Residential property market in Spain: COORDINATES AND COURSE

Residential property market in Spain:
COORDINATES AND COURSE
Julio / July 2010
El mercado inmobiliario residencial en España:
COORDENADAS Y RUMBO

Beagle Consulting © 23
Residential property market in Spain
Is your company ready
to face the change in
the real estate cycle?
This report is addressed to all property and companies
owners and managers who are committed to remaining
in the property sector in the medium and long term.
In this paper we present an overview of the current
property crisis, principally from the standpoint of the
recovery being forecast for the Spanish housing market
and also the actions and attitudes that managers
and owners of property and related companies take
advantage of the real opportunities that are evident today.
Our assessments and conclusions are the result of
objective and thorough analysis conducted by a group
of highly specialised property consultants who have
extensive professional experience in sector companies
and in consultancy work and analysis for these firms.
The analysis we are providing here focuses on the
essential factors that explain the behaviour of the
market. It provides an objective and professional vision
that stands out among the vast amount of information
(and misinformation) that proliferates in the market,
while it also questions the majority of official and
unofficial sources which for a variety of reasons are
systematically misconstrued.
Essentially we have two goals. Firstly, we seek to assist
with the difficult task of distinguishing between serious
and thorough analysis as a foresight exercise in order
to keep ahead of the market on the one hand, and
expectations based on intuition or simple projection
of the present on the other. Secondly, we also hope to
provide thought-starters for owners and managers in
the sector and, just as importantly, encourage planned
action as an essential tool for successfully addressing an
immediate future that will be full of change.
Ferran Gonzalez Feliubadaló
Founding partner & CEO – Beagle Consulting
fgonzalez@beagleconsulting.com

Foreword
Markets behave cyclically, and the expectations of players
in the sector, particularly those that make up supply and
demand, have a strong impact on how they evolve.
The property sector is no exception to this. However,
one thing that does set it apart from many others is
that its cycles are long and slow to mature, i.e. there
is a long time lag between when decisions are made
and results are produced. Hence actions that originate
from mistaken expectations have a much greater
impact than they do in more flexible sectors.
Thus when in 2005 the sector was still experiencing
strong artificial growth (leveraged inter alia by
expectations which from a technical standpoint were
barely if at all reasonable), there were only a few
who foresaw the coming debacle and took decisions
that just about no-one else agreed with. The general
behaviour of the sector helped to worsen a profound
crisis which only the minority who swam against the
tide managed to escape. In general, expectations
based more on desire and herd instinct than on
objective analysis indicators landed both supply and
demand in deep water.
It is understandable that demand in the housing
market, made up as it is mostly of private purchasers,
does not rely on technical and objective analysis. In
the case of supply, perhaps the explanation lies in the
fact that it is heavily fragmented and consists largely
of small enterprises in which strategic management
is based for the most part on intuition and looking at
what everyone else is doing.
Contents
Foreword 24
The market up to the presenT 26
Transactions 26
Stock 30
Prices 32
Market prospects up to 2012 35
Recommendations for
PROPERTY AND COMPANIES OWNERS
and managers 37
Final conclusions 41

Expectations not only prolong market inertia when
times are generally optimistic but also in market
situations like the present one. It is easier to think
about the future based on present reality projections
than on a forecast that contradicts it (no matter how
accurate the analysis that foretells the change may
be). This is especially true when collective behaviour
seems to justify what we are doing, even though this
unfortunately ends up being cheerless and inadequate
consolation.
Just as there was unwarranted optimism at the end
of the last period of growth, we believe that the
current disproportionate pessimism does not tally with
foreseeable market developments. We know that the
market is cyclical and therefore the relevant questions
are: When will it bottom out and reach a turning point
that marks the start of recovery? What decisions do
we need to make and when should we start making
them?
In this respect, another of the especially decisive
factors in the property sector is that it behaves in a
particular way depending on the location and product
being observed. General analysis makes it possible
to interpret the main currents which we will have
to navigate, but detailed examination of areas and
products of specific interest will still be required.
At all events, the analysis presented in this paper
points to an improvement both in general and also in
specific areas and products which suggest a change
for the better is in the offing, even though expectations
continue to be pessimistic and especially so among those
who have been hardest hit by the consequences of the
recessionary period that is beginning to come to an end.
The present is the turning point and some companies
will be able to identify and exploit it. This will enable
them to think ahead and be ready for the day when
the recovery has become obvious to everyone else.
In our view, the decisions and actions put in place
over forthcoming months will have a decisive impact
on medium and long-term success in a sector
that is undergoing major change and in which the
management practices that have been widespread in
recent years will not guarantee positive outcomes, but
rather the reverse.
Alex Sixto Aira
Founding partner & Report Technical Director
Beagle Consulting
asixto@beagleconsulting.com

26 Beagle Consulting ©
thE MARkEt Up tO
thE pRESENt
tRANSACtiONS
The hardest hit indicator in the property sector has
been transaction volume. It tends to go up and down
before prices move in one direction or another.
Even though the quality of real estate statistics is poor,
they are nonetheless good enough to enable us to
identify trends and examine how they change.
Real estate transactions in Spain in the residential
market experienced a 61% decline from their peak
in the second quarter of 2006 to their low point
recorded in the first quarter of 2009.
Figure 1 shows that the year-on-year volume of
market housing transactions declined sharply by 55%
after 2006, when it reached its peak fi gure of 907.987.
In the third quarter of 2009, transaction volume
bottomed out and a turnaround began. A sustained
recovery had become apparent by the second quarter
of 2010.
Figure 1
YEAR-ON-YEAR VOLUME OF TRANSACTIONS
Source: Ministry of Housing
* Second quarter is provisional
907.987
407.080
446.966
0
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
900.000
1.000.000
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
55%
2004 2005 2006 2007 2008 2009 2010
Transactions
Quarters

