Real Estate

Spain’s dysfunctional housing market finally offers some opportunity

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In the years leading up to the financial crisis, high house prices spurred a building boom and a glut of ultimately unwanted homes in peripheral European countries.

Spanish house prices have only just recovered to those levels today. As the available housing stock dwindles, undersupply is becoming the new problem. The country recorded a shortfall of about 350,000 homes last year. A familiar European story is playing out in Spain: people desire homes but financing conditions are stunting both demand and supply.

Property developers in Spain are in a rut. House prices are holding up but it is volumes that count. Transactions for new homes fell by a 10th last year. New permits are stagnant and completions are falling too. Lower construction activity explains why prices for new homes are rising about twice as fast as those for existing ones. These fundamentals point to something almost unthinkable for two decades: an opportunity in the Spanish housing market.

Line chart of Indices rebased showing European house prices

Shares in Spain’s listed builders such as Neinor Homes, Metrovacesa and Aedas Homes have all been stuck below book value for years. Lack of investor interest is hampering efforts both to develop new homes and build businesses with sustainable costs of capital.

The market’s disregard for the sector means that models are being tweaked to prioritise cash flows and shareholder returns. Metrovacesa has already returned more than 40 per cent of its market cap in dividends since 2019, funded through profits and land bank optimisation. It is still offering an expected yield of 10 per cent this year.

Neinor Homes began a similar journey last year with the decision to sell off its build-to-rent division and return cash to shareholders. Expected dividends this year of €200mn are equal to a forward yield of 25 per cent. A further €150mn is expected in 2025.

Spanish building permits per new household created

Builders need to be ready for an expected pick-up in demand this year as interest rates fall and government-sponsored mortgage support kicks in. Presales at Metrovacesa were a fifth higher in the first quarter.

Unable to raise equity, Neinor Homes is bulking up its own pipeline with joint ventures, contributing €300mn from its disposal plan towards three partnerships last year. Necessity aside, it hopes that investors will look more favourably at a capital-light approach and the higher returns on capital it expects to generate.

Shares in all three are up by a 10th in the past month, spurred on by a dovish outlook from the central bank. Hacienda-sized yields and 20 per cent discounts to book value suggest there is more to come.


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