Spanish property stocks slump

Spain's overpriced property stock market came crashing down yesterday, with panic selling of real estate stocks signalling the end of a 10-year-old construction boom.

The sell-off dragged down related industries such as construction and banking and caused a 2.7 per cent drop in the Ibex 35 index of leading shares. The fall also rippled through other European markets as investors worried about its knock-on effects.

Investors got the jitters after Astroc, a Valencia developer, went into freefall last week when its audited accounts revealed that some of last year's profits came from the sale of Astroc assets to its chairman, Enrique Banuelos.

Astroc's shares have fallen by 70 per cent in a week. Astroc had been the darling of the stock market, rising by 1,000 per cent after its listing last May.

Meanwhile, the heavy debt load of some real estate groups and worries about oversupply - with 800,000 new housing starts approved for this year, compared with an estimated demand for 600,000 - also contributed to the sell-off, traders said.

The sector has also lost its shine as a result of several corruption scandals linked to property deals. In Marbella, many municipal counsellors are in jail awaiting trial for taking kickbacks on real estate deals. Valencia's "land-grab" law, which allows local councils to expropriate private land for urban development, is being challenged by the European Commission. The Spanish government has promised tighter regulation and a crackdown on municipal corruption.

The top five real estate groups - Colonial, Metrovacesa, Fadesa, Urbis and Inmocaral - rose by 132 per cent last year. During the boom, the sector attracted some of Spain's richest entrepreneurs, such as Amancio Ortega, chairman of the Inditex fashion empire.

"The real estate bubble has not burst. It is the inflated valuations of some real estate companies that has been pricked," says Natalia Aguirre, head analyst at Renta 4, a Spanish broker. "The sector was trading at a 20 per cent premium to its net asset value. This was not sustainable," she said.

Luis Portillo, chairman of Inmocarral, a property management company that lost 14 per cent of its stock market value yesterday, said he was unaffected by the fall. "The share sell-off won't affect the fundamentals of our business." Inmocarral's share price rose 374 per cent last year.

Maria Trujillo, Spain's housing minister, yesterday said the market was heading for a soft landing, rather than a crash. House prices rose 7 per cent in the first quarter, their lowest increase in eight years. But in many parts of Spain, prices are falling.