at 5.9%, little more than half the figure for the former
period.
“The decline in transaction volume has not
been uniform and the island areas and the
Mediterranean arc have been most affected,
largely due to the importance of foreigners and
non-residents in their demand.”
Analysis of the type of buyer data that appear in Figure
3 shows that the decline in transactions carried out by
Spanish nationals resident in Spain, foreigners residing
in Spain and non-residents has been similar in all three
cases and bottomed out in the first quarter of 2009.
The decline in the number of transactions by foreign
residents and non-residents has been proportionally
much more pronounced: transactions by Spanish
national residents have fallen by 55%, while the
demand from foreign residents and non-residents has
virtually disappeared.
Comparison of the volume of transactions in Figure
2 shows that the fall in the volume of new housing
transactions has been less marked than in the case of
second-hand housing, although the latter has already
begun to recover.
“The recovery in second-hand housing
transactions started in the second quarter of
2009 and it heralds an improvement in the new
build market.”
The largest number of second-hand housing
transactions took place in the first quarter of 2006
while in new housing it occurred a year later (first
quarter 2007). This gap is due to the fact that
demand for second-hand housing is more sensitive
to the market situation in the short term whereas
new housing takes longer to react, mainly because
of advance purchases and the greater reluctance of
development companies to lower prices for new
housing compared with sellers of second-hand housing.
Transaction data also confirm the gap between new
housing and second-hand housing when the trend
changes. New housing transactions started to bounce
back in the second quarter of 2010, while second-
hand transactions had already picked up in the second
quarter of 2009 with an accumulating growth of 35%
Figure 2
YEAR-ON-YEAR VOLUME OF TRANSACTIONS
Source: Ministry of Housing.
* Second quarter is provisional
0
100.000
200.000
300.000
400.000
500.000
600.000
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2004 2005 2006 2007 2008 2009 2010
Transactions
Quarters
New housing
Second-hand housing
380.510
193.829
559.275
187.311
253.137
Historically the percentage of transactions carried out
by foreigners in Spain has been high. According to the
Ministry of Housing, foreigners accounted for 11.7% of
transactions recorded in Spain in the first quarter of
2007, while in the second quarter of 2010 they stood
Figure 3
RELATIVE WEIGHT OF TRANSACTIONS BY TYPE*
*Does not include the buyer type "other" which accounted for 4.4% in second quarter 2010.
Second quarter 2010 is provisional.
75%
80%
85%
90%
95%
100%
Non-residents in Spain
Foreign residents
Spanish residents
Transactions
Quarters1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2006 2007 2008 2009 2010
%

Transactions by foreign residents and non-residents
have an important relative weight in the autonomous
communities along the Mediterranean arc and on
the islands. Areas which have historically had more
acquisitions by foreign residents and non-residents
have been most affected (Map 1).
As shown in Table 1, transaction volumes vary
significantly between the autonomous communities
concerned. Each of them had a peak quarter between
2005 and 2007 and then started to decline from that
pinnacle to a low point quarter which in most cases
came in 2009.
It can be seen how the communities which had not
picked up in the first quarter of 2010 have in fact
done so in the second quarter of the year, with the
exception of Murcia which has yet to reach its lowest
point.
It is important to examine how many quarters
year-on-year transactions have fallen for in each
autonomous community and whether they have begun
to grow again or not. There are significant differences
in where autonomous communities are in the cycle
with respect to market housing transactions, although
most of them have already begun to pick up.
The Basque Country stands out in this respect, as
it was the last community to begin to experience a
decline in the number of transactions and the first in
which they increased again, eight quarters after the
peak.
The Community of Madrid reached its year-on-year
peak relatively early in the second quarter of 2006, but
also began to recover its transactions level relatively
quickly after twelve quarters. By comparison, Catalonia
and Aragon experienced a decline in transactions a
quarter earlier and begin to pick up a quarter later
than the Community of Madrid, which means they
have taken an additional six months to kick off their
recovery.
There are some areas where recovery has been
delayed and which did not turn around until the first
quarter of 2010. They include the Canary Islands, La
Rioja, Castilla-La Mancha, Extremadura and Andalusia.
Murcia has not yet reached its low point and has been
declining for fourteen quarters from its peak recorded
in the fourth quarter of 2006.
The Spanish average stands at eleven quarters of
decline from peak, starting in the fourth quarter of
2006 and with aggregate recovery beginning in the
third quarter of 2009.
1%1%
1%
1%
1%
7%
10%
18%
2% 13%
2%
7%
18%
2%
2%
1%
4%
+15%
Map 1
PERCENTAGE OF TRANSACTIONS IN EACH
AUTONOMOUS COMMUNITY BY FOREIGN
RESIDENTS AND NON-RESIDENTS
(SECOND QUARTER 2010)*
* Second quarter 2010 data are provisional and do not include transactions in Ceuta and Melilla.
10 -15% 5 - 10% 0 - 5%

