• Pain arrives in Spain

The economic slowdown pain arrived in Spain in force this week with the collapse of Martinsa-Fadesa, one of that country's largest property groups and a builder of hotels, homes and shopping centres.

The company filed for protection from creditors, admitting debts of Eu5.4bn and forcing Spanish banks to make initial provisions of over Eu500m for write-offs.

Fingers have quickly pointed to the heavily-leveraged takeover of Fadesa by Martinsa last year as a key cause of the company's current problems. But the economic slump is thought likely to bring down other property groups of an equivalent size in Spain. Already, more than 60 smaller, privately held, companies have gone to the wall.

The main business activity of Martinsa-Fadesa is centred on creating residential developments which usually include hotels and golf courses. It has a land bank of 27.5 million sq m, 58% of which is in Spain and the rest in countries such as France, Bulgaria, Morocco and Mexico.

The land bank has a book value of Eu6.6bn but would sell for much less than this given the current meltdown in the Spanish residential market and widespread weakness elsewhere.

The collapse of the company sparked a sell-off on the Madrid stock exchange and it is widely expected that the failure will not be the only one among major developers.

While Spanish banks had largely escaped the sub-prime problems that have afflicted other European financial institutions, they are significantly exposed to what is seen as potentially the weakest European housing market.

The problem for Spain is that it has not only seen a huge price bubble in residential property – a problem it shares with other countries such as the UK and Ireland – but there is also a significant supply overhang.

A prolonged slump and significant price drops are forecast for residential property. Consensus estimates are in the range of a quarter to a third fall in values with no recovery until 2011 at the earliest.

The hotel business of Martinsa-Fadesa is comparatively small with just two hotels operating and generating income of Eu57m in 2007. But it has seven hotels under construction and land for 57 more. At the end of last year it sold a group of hotels to Barcelo for Eu147m.

A hotel company that may be indirectly affected by the current issues in the Spanish property market is NH Hoteles. Spanish savings banks currently hold 30% of its shares and if the banks' liquidity positions worsen significantly, a sale of this stake could be pursued, effectively putting the company into play.

The most recent numbers from NH, for the first five months of 2008, showed like-for-like revpar up 3.0%. EBITDA was up 14.4% and consolidated net income was up 6.6% to Eu25.3m.

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