The rain from Spain
Martinsa-Fadesa, one of the largest players in the Spanish real estate market, suspended trading on the Madrid Stock Exchange last month and filed for bankruptcy protection. The catalyst for this was the plummeting value of its stock and the realization that its massive debt was unmanageable.
The unprecedented downfall of a market giant, a firm which has also made substantial investments in Poland, has intensified speculation in this country about whether - and to what degree - crises on Western European real estate markets could impact at home. Moreover, the slowdown on the residential market has called into question the future of Polish developers themselves.
Sinking armada
Martinsa-Fadesa's problems followed the 2007 crash of a speculative property bubble in Spain, an event which followed a decade of prosperity in the market. According to the Bank of Spain's data, property prices in the country increased by approximately 106 percent from 1998-2006. By 2003, the bank estimated that residential properties were already overpriced by eight to 20 percent. Demand for housing decreased in 2006 and since then the market has been characterized by an oversupply amounting to a few hundred thousand units annually.
Largely due to the changed market reality, Martinsa-Fadesa's 2007 home sales recorded a 36-percent decrease over the previous year and its debt reached over EUR 5 (zł.16) billion. In July, the company failed to obtain the EUR 150 (zł.482) million in credit it needed to refinance EUR 4 (zł.12.8) billion of its debt and its listed shares recorded a massive drop in value. Martinsa-Fadesa subsequently applied for court protection against its creditors but not yet received it.
"The situation in the market is currently very nervous and there has been speculation for some time now as to which of the large players would not weather the recession in the construction market," said Tomasz Starus, head of the risk assessment department at Euler Hermes, a firm specializing in trade credit insurance and legal debt collection. "[The number of] bankruptcies of smaller developers and construction companies began to increase last year, so a culmination of the trend in such a spectacular manner was to be expected," he added.
Martinsa-Fadesa is by no means the only large Spanish real estate company that has been hit hard by the downturn on the market. Other firms, including Ferrovial, Acciona and Inmobiliaria Colonial, have seen sharp decreases in the value of their shares as well. According to Krzysztof Chechłacz, vice president of the board of Euler Hermes, Inmobiliaria Colonial - the second-largest developer in Spain - avoided major financial troubles earlier this year only because banks agreed to exchange their receivables for shares in the company.
Polish schadenfreude?
Martinsa-Fadesa's problems have raised questions about the future of the company's assets in Poland. The firm has a 51-percent share in Fadesa Prokom Polska, a joint-venture firm it established with Polish developer Polnord, which owns some attractive plots in the country and whose investments include a prestigious residential project in Warsaw's Miasteczko Wilanów. The management board of Fadesa Prokom, for its part, has announced that its investments would not be affected by the recent developments in Spain.
"The situation on the Spanish bourse does not have any impact on the residential investments of Fadesa Prokom Polska. Fadesa Prokom Polska has very good financial results and guaranteed financing for the investments currently being realized in Poland. Close cooperation with its Polish shareholder, Polnord, has helped the firm to create a guarantee of stability," the company said in a July press release.
According to a number of market analysts, Polnord is now likely to benefit from the situation and acquire Martinsa-Fadesa's shares in Fadesa Prokom Polska, thus becoming the sole shareholder in the company. Acquisitions of other cash-strapped Spanish investors' assets may follow as well, especially since companies that purchased valuable plots during the residential boom years may soon be forced to sell at relatively low prices. The scale of the potential sell-offs of Spanish companies' assets in Poland is difficult to assess, however, and such transactions, Euler Hermes analysts pointed out, do not always prove beneficial to the acquiring company.
Domestic (in)stability
Could the fate of the crisis-stricken Spanish developers be replicated in the case of Polish companies? Real estate market analysts don't have any definite answers.
One possible problem, analysts say, could be defaults in their payments to contractors and construction materials suppliers.
"We are currently witnessing increased interest in transaction insurance offers on the part of firms from this sector, which testifies to increased uncertainty in the [whole] industry," said Chechłacz.
The situation in Poland's residential market is, of course, quite different from that in Spain's - the former is less mature and demand for housing remains relatively strong. Although sharp increases in home prices have passed for now, current price levels still allow developers to turn a profit, even if the margins have narrowed. Large real estate companies, which made solid profits during the boom years, thus seem rather confident in the face of further lean years.
"We are witnessing a slowdown in the real estate market, but after the recent years of growth, developers are in good financial standing and are prepared for more difficult times," said Jarosław Szanajca, president of the board of Dom Development. "Perhaps, after deeper analysis, some projects will be put on hold. I would not speak, however, of a wave of developers' bankruptcies. Nor will there be much consolidation in the market, although individual takeovers may follow," he added.
On the other hand, however, the slowdown could yet hit smaller and less experienced firms, some of which made ill-advised investments in times of rapid market growth.
"Many small developers bought land at the time when prices were highest, hoping for further price increases. The market saw the appearance of a number of entities that had neither sufficient capital nor experience in the developer segment," said Ewa Perkowska, commercial director at Budimex Nieruchomości. "Now that the period of dynamic price growth has come to an end, it seems that takeovers of smaller firms or their projects may take place," she added.