There are major differences in the fall in housing
transactions between autonomous communities, with
the Community of Madrid, the Mediterranean arc and
the island regions being most affected.
The evolution of transactions in the autonomous
communities from peaks to lows (Map 2) compared
with the difference between the peaks and the second
quarter of 2010 (Map 3) shows a much more positive
outlook, with recovery rates of up to 15 points in the
case of the Basque Country and Madrid, and up to 7
points in Catalonia, Asturias, Castilla y León, Galicia,
Aragon and Navarra.
+60%
55 - 59%
50-49%
0-50%
+60%
55 - 59%
50-49%
0-50%
Map 2
DECREASE BETWEEN PEAK AND LOW POINT QUARTER
Map 3
DECREASE BETWEEN PEAK QUARTER AND Q2 2010
Maps 2 and 3
CHANGE IN MARKET HOUSING TRANSACTIONS BY AUTONOMOUS COMMUNITY
∇38%
∇52% ∇52%
∇52%
∇38%
∇52%
∇52%
∇52%
∇60%
∇55%
∇70%
∇66%
∇46%
∇59%
∇40%
∇61%
∇61%
∇32%
∇45% ∇47%
∇45%
∇38%
∇50%
∇52%
∇49%
∇57%
∇49%
∇63%
∇61%
∇45%
∇57%
∇25%
∇48%
∇62%
* Note: year-on-year value of market housing transactions between 2004 and second quarter 2010.
Quarter in which transactions peaked
2005 2006 2007
Quarters 4 1 2 3 4 1 2
Quarterinwhich
transactions
reached
lowestpoint
2009
2 C.Madrid (12) Basque Country
(8)
Basque Country
(8)
3
Aragon (14)
Catalonia (14)
Aragon (14)
Catalonia (14)
Galicia (13)
Asturias(11)
SPAIN (11)
Balearic Islands
(10)
Castilla y León (10)
Balearic Islands
(10)
Castilla y León (10)
4 Cantabria (16) C.Valenciana
(14)
Navarra (13)
Todavía no han repuntado
(Mínimo en Primer
Trimestre 2010)
Murcia (13)
La Rioja (13)
Castilla La
Mancha (12)
Extremadura (12)
Andalusia (11)
Quarter in which transactions peaked
2005 2006 2007
Trimestres 4 1 2 3 4 1 2
2009
2 C.Madrid (12)
3 Galicia (13) Asturias(11)
SPAIN (11)
4 Cantabria (16)
C.Valencia
(14)
Navarra (13)
2010
1 Canary Islands
(14)
Canary Islands
(14)
La Rioja (13)
Castilla La
Mancha (12)
Extremadura (12)
Andalusia (11)
Murcia (14)
* Note: year-on-year value of market housing transactions between 2004 and second quarter 2010.
Quarterinwhich
transactions
reached
lowestpoint
Have not yet picked up
(lowest point in Q2 2010)
Table 1
AUTONOMOUS COMMUNITIES BY NUMBER OF QUARTERS ELAPSED BETWEEN PEAK AND LOWEST POINT*

Table 2 contains a cross-cutting analysis of the time
that has elapsed between maximum and minimum
transaction volume, and the percentage decline
in transactions between peak and low point by
autonomous community.
Looking at these two axes shows there is a group of
autonomous communities in which the number of
transactions has already started to pick up.
Some, like the Balearic Islands, have suffered a higher
percentage decrease in transactions, whereas in the
case of the Basque Country it has been smaller. The
length in quarters of the decline in transactions is
greater in Catalonia than in Castilla y León.
Some autonomous communities have just reached
their transaction low point and are close to recovery,
with a rise forecast for the immediate future. They
include the Canary Islands, Navarra, the Community of
Valencia and La Rioja.
In Murcia the adjustment in transaction volume has not
been so pronounced and the region still has some way
to go before it can begin its recovery.
16 quarters8 quarters
Number of quarters between peak and low point
Declineintransactionsbetweenpeakandlowpointquarters
12 quarters
Basque Country Galicia
Navarra
Cantabria
Murcia
Its transactions have not yet picked up
Their transactions picked up between the fourth quarter of 2009 and the ﬁrst quarter of 2010
Their transactions picked up between the second quarter of 2009 and the third quarter of 2010
Castilla
La Mancha
Andalusia
Asturias
SPAIN
Balearic Islands
Catalonia
La Rioja
Aragon
Canary Islands
C. Valencia
70%
55%
35%
Castilla y León
Extremadura
C. Madrid
Table 2
StOCk
If there is one thing that very clearly reflects what
happened in the Spanish property boom, it is the
country’s housing stock. The stock of new housing
available for sale accumulated between 2004 and 2009
in Spain comes to nearly one million units.
Figure 4 shows the volume of housing units started
per year. In the period from 1991 to 1997 on average
229,418 were started each year, while between 1998
and 2006 the upward trend gathered pace to reach
an annual average of 499,046 market housing units
started. The volume of housing starts peaked in 2006
at 664,923, which is a higher figure than the total
housing units started in the same period in Britain,
France and Germany combined. The cumulative
increase between 1991 and 2006 was 313%.
“In 2006 the volume of housing starts in Spain
was 313% greater than in 1991.”
Nonetheless, there has been a dramatic change in the
volume of housing starts during the last three years,
which will certainly help towards a gradual reduction in
this significant oversupply.
In 2007 there was a turnaround in the trend and the
number of market housing starts was reduced by 20%
compared with the previous year. Since then there
has been a cumulative decrease of 88%, meaning that
this index has now fallen to below half the number of
market housing units started in 1991.
664.923
80.230
0
100.000
200.000
300.000
400.000
500.000
600.000
700.000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
50,6 % Annual
change(1)
9,9% Annual change(1)
312,8%
87,9%
Free housing started
Years
(1)
Compound annual growth rate (CAGR)
Figure 4
VOLUME OF HOUSING UNITS STARTED PER YEAR

