Promociones y Propiedades Inmobiliarias Espacio, S.L. and Subsidiaries
Promociones y Propiedades Inmobiliarias Espacio, S.L. (Priesa), established in 2000 and a 100% subsidiary of Grupo Villar Mir, focuses either directly or through its subsidiaries on all of the Group's real estate activity, which ranges from land management to housing development.
Grupo Villa Mir's real estate activity throughout the 2011 financial period was inevitably affected by the financial and economic situation that continues to severely punish many economies, and in particular those of the Euro Zone's peripheral countries. In a historically complicated situation, in which all sectors are affected to a greater or lesser extent, the real estate sector is experiencing the effects of the crisis the most, even though it is true that the market must correct the errors made during the boom years and a resizing thereof was completely necessary.
However, there are some data that are a cause for optimism. The slow recovery, yet recovery nonetheless, of the Central and Northern European economies could be viewed as the reactivation of the market of Spanish second homes purchased by foreigners.
The reasons that real estate activity is experiencing this complicated situation are common knowledge and repeating them here is not necessary, but after the boom years, with high growth and employment creation rates, low interest rates and easy access to credit, there is almost a complete restriction thereupon nowadays. Many financial institutions' payment default rates are unmanageable and the unemployment rate, around 25%, clearly exacerbates the solvency of the demand.
With this is mind, the housing stock in the hands of the banks is of particular importance, and the little money that is designated for mortgages is reserved, logically, to finance the operations that remove real estate assets from their balance sheets.
Furthermore, and as a consequence of the increasingly demanding provisions, the prices at which financial institutions are selling their stock have continued to fall, even below their cost price, which only serves to create uncertainty about future price trends. In fact, according to market analysts, in an attempt to reduce the stock that appears on their accounts as unpaid assets, such institutions are applying price reductions of up to 50% on the development's initial prices.
This policy affects not only the financial sector, but it has also, inevitably, a knock-on effect on the market as a whole, with a demand that expects the developers to apply similar discounts, which delays purchasing decisions being taken as buyers are waiting for even better deals.
Based on these premises, our analysis by subsector is as follows:
- First homes in prime areas are the ones least affected by the price adjustment, with drops at around 30%, with demand showing some activity and a limited supply that requires less financing.
- The price adjustment was much more aggressive in the private average-range first-home segment, where there is a large supply of finished properties resulting from large-scale housing developments built during the real estate boom; in this case, price cuts reach 40% on average.
- The second-home sector is, without a doubt, the most sharply affected one. Price drops ranging from 30% to 50%, depending on the quality and location of the properties. The decline in the English market due to the negative exchange rate between the Pound and the Euro has also had a strong negative impact on the halt in demand for second homes, although a slight recovery in other markets, such as the Russian and German markets, has been detected in recent months.
- Conversely, investment in the social housing market, which at this time is in limited supply and at prices that are logically more accessible, must be increased over subsequent financial periods, although, once again, the lack of financing that we have already touched upon is causing a tremendous slow-down in launching these projects.
In this regard,
investment in new real estate projects has practically stopped, which logically contributes to existing stock being absorbed, and in the future it will contribute to the sector adapting to its ideal size, which we estimate to be an annual construction rate of 250,000 housing units for the next five years.
As to the
finished housing stock levels, at the end of the financial period, we place it at around 670,000 units, even though approximately 30% of them are probably off the market, either due to their poor location (far away from urban centres) or their poor design and quality (infrahousing).
Regarding the
assessment of the current financial year, all financial indicators continue to be extremely negative, with an ever-increasing unemployment rate, which according to some opinions may reach the dramatic figure of six million unemployed workers, a figure that translates into a greater reduction in the solvency of potential demand for the real estate sector. Another factor to take into consideration is that in Spain, and compared to other countries in the region, in particular Northern European countries, the emancipation age is a lot higher, which also affects demand for our housing.
In this complex context, we expect
domestic demand over the coming years to be a stable 250,000 homes/year, including foreign demand for second homes.
It is, therefore, not surprising that the division's
total revenue figure reached € 62.2 million as opposed to the € 110 million of revenue last year. We must highlight that income from renting offices in Torre Espacio has neither increased nor decreased.
As to new projects, we have continued with the policy we initiated in previous financial periods of not making new investments unless they are made on land and with some form of protection:
We must highlight:
- Halting geographic expansion, focusing on carrying out the zoning procedures for the land owned by our different PRIESA offices.
- Leveraging marketing actions to sell the finished developments, while trying to preserve most of the returns in initial forecasts.
- Continuing to focus on the public housing sector. At year-end, PRIESA was developing and marketing more than 266 homes under some kind of public housing scheme developed through associate companies such as Espacio Joven Hogares, S.L. (held by Caja Madrid and ECISA).
This company developed units from the “Vivienda Joven con Opción a Compra” (youth housing for lease with the option to buy) programme in Móstoles (Madrid), another 139 units in Alcorcón and 27 units in Campo Real, also in the Region of Madrid.
