Spanish debt is very nearly in the toilet, obviously this is true metaphorically in more ways than one, but now it is true literally as well. Ratings agency Standard and Poors have just downgraded Spanish bonds by two notches to BBB-, which is now just 1 notch above junk-debt ratings – Spanish bonds are hanging over the toilet with one foot in the grave.
But surprisingly the downgrade had next to no effect on the value of the Euro. The normal reason brought out and touted around to explain anomalies like this is that the markets have already adjusted for what is agreeably an almost inevitable downgrade. But in this case it can be expanded; the markets have been treating Spanish debt as junk on and off for ages now, so this is just the ratings agencies catching up, and so yes, the markets have already adjusted for downgrades.
However, there is another argument here. Some analysts say that many in the markets believe the Euro being saved is a foregone conclusion, and that they drive up bond prices a: to teach markets like Spain a lesson and make them act more decisively to bring things back to normality, as this crisis is affecting investments the world over, and b: because it serves another purpose of making them more money on the bonds. It is true that, while the prices of Spanish debt may rise in favour of the investor, it never has any trouble finding buyers, suggesting that investors ultimately do have faith that Spain will continue to be able to pay its debts.
Property investors can certainly benefit from acting in the same faith, indeed they have more reason to. Let me explain: if Spain leaves the euro and/or defaults on some or all of its debts, bonds investors have a nightmare on their hands, either their debt will be renegotiated into the new Spanish currency (or old as the case would likely be), or they leave with nothing as Anne Robinson would say.
However, in the same instance a property investor is always going to have the bricks and mortar property, which will always tend to grow in value over the long run, and stands very little chance of devaluing to a new currency if the investor chooses wisely. Not to mention rental income in Spain which continues to be one of the top tourist destinations in the world.
Spanish property is currently available at discounts of up to 60% and with mortgages of up to 100%. If an investor buys with a mortgage in euros, the value of his property may fall, but so would the value he owes the Spanish bank. Sure, it is far from ideal investing where there could be a major change in currency values in the near future, but is that uncertainty enough to make us miss out on a great investment opportunity?
Increasing reports of rising sales seem to suggest not. The latest report is that sales of new homes increased by 7% year-on-year in August according to official figures. This comes after figures from the Ministry of Development showed a 12% increase year on year in the number of foreign buyers in Q2. According to the data more homes were sold to foreigners in Q2 2012 than has been since 2008.
Liam Bailey is a UK based property expert, he follows the situation in Spain closely, including the bargains to be found in Polaris World resorts including the Mar Menor resort development, a gated community that offers a residential feel with many full time occupants and featuring an 18-hole golf course.
- Tuesday 16 October 2012