Friday, Dec 14, 2007

By Jonathan House 


   Of DOW JONES NEWSWIRES

MADRID (Dow Jones)--Merger talks announced Friday between the French unit of Metrovacesa SA (MVC.MC) and Inmobiliaria Colonial SA (COL.MC), two of Spain's largest home builders, show how the country's once flourishing real-estate sector is consolidating after a decade-long boom.

Spanish housing prices have more than doubled since 1997 and Spain last year built more homes than France, Germany and the U.K. combined, setting the sector, as well as the wider economy, up for a potentially hard fall.

Construction activity accounts for around 18% of Spanish economic output and tight credit conditions resulting from the meltdown of the U.S. subprime lending market are putting further strain on heavily indebted Spanish companies already feeling the pressure from rising euro-zone rates.

"There is going to be a sharp decline in house prices and sales... a lot of small- and mid-sized (real-estate) companies are going to disappear," Manuel Romera, head of the finance department at Madrid's Instituto de Empresa business school.

For Barcelona-based Colonial, Spain's second largest real-estate company by assets, a merger with Metrovacesa's unit Gecina (1004086.FR) would help it lower a soaring debt ratio of 77% of assets, one of the highest in the Spanish sector.

In September, the company was forced by the lenders to renegotiate the terms of a EUR6.41 billion loan from Royal Bank of Scotland PLC (RBS.LN), Calyon, Eurohypo AG (EHY.XE) and Goldman Sachs Group (GS). Colonial said the loan's new average cost was 69 basis points higher than what it had initially agreed with the banks.

Earlier this week, Colonial sold a series of the Madrid and Barcelona properties for EUR150 million as part of a series of asset disposals to help it meet its debt obligations.

For Gecina, a tie up with Colonial would offer a way around a French regulatory ruling Thursday that threatens to spoil Metrovacesa's plan to spin off Gecina as a separate company controlled by Joaquin Rivero, Metrovacesa chairman and shareholder, and Metrovacesa shareholder Bautista Soler.

France's stock market regulator Autorite des marches financiers said Rivero and Soler would have more than 33% of new company, and as a result, would have to launch a bid for 100% of the company, a move they would likely find hard to finance.

"A merger with Colonial would dilute Soler and Rivero's stakes" and relieve them of the obligation of launching a takeover bid, said one person close to the negotiations between the two companies.

Still, financing problems are growing throughout the Spanish construction sector as activity levels slow.

Prices for existing homes in Madrid, Barcelona and