How to Survive a Crisis: The Experience of Spanish Real Estate Firms

No one dares to predict on a day-to-day basis the scale and consequences of the virulent crisis that the Spanish real estate development sector is suffering. Lábaro, Cosmani, Prasi, Ereaga, Jale, Grupo Sánchez, Seop…. Each week, new names are added to the lengthening list of Spanish real estate companies that are pursued by competing creditors and have had to suspend their debt payments.

Other companies, such as Habitat, Martinsa-Fadesa and Colonial, have either negotiated – or are currently negotiating – with financial institutions so they can achieve a reasonable refinancing of their debt and deal with their problems. This period of torment began in April 2007 when shares of a company called Astroc plunged. It was the first sign of serious illness in the sector, but at the time it was impossible to realize just what was going on. It wasn’t until Spain’s elections on March 9, 2008, that the sector began to realize how tough this crisis was going to be. Earlier, Carme Chacon, then minister of housing, described the real estate situation as “a smooth landing.”

In reality, we have very likely seen only the tip of the iceberg. Real estate developers warn that the pace of housing construction will be cut in half over the next two years, which means the worst is yet to come. Something similar has already happened in the U.S., where the abrupt drop in housing prices has swept away a number of real estate firms and their suppliers. Financial institutions have not escaped harm because they, too, are very much involved in financing housing. Now lenders are measuring how much they can risk by refinancing debts to home owners or whether to let the real estate companies collapse because the value of the assets that guarantee housing loans has significantly dropped, or because the lenders have had to suspend collecting interest payments.

Informed sources say that this situation has not passed unnoticed by the Bank of Spain, which has intensified its control over the risks assumed by banks and finance companies on the loans they made to land developers and real estate firms. Things have deteriorated so much that the country’s growth rate has slowed. The Bank of Spain estimates that it will be 2.4% this year (compared to 3.8 in 2007).

Experts say that it would be a mistake for the government to play a partially interventionist role in the crisis; in such a case, the government would succumb to the temptation to increase tax incentives in order to artificially stimulate demand for housing in order to revive housing prices. This would be a shortsighted way of breathing air back into real estate firms, according to some experts. It would delay the necessary purge of past excesses and merely delay a solution to an exhausted business model. The dimensions of this crisis demand horizontal measures of broad scope, which would prepare the Spanish economy for a new cycle of sustained growth.

Waiting for Prices to Drop

“These problems didn’t just show up one day. The Spanish real estate sector showed signs that things could be changing but companies continued to be very aggressive so long as prices kept going up. But you could see this coming,” notes Miguel Hernández, director of the Instituto de Empresa’s advanced program for real estate management. Without doubt, the real estate crisis has shaken the entire country. Some of the novelties being offered by promoters who cannot sell their apartments to private individuals include financial assistance and an option to buy rental property. Consumers don’t like the idea of buying at exorbitant prices and they’re waiting for prices to drop to levels where they can afford to buy. Developers agree that only those companies that can adapt to the new cycle of change will survive this crisis.

Is there really any effective way to sell property when the market slows down like this? “Every sector of the market has its own [appropriate] strategy,” notes Juan Carlos Martínez, professor of marketing at ESADE business school. “There are no magic formulas for boosting sales. The market is going to have to move in the direction where the sales are.” Marketing, continues Martínez, should be seen as a tool for management. “At least, until now it has not been the case; but marketing has been confused with advertising,” he adds. Hernández is not so sure that any really effective sales technique currently exists because demand “is subdued and people are waiting for prices to drop,” he says.

Given the way things are going, Spanish real estate firms are trying to find fresh solutions. “Professional management is the most appealing way to hook buyers and survive the cycle of change. Management must be based on three fundamental pillars: innovation, quality and service,” notes Martínez. In contrast, Hernández does not believe that customers will fall for the tempting offers made by real estate developers. “What people want is something very simple: to pay the lowest possible monthly mortgage (or rent) for decent housing. They don’t want people to give away cars to them,” the way some promoters are doing in an effort to provide a sales incentive. Hernández believes that Spanish people are not going to buy at these prices; they are going to wait until they can get a price that “is the best deal given current conditions.”

Nowadays, the most popular sales approach for developers is to provide a range of offers to potential buyers. “Any way to improve your financial condition is tempting for customers who don’t mind listening to lots of offers and like to be pursued, rather than submit to any single offer.”