“Espacio Valdebebas del Mediterráneo” (held by Caja de Ahorros del Mediterráneo) has a real estate portfolio of 565 public housing units in Valladolid, of which, the first phase of 60 units is under construction and completely sold out, and we are currently launching the second phase, of 96 units.
Due to the general depreciation of real estate assets,
PRIESA decided to adjust the value of all its land and properties and real estate associates to the current market value, in accordance with assessments by independent experts. This new assessment, which has affected the land acquired during the 2005 and 2007 financial years the most, has made the value of the Group's inventories drop to EUR 250 million. However, the selective investment policy implemented by PRIESA
has meant that there are still unrealised gains, which at 2011 year-end came to a total of € 36 million.
Grupo Villar Mir supports the real estate sector and is a firm believer in the recovery thereof, and therefore continues to strengthen PRIESA's balance sheet, as it has done since 2008, when it increased its capital to € 52 million. Its capital was once again increased in 2011, to € 150 million, and before the aforementioned difficulty of entering the credit market for real estate projects, the Group has provided the financing required for the implementation of the Division's activities, which has permitted Grupo PRIESA to reduce its bank debt by EUR 80 million, 18% less than the bank debt before the crisis. de la crisis.
Group Companies and associates as at 31 December, 2011
Pursuant to the International Financial Reporting Standards (IFRS), PRIESA’s revenues in 2011 amounted to € 36 million, compared to 84 million recorded in the previous period, representing a 57% decrease. In terms of sales made when the private agreement was signed, prior to delivery, a total of € 30.6 million was attained, compared to € 39.5 million in 2010.
EBIT amounted to a loss of € 6.7 million, representing a loss after tax of € 12.6 million, representing negative returns of 34.9% on the revenue figure and -7.5 of average shareholders' equity for the period.
In turn, at 31 December 2011, the sum for formalised purchase and sale agreements pending delivery of the dwellings came to EUR 31 million, with an estimated 10% margin. As in every period, these contracts will be taken to sales as the developments are concluded and delivered.
At year-end, PRIESA finished 21 developments and has 3 in progress, for a total sum of 680 dwellings and 78,986 gross m² with a carrying amount of EUR 166 million. Moreover, the company has continued working as a property developer in several industrial areas in the Region of Valencia, Castilla-La Mancha and Castilla-Leon.
The portfolio of land ready for zoning at 31 December 2011 was 776.000 m2 / gross floor area, including subsidiaries.
Forecasts
Priesa will maintain its current policy while it remains difficult to obtain credit to access the real estate market and while existing stock is absorbed and supply and demand are brought into line.
- Refraining from purchasing any additional land, except for land for public housing, using highly selective location criteria and with guarantees regarding sales and financing.
- No launching of new developments until demand has recovered, except for public housing developments. Continuing to manage developments belonging to banks.
- Speeding up the management of zoning procedures on the land in our portfolio so that once this situation is behind us, we have a high-quality stock of land ready for building.
- Maximum restraint in spending.
Torre Espacio Castellana, S.A.
Grupo Villar Mir's assets management activities are focused on the Torre Espacio office building, located in Madrid, at Paseo de la Castellana.
The office rental market has shown a very similar performance to the housing market, with investments being halted, waiting for prices to change. The office vacancy rate has increased in Spain, and specifically in Madrid, where this rate has risen to 11.4% of the total stock. However, in the Central Business District (CBD), availability has fallen slightly, from 93,600 m2 available in 2010 to 82,300 m2 at the end of 2012, with a total vacancy rate of 10.4%. Total gross absorption at the end of the year was 356,583 m2.
In a tenant-friendly environment, prices continue to be renegotiated and possible location changes are being assessed, often seeking better locations and building quality at the same cost. Not all areas are equally affected, with areas on the city outskirts experiencing greater drops in rent and higher vacancy rates, whereas in the CBD district, the vacancy rates are much lower and rent reductions much less drastic.
At any rate, Torre Espacio has been positioned as the best office buildings in Madrid and in the heart of the CBD, placing it in a privileged position when attracting new tenants.
Torre Espacio has a total area of 60,142 m² available for rent and 1,173 parking spaces. Approximately 52% of this area is occupied by Grupo Villar Mir companies.
At 31 December 2011, the occupancy rate came to 82%, which reached 84% during the current financial period, and all tenants are first-rate tenants, four of them being embassies, two of which belong to two of the G8 countries (United Kingdom and Canada), and the other two are diplomatic delegations from relevant countries (the Netherlands and Australia).
Once the building is completely occupied at current prices, it will generate annual revenues of approximately € 28 million. The tower offers a wide range of services, such as several categories of restaurants, a gym, rooms for rent equipped with the latest technologies, a car wash service, physiotherapy services and a beauty salon, to name a few, making it unique in its market niche.