reduce this stock in a significantly sustainable way.
There are no figures for transactions prior to 2004,
although the quantity of stock created is estimated to
be significantly below stock for the period 2004-2009.
For this reason, the absolute data presented here
should be seen as approximate, although valid in terms
of the trend they depict.
The figure for accumulated stock in 2009 of about
one million dwellings has been calculated based
on the volume of building permits issued, although
during a recession not all permits lead to the actual
construction of housing units so this is an upward
estimate.
Examination of quarterly data (Figure 6) shows that
between the fourth quarter of 2008 and the first
quarter of 2010 the number of transactions fell by
39%, while the decline in market housing starts came
to 56%.
Figure 6
Source: Ministry of Housing
VOLUME OF TRANSACTIONS AND MARKET
HOUSING STARTS BY QUARTER
Transactions Housing starts
63.358
49.806
54.227
46.250
51.443
38.83740.368
22.828
20.650
16.674
20.078
17.876
4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 Quarters
Therefore the gap between housing starts and
transactions is diminishing, in spite of a decrease in the
number of transactions, due to the strong decline in
the number of housing starts.
We estimate that the housing stock will be fully
absorbed in about five years, with forecast annual
transaction levels higher than in 2009 but lower than
in previous years.
Consequently real estate production has dramatically
adjusted down to levels lower than twenty years ago.
“As a result of accumulated oversupply, the
annual number of housing starts has fallen
around 90% over the last three years and in
2009 was less than half the figure for 1991.”
Looking at the monthly data in detail, the decline in the
number of housing starts becomes especially evident
from October 2008 onwards. During the first quarter
of 2010 17,876 dwellings were started, which is a 56%
fall over the fourth quarter of 2008.
The reduction in the number of housing starts over
the last 12 months is mainly due to the credit crunch,
high land prices and shrinking demand.
Although the number of housing starts is being
severely cut, we believe that the stock of new housing
for sale that accumulated between 2004 and 2009
comes to 963,629 units (Figure 5), having fallen by
almost 200,000 units since its peak in .
* New market housing transactions. There are no ﬁgures for transactions prior to 2004,
although the quantity of stock created is estimated to be signiﬁcantly below stock for
the period 2004-2009.
Figure 5
VOLUME OF TRANSACTIONS*, MARKET HOUSING
STARTS AND ADDITIONAL CUMULATIVE STOCK
PER YEAR
267.540
306.060
377.156 364.506
291.478
201.726
621.257 635.608
664.923
532.117
237.960
80.230
353.717
683.265
971.032
1.158.643
1.085.125
963.629
0
200.000
400.000
600.000
800.000
1.000.000
1.200.000
1.400.000
0
100.000
200.000
300.000
400.000
500.000
600.000
700.000
2004 2005 2006 2007 2008 2009
Transactions Housing starts Cumulative stock
Years
Between 2004 and 2007 new market housing
transactions were far below the number of market
housing starts, and as a result a stock of 1,158,643
dwellings was built up. In 2008 and 2009 this
accumulated stock was reduced by 17%, mainly due
to the sharp fall in market housing starts that was
sufficiently greater than the fall in transactions to

The possible scenarios evaluated are shown below in
Table 3:
Based on the analysis of the scenarios, the highlighted
ones are viewed as being more probable, with a
forecast of an approximate national average of 4.7
years in them to absorb the additional national stock
accumulated since 2004.
At any event, this is not the time period that should
be used as a reference for beginning property
development operations as the key factor is the time
taken by development from start to marketing, which
is on average between one and two years.
Moreover, this is an average figure for Spain as a whole
and is unlikely to reflect the particular situation in
each specific area or location. This is because there
are housing areas and types in which the stock is
being absorbed quickly, while by contrast in others
it is unlikely to be absorbed in the short to medium
term. In general, there is an excess supply in coastal
areas and non-metropolitan areas that is far greater
than that to be found in big cities like Madrid or
Barcelona. Consequently it is expected that absorption
in areas with a lower level of excess supply will take
considerably less than 5 years.
pRiCES
One of the most important indicators for getting a
complete picture of the real estate market situation in
Spain is the level of housing prices (Figure 7).
In our view, the majority of available official and
unofficial sources need to be reinterpreted, if not
corrected, in order to come to accurate conclusions.
There are several factors that significantly affect the
content of the various sources.
Firstly, the price indicators in the various sources do
not take into account the changes resulting from the
time that has elapsed up to the moment of sale, for
instance price changes since valuation.
Secondly, as a general rule valuations, especially those
for assets owned by banks, do not include all of the
Forecast of
average
transactions
per year*
Pessimistic
scenario
Base
scenario
Optimistic
scenario
200.000
Forecast of housing starts per year*
Low base scenario Base scenario High scenario
80.000 120.000 160.000
275.000
350.000
Current stock of new market housing
(2004-2009): 963,000 dwellings
Most likely scenarios
*Assuming that from 2009 numbers
are stable year after year.
8,0 12,0 24,1
4,9 6,2 8,4
3,6 4,2 5,1
4,7
Table 3
NUMBER OF YEARS IT WILL TAKE TO ABSORB THE
STOCK OF NEW MARKET HOUSING ACCUMULATED
FROM 2004 TO 2009 (POSSIBLE SCENARIOS)
Figure 7
CHANGE IN HOUSING PRICES IN SPAIN
2.320
Peak: 2.702
2.374
2.077
Peak: 2.101
1.849
1.700
1.900
2.100
2.300
2.500
2.700
2.900
3.100
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Peak: 2.943
Peak: 2.905
Peak: 2.521 2.537
Price / m2
2006 20102007 2008 2009
Quarters
Sociedad
de tasación
Idealista
Fotocasa
Facilísimo
Ministry
of Housing