Some real estate agents have succumbed to the temptation to use promotional techniques that are commonly “used in the consumer goods market, without considering that buying a house is not the same thing as buying a bottle of milk because of the emotional content that goes along with it,” states Martínez. Not every Spanish real estate company is prepared to pass this test, he says. “Certainly there are companies that have learned how to diversify and, therefore, have gotten results.” Martínez believes that there are no creative formulas, and that marketing won’t provide any solutions. “It is very hard to sell more nowadays. Prices will have to go down [before that happens].”

The promises made to home buyers vary from company to company, but all of them have a common denominator – a stronger focus on making the sale.

Reyal Urbis, a Spanish firm headed by Rafael Santamaría, has created Reurbe, a new company that manages communities and housing cooperatives, both open (that anyone can buy) and protected (just for people with low income). The company offers advisory and managerial services to consumers who choose by themselves the best way to gain access to housing. “For me, this is the most reasonable solution I’ve heard in Spain since the real estate bubble burst, because the financial risks are very small,” says Hernández.

Another new idea known as the “‘outlet” concept was developed by Spain’s Bancaja Habitat in an effort to win the trust of buyers. Taking advantage of the recent real estate fair in Madrid, Bancaja Habitat exclusively offers 40 homes, both new and used, which were left over from previous seasons and are now available at a significant discount. “A bucketful of confidence” is the maxim of Afirma Grupo Inmobiliaro (Afirma Real Estate Group). That company promises buyers that if they back out before they formally register their property, Afirma will return the money they deposited in reserve plus 2% in interest payments. When a purchase actually takes place, they reward the buyer with 20% of the amount they paid in their initial installment, which they then discount from the overall price of the home. That way, just in case the market valuation of the home declines five years after the registration date [of the sale], Afirma will pay the appropriate difference.

Who will wind up the winners? That remains to be seen. Experts say that success will depend on whether potential home buyers believe that they are taking advantage of current market conditions. Some people say that the key is to make it easier for buyers to finance access to the market. “Whoever develops an attractive offer is guaranteed to succeed,” informed sources say. Another sort of ingenuity involves auctioning off homes. A few days ago, Madrid was the site of the first Dutch auction. This process begins with an offer made by an auctioneer at a high price. The price continues to drop until a bidder accepts the lower price or until they arrive at an established minimum price. Using this process, 22 housing units out of a total of 216 available, were purchased for a total of 4.2 million euros in Madrid recently. The discounts on these homes varied from 18.5% to 30.3%.

In ways such as these, developers are using their entire range of weapons to earn the confidence of consumers. But how are they going to sell more if demand has dried up? “By freeing up demand that is pent-up or has slowed,” says Martínez. And how do you do that? “That means using all of the stakeholders who play a role in the market: administrators, financial institutions, developers, construction firms, intermediaries and the mass media; and it means doing that in a way that is firm and responsible.”

Nowadays, every developer is looking for ways to free up demand. “People are copying one another’s moves, so the only difference [from one company to another] is how long it takes to copy the other guy. What really distinguishes one company from another is its personnel,” notes Martínez. He believes that the “most dangerous” strategy is to focus on the price variable, given current conditions in the real estate market. When you do that, “you have a direct impact on one of the most important ways to shape expectations in the market and, in the long run, and that sends false signals to the market.”

Lessons Learned

The story of Spanish real estate over the last 10 years – from the beginning of the boom until its recent collapse – “will be the subject of research in other countries,” says Martínez. Already, he adds, some countries are “anxious” to know what measures Spanish firms are going to adopt. They want to analyze what is happening in Spain “and learn about what they should avoid doing” in their own countries. Yet Hernández argues that you can’t compare the collapse of Spain’s real estate boom with the subprime crisis in the United States. “That’s because the two countries have very different ways of awarding loans.”

Hernández compares the situation in Spain with events in the United Kingdom. That country, which has a population of 60 million people, he said, builds between 100,000 and 150,000 homes each year. “In Spain, we believe that we are going to lower our construction volume from 800,000 units today to 450,000 in the future.” He adds: “In Spain, we are suffering through a period of social change that is the result of current [economic] conditions. Ultimately, you wind up paying for your excesses.”

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