%

2.5%

0.5%

1.6%

> 4

3 - 4

2 - 3

< 2

19.3%

16.3%

15%

7.8%

7,4%

6,2%

5.9%

5.7%

4.3%

2.6%

2.4%

1.8%1.7%

1.3%

0.5%

0.4%

>10%

5 - 10%

0 - 5%

0.7%

Source: Ministry of Public Works

Investing in spanish real

estate sector is safe

Strong legal and institutional framework

Public Land

Registration

Office

Examination of

the physical

and legal

condition

of the house

Contract Public deed

Public

Cadastre

Urban

Information

Service

Legal security

Additional measures to consolidate legal security:

• Compulsory town planning information provided by the Public

Land Registration Office

• Public access to property information in English language through

UK embassy in Spain

• Creation of the figure of the Town Planning and Environment

Public Prosecutor

• Creation of specific police departments against urban

development delinquency

• Land Use Act to fight against urban development corruption

• Penal Code reform to prosecute urban development corruption

Thank you for your attention

www.fomento.gob.es/spanishrealestate