fall in prices because of the negative impact this would
have on their balance sheets.
Furthermore, the statistics of online real estate portals
only include the starting price and ignore the whole
process of further bargaining between seller and buyer,
which at present may lead to a significant discount.
Real estate portal statistics are therefore a good
indicator of prices in times when demand is strong
and there is little or no bargaining, but at times like the
present, the final sale price may differ significantly from
the price originally asked for.
The fact that part of the price agreed in certain
transactions is not reported officially reduces their
register value and can also distort results, meaning that
official statistics may give an average price that is less
than the real one.
As to the figures released by the Ministry of Housing,
there are widespread doubts about them due to fears
that they are “cooked” to produce implausible results,
for instance that prices have only fallen by 12% from
their peak to the second quarter of 2010.
Finally, analyses of large geographic areas that look at
aggregate data come to conclusions that are based
on averages that are not representative for most of
the areas sampled, except for those in which the local
indicator coincides with the national one.
As shown in Table 4, because of all these factors there
is a high degree of divergence between published
estimates of price trends, with differences of up to
45 points. Nonetheless, based on market research
conducted by Beagle for sector clients we can state
that the real fall in prices has been between 25% and
35% in general, and we believe that there is still room
for a further fall of between 5% and 10% for certain
types of products in certain areas.
FORECAST FALL IN HOUSING
PRICES IN REAL TERMS
(ESTIMATES MADE IN 2010)
Table 4
-60%
Standard & Poor’s: "Although there are signs that the decline
in market housing in Spain is coming to a close, prices could still
fall another 12% from the second half of 2010 before stabilising."
(June 2010)
ESADE: "Housing prices will fall an average of 20% over the next
two years, which will be in addition to the adjustment that has
already taken place of between 10% and 15%." (January 2010)
BBVA: “Prices must fall 30% from their peak to absorb unsold
stock, i.e. two thirds more than up to now (10%)". (December
2009)
Aguirre Newman: "Houses are currently overvalued by 30%".
(December 2009)
Eduardo Rodríguez-Losada (INMOAdjudica): “The future
increase in the supply of properties from banks will generate
discounts of up to 35% over the course of 2010." (November 2009)
The Economist: "Prices remain overvalued by 55% in Spain."
(January 2010)
0%
-12%
-15%
-20%
-30%
-35%
-55%
It is by no means unusual to come across published
interpretations of statistical data that come to
mistaken conclusions about changes in prices.
An example of misinterpretation can often be found
in a combination of two factors. Firstly, in any type of
real estate product there are disparate average prices
per square metre in different regions or areas; it is
obvious that, for instance, the average price per square
metre for a dwelling in Madrid is much higher than
for a comparable dwelling in, say, Badajoz. Secondly,
the beginning of the recession and growth stages in
the real estate cycle does not take place at the same
time in the various regions; thus as can be seen in
Table 1 in this paper, the Community of Madrid began
its recovery in transactions nine months before the
Community of Extremadura did. This means that the
relative weights of the products sold in each area vary
in the global average. The example in Table 5 shows
that the average price per square metre sold has risen
by 8.5% (from €3,500/m2 to €3,800/m2) in the time
period covered, yet the unit prices per square metre
at which the homes have been sold have not changed
(€1,000/m2 in the case of Region 1 and €4,000/m2 in
Region 2).
In other words, in our example the change in the
average relative weight of the products sold in the
different regions leads to a change in the average price
per square metre, yet in fact sale prices, that is to say

the ones at which the transactions included in the
calculation are made, have not changed. This effect
is also to be found on a smaller scale even between
neighbourhoods in the same town or city.
Table 5
ILLUSTRATIVE CALCULATION OF THE CHANGE
IN AVERAGE PRICES
REGION 1 2 homes: 1.000 €/m2 REGION 2 10 homes: 4.000 €/m2
REGION 1 1 home: 1.000 €/m2 REGION 2 14 homes: 4.000 €/m2
Although prices in each of the autonomous communities have not changed, an incorrect
interpretation of the data leads to a wrong conclusion, namely that prices have increased by 8.5%.
First quarter sales (true)
Average ﬁrst quarter transaction price: 3.500 €/m2
Second quarter sales (true)
Conclusion (false)
Average second quarter transaction price: 3.800 €/m2
“Every type of real estate product calls for a
different and suitably restricted local level of
zoom which is essential for careful price analysis.”
In Spain there is an ingrained predilection for buying
rather than renting housing. This cultural factor
essentially explains the difference between the curves
for change in purchase prices and their financial
equivalent in rent (discounted present value of an
income for 25 years equivalent to the rental price).
Ceteris paribus, from a strictly financial point of view
this discrepancy would not make sense.
The approach of the two curves seen in Figure
8 in 2008 reflects an anomalous and transitional
situation that will soon be corrected by the market.
This correction can only come about through better
performance by purchase prices compared to rent.
Market pressure will push sale prices upwards, while
rent prices are unlikely to continue to decline or they
will do so only moderately. We do not anticipate
a significant deterioration in rental prices as they
were less overvalued during the inflationary period
than purchase prices, and indeed they have already
undergone equivalent adjustment.
Furthermore, during this recession period we have
seen that the volume of rental transactions has
continued to remain strong, which shows that there
is sustained demand that can absorb the supply
(significantly increased due to housing units formerly
for sale now being let).
As sales transactions increase, the supply which
previously shifted over to letting will naturally
and efficiently go back to the selling market,
further reducing pressure on the supply of rental
accommodation and strengthening resistance to falls in
rental prices.
Source: Idealista.com
* The net discount rate is 4%, equivalent to renting a ﬂat for 25 years.
Figure 8
EXAMPLE OF THE CHANGE IN AVERAGE PURCHASE
PRICE AND COST OF RENTING IN BARCELONA
Price / m2
3.500
3.700
3.900
4.100
4.300
4.500
4.700
4.900
5.100
ENE '06 ENE '07 ENE '08 ENE '09 ENE '10 JUN'10
€/m2 (PURCHASE)
€/m2 x 12 months
x 25 years (RENT)*
Years

The property market cycle is similar to the business
cycle in the sense that both feature periods of crisis
and expansion together with neutral stages. All three
of them can be seen by looking at the change in the
level of prices in the property market over the last 25
years (Figure 9).
Examination of the property cycle up to the present
would suggest that we are beginning to enter a
period of stabilisation with an upward trend in which
opportunities will start to appear in the sector.
“The property market reacts in transactions
before it does in prices.The recent surge in
transactions in most areas is a sign of incipient
market recovery.”
MARkEt pROSpECtS
Up tO 2012
The association between the business cycle and the
property cycle would give added impetus to the idea of
recovery as the economic growth forecasts for Spain in
2011 from the IMF (+0.6%) and the OECD (+0.9%) are
positive.
Furthermore, growth forecasts for European Union
countries which have historically generated a significant
part of demand, and which has been one of the hardest
hit segments in the Mediterranean arc and the islands,
are higher than those for Spain.
Figure 10 shows the different stages in the real estate
cycle with respect to sales volume. Each point in the
cycle has a specific level of four variables: market
demand absorption capacity, developer margins, future
demand absorption expectations and expectations
about increases in margins.
Figure 9
PERCENTAGE CHANGE IN THE REAL PRICE OF MARKET HOUSING IN SPAIN(1)
-15
-10
-5
0
5
10
15
20
25
30
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(1)
Source: Sociedad de Tasación
Current crisis
Growth
Crisis (91-96)
2011?
End of cycle?
Price (% change)
Years
16,9
24,1
20,3
16,9
2,9
-5,4 -6,3
-5
-0,3 -0,5
-1,9
1,4
3,7
5,8
8,2 8,1 9
14,2 14,7
6,4 7,1
1
-9,5
-5

In the valley of the curve, expectations about demand
absorption and increasing margins are positive, while
demand absorption capacity and developer margins are
not encouraging.
At the following point expectations remain positive and
the situation begins to improve with an increase in the
stock absorption capacity of demand, albeit with no
improvement in developer margins.
All four variables are positive from the next point on
until the following point is reached when the demand
absorption expectation variable is reduced. From point
5 onwards the variables perform in the opposite way to
what they did at point 1 until the cycle starts again.
The current market situation is between points 8 and
1’. This point on the curve is the turning point where it
is especially important to take appropriate decisions to
seize the opportunities that are to be expected in the
short to medium term.
Figure 10
Absorption
capacity
(demand >supply)
Developer
margin
Demand absorption
expectation
Increasing margin
expectation
(1) Illustrative about new market housing.
1
2
3
4
5
6
7
8
1’
Time
Sales volume (1)
1999-2006 2008-2010 2011-?2007
The absorption capacity of current demand is in the
early stages of recovery, especially in second-hand
housing and urban areas. There has been an increase
in demand for rented properties. In 2011 there will be
improved access to credit because economic pressures
will no longer be as strong and demand for use will be
stimulated by low interest rates. This will make it possible
to increase mortgage lending in 2012 owing to economic
recovery and net job creation. We believe that interest
rates will not rise significantly in the medium term given
the macroeconomic situation in the European Union.
As for developer margins, this year some developers will
be buying land opportunistically while trying to keep very
competitive prices. The banks will continue to prioritise
the sale of their stock by offering better mortgage
conditions for their own supply with smaller margins.
In 2011 buyers will be more realistic about prices, and
these transaction prices will be adjusted more to the
price demanded, while areas with less stock will provide
opportunities for selective development and land
purchase. In 2012 margins will still be moderate, although
a turnaround in price levels will begin in areas where
prices still need to fall by cutting margins.
“Gloomy expectations and inertia, which up to
the present have been seen across the board,
do not tally with our forecast analysis of market
developments.”
The expectations for demand absorption in 2010 are
characterised by a deep-seated pessimism, especially
in areas most exposed to foreign demand and second
homes, although they should focus on proactivity with a
view to the growth period that is approaching. In 2011
there will be signs of recovery which will foster optimism,
and this in turn will lead to the selective start-up of new
property developments. There will be some areas in
Spain where net job creation will begin, and this will
generate positive absorption expectations. In 2012, the
expectation of economic recovery will make the increase
in real estate activity more widespread.
With something of a lag, expectations for increasing
margins in 2010 are creating a demand for opportunistic
investment while interest rates stay low, but the
difficulties in obtaining financing still remain. In 2011,
international investors will once again take an interest in
the Spanish market due to favourable price expectations
in Europe, against a backdrop of prices that will still be
low in Spain. In 2012 there will be an expectation of
prices rising in line with the rest of Europe, albeit at
moderate rates, and the beginning of the growth cycle
equivalent to point 2 will be consolidated.

RECOMMENDATIONS FOR
PROPERTY AND COMPANIES
OWNERS AND MANAGERS
Falling sales and prices, the credit squeeze and
declining business investment, the drop in consumer
spending brought about by the credit crunch and
redundancies and cuts in expenditure of all kinds have
been a regular feature of the Spanish economy since
the first signs of recession became apparent.
Ever since the first impact of the crisis was felt, the
economy has been adjusting and this has led to a
reworking of the current competitive map which will
continue until the end of 2010. The disappearance of
some competitors and the merging of others together
with restructurings or integration in both directions in
the real estate value chain are just some examples of
the consequences, some more visible than others, for
the property sector.
Moreover, although the market is cyclical and is
starting to show signs of stability and recovery, there is
still a gap between reality and expectations which are
usually built, more or less unconsciously, by projecting
current reality into the future.
Reality
Expectations
Time
Just as the herd behaviour of supply and demand and
the marked optimism of earlier expansive phases of
the cycle clouded views of the obvious risk, today
undue pessimism means that expectations are overly
cautious or gloomy in a way that does not tally with
the actual market situation. In fact, the cyclical nature
of the property market and recent data suggest that
recovery is beginning, even though the inertia of
entrenched glumness among industry players may in
itself be a factor that slows the rate of recovery.
In the current business situation opportunities in
specific products and locations are starting to emerge
which can be used to anticipate the next phase in
the upward cycle which is drawing near. Given the
slow maturation of real estate product, doing this will
involve taking some decisions early on and assuming a
certain degree of controlled and duly evaluated risk.
There are a number of external factors over which
we have no influence but which we need to be
aware of and analyse objectively. These factors, for
instance changes in economic circumstances or in the
competitive environment in the sector, variation in
supply and demand or the evolution of stocks, have an
exogenous yet nonetheless extremely relevant effect
on us. Disregarding their probable development is a
mistake that usually turns out to be an expensive one.
By contrast, keeping one step ahead of them can be a
source of opportunity and competitive advantage.
In addition to external factors, company owners and
managers also have available a number of management

levers which they can, and indeed should, use to
secure success for their enterprises. In current
circumstances, the most significant management levers
which combine indispensable short and medium-term
approaches are strategy, corporate governance and
operations.
In this final section of the paper we present a series
of recommendations for each of these three areas of
management.
STRATEGY
OPERATIONSCORPORATE
GOVERNANCE
EXTERNAL
FACTORS EXTERNAL
FACTORS
StRAtEGY
Strategy is the functional area and internal factor which
owners and managers need to think about in order
to make decisions that have a major impact and also
generate results in the medium and long term. This
ability to weigh up and anticipate market trends is
especially important in sectors like real estate where
the time lag between making decisions and their
consequences becoming apparent is long, because the
nature of the business and the volume of resources
committed mean that “changing course” is a slow and
in most cases very painful process.
Whatever our assessment may be as to how
the sector will evolve over the coming years, it is
imperative to have one that is both specific and as
objective as possible. This is not so much because of
how we can influence this evolution (unless we have
a clear leadership position in the industry it will be
very difficult for us to have a significant impact on it),
but rather because we need to act in a way that is
consistent with its probable course and anticipate it to
the extent that this possible.
In all probability we will not be able to influence
the market sufficiently, but undoubtedly we can, for
example, choose which market we want to operate
in over the next few years or ask ourselves: Which
locations will have the best market conditions?
In which businesses should we have a presence
(generating buildable land, development, marketing,
operation, etc.)? Should we concentrate our efforts or
diversify? What degree of vertical integration should
we seek in the value chain? What products should we
focus our resources on (first homes, holiday homes,
state-subsidised housing, new builds, refurbishment,
tertiary sector, etc.)? Which market segment should
we address (domestic, foreigners, investors, purchase
for use, etc.)?
Appropriate strategic thinking should take into account
numerous external factors and how they will change
but also the particular features of the company and its
access to resources.
For instance, given the current squeeze on bank credit
and the likely evolution of macroeconomic variables
such as inflation and interest rates, what is the degree
of leverage with which it is possible and advisable to
carry out real estate developments?
What will be the role of the financial sector and what
are its implications for financing real estate projects?
What will our competitors do in this respect? How
can we turn what is at first sight a threat into an
opportunity?
How is the sector going to be reshaped? Who will our
direct competitors be and what will they do? How
can we differentiate ourselves? What is the best size
for our business project? What is the critical mass and
where can we find the synergies we need? Where are
the financial resources and the knowledge we require?
Who are the strategic partners we need in this new
business ecosystem that is taking shape?
There is a whole compendium of strategic
uncertainties that must be cleared up in order to set
business goals. Given the relevance of this subject for
management and its long-term impact, it is essential
that the owners of the company lead the strategic
thinking process and build the highest concentration
of specific knowledge, intelligence and common sense
into it. It is also highly advisable to have an external

and objective view as well as experience in this type
of thinking brought by the necessary process and
methods.
Carrying out the actions necessary to turn strategic
expectations into results requires turning goals
into action. This calls for an appropriate system of
corporate and executive operational governance.
Corporate governance
First-rate strategy is essential for long-term success, but it
is useless if it is not executed effectively.
Corporate and operational governance is a key
management lever not only for taking the right decisions
but also for implementing them through the organisational
pyramid, minimising opposing forces and energy loss
throughout the entire process.
The formal and explicit component of governance in a
company is made up of its decision-making bodies, policies
and procedures, tools for setting goals and performance
evaluation, internal communication mechanisms, etc.;
in short, the organisation’s operational system from its
highest organisational level, which includes its board of
directors and related bodies, to the various units and
mechanisms for making decisions and conveying them
across the organisation. Issues such as what the goals of
these bodies are and their composition and operation are
crucial to their proper performance.
Yet just as important for governance are less visible factors
linked to human dynamics, organisational culture, attitudes,
motivation and leadership.
Hence just as both wind and invisible currents are
important for any boat, both formal components such as
leadership style and other informal aspects are important
for any business. All of them need to be adapted to the
situation. You do not steer a ship which has a tailwind in a
calm sea in the same way as you would in the middle of a
storm. Likewise you would not handle a small yacht as you
would a large transatlantic liner regardless of the weather.
Strategy
Operations
Governance structure
Procedures
Human dynamics
Organizational culture
Attitudes and motivations
Leadership
Human dynamics
Organizational culture
Attitudes and motivations
Leadership
Strategy
Operations
Governance structure
Procedures
Apart from the formal aspects of governance,
which must be commensurate with size and the
organisational model (which in turn must be
built in keeping with the business project), there
is a generalised need at present for a change in
mindset and attitude which should start at the top
of organisations. Organisations are receptive to
informal aspects which have a strong impact on the
motivation, commitment and attitudes of personnel.
This receptiveness is all the greater when the influence
comes from the top down, which means the change
has to start at the apex of the pyramid that legitimises
the power structure governing the organisation.
Operations
Guided by appropriate governance, efficient and
aligned with strategic objectives as well as with the
economic situation and the specific features of the
organisation, operations are the basic instrument for
the implementation of strategic decisions and the
achievement of short and medium-term goals.

In the crisis we have just experienced business efforts
have focused on streamlining costs, although in many
cases this has been taken to the extreme. Many
companies have “thinned down” to commit the
least “muscle mass” required to face the future with
reasonable assurance. Cutting costs was the “easiest”
way to achieve a balance in hard-hit income statements
(and in some cases was too late or implemented with
insufficient energy).
Nonetheless, once cost cutting has reached its limits it
becomes important to turn attention to operations that
need to start generating earnings as soon as possible to
help balance the income statement on the revenue side.
This will ideally be accompanied by a search for growth
that makes it possible to negotiate the turning point and
face the future with greater optimism.
Smart management of operations that bring revenue
into the company is always necessary, but it is especially
important in the current circumstances if we are
convinced that opportunities to develop business which
had faded away in recent years will start to come back
into view sooner rather than later.
Hence it is essential to revamp the way in which
marketing and sales have been managed so far.
Pricing has become a critical tool for even having the
chance of turning any potential sale into a reality.
Identifying potential customers and how to reach them
and get our message across will also be different from
now on. The way we market our products and services
in this sector also calls for a wide-ranging review so as to
adequately assess the new realities which we face from
the standpoint of demand as well as the rearrangement
of supply and the restructuring of sales channels.

In spite of some gloomy expectations anchored
in forecasting inertia and the herd behaviour of
industry players, analysis based on the evolution of
the main indicators for the residential market in Spain
(transactions, stock and prices) shows that the crisis
in the sector has bottomed out. We would therefore
hope that the recovery that is beginning to be seen in
many regions will become consolidated and pick up
speed across the country.
This analysis of the property market forms the overall
framework for the sector, but in order to come to
the right conclusions about a particular product,
analysis must be carried out in conjunction with an
examination of its particular location and using the
appropriate zoom level.
Given the heterogeneity of the stock that has been
built up in some areas and the varying rates at which
demand changes in them, the rate of absorption will
be uneven. This situation will generate immediate
opportunities for property development in some
areas. By contrast other areas will take many years to
absorb surplus stock.
The market is changing and its actors are adapting to
achieve success in the new situation. Both supply and
demand need to change their ways because the playing
field and the players are changing.
Owners and managers of property and similar
companies have tools available for anticipating the
foreseeable evolution of the market and opening
windows of opportunity that afford competitive
advantage.
The first of these tools is to understand objectively
the current market situation and its probable
development, not so much to try to influence it but
rather to act accordingly. This is the foundation for
building a successful business strategy that ensures
continuity and growth in the medium and long
term. Mapping out this strategy calls for bringing on
board the highest possible concentration of specific
knowledge, intelligence and common sense.
Proper foresight and good strategic design are
necessary but not sufficient conditions; it is also vital
efficiently to turn ideas into action. To do that it is
essential to plan actions to be implemented, not only
by assigning the required timescale, resources and
responsibilities but also by providing the organisation
with an appropriate operational system. The goals,
development and composition of the different organs
of corporate and operational governance need
to constantly adapt to the situation and operate
efficiently.
Also highly significant are less explicit and obvious
factors concerning human dynamics that determine
staff attitudes and motivation. The change in attitude
must start at the top of the organisational pyramid and
“spread by gravity” across the rest of the organisation,
legitimising and driving the change of course.
Operations are critical to the outcome in the short to
medium term and to turning strategy into a reality that
is aligned with it. Over recent years cost restructuring
has been inevitable and widespread, although in some
cases it has either come too late or gone much further
than would be recommended. It is now time to start
up a business rehabilitation process which involves
getting back the fitness required to take part in the
“long-distance race” that has to be run. Revenue
generating operations will regain their lost relevance
but must nonetheless be redesigned to meet the
challenges of the new market. This process calls for
thinking ahead, and so it is now time to start focussing
our efforts on this goal.
FINAL CONCLUSIONS

Si tiene interés en ampliar o personalizar el contenido
de este informe o desea recibir actualizaciones del
mismo no dude en contactar con nosotros:
Beagle Consulting
www.beagleconsulting.com
informeinmobiliario@beagleconsulting.com
Tel. (+34) 935 535 656
Rambla de Catalunya, 18, 1º C
08007 Barcelona (España)
If you would like to expand or customise the content
of this report or want to receive updates to it, please
do not hesitate to contact us:
Beagle Consulting
www.beagleconsulting.com
informeinmobiliario@beagleconsulting.com
Tel. (+34) 935 535 656
Rambla de Catalunya, 18, 1º C
08007 Barcelona (Spain)

Fundada en el año 2001, Beagle Consulting es
una consultora de negocio que presta servicios
profesionales a empresas y a la administración pública.
Su actividad se centra en tres ámbitos: en el diseño e
implantación de estrategias corporativas y de negocio,
gobierno corporativo y marketing.
Las valoraciones y conclusiones que exponemos en
este estudio son fruto del análisis objetivo y riguroso
llevado a cabo por un equipo de consultores de
Beagle con un alto grado de especialización en
el sector inmobiliario y que combina una amplia
experiencia profesional tanto en compañías del sector
como en proyectos de consultoría y análisis para éstas.
Founded in 2001, Beagle Consulting is a business
consultancy firm that delivers professional services to
companies and government. It specialises in three areas:
design and implementation of corporate and business
strategies, corporate governance and marketing.
The assessments and conclusions we present in this
report are the result of objective and thorough analysis
conducted by a highly specialised group of Beagle
property consultants who have extensive professional
experience in sector companies and in consultancy work
and analysis for these firms.

Residential property market in Spain: COORDINATES AND COURSE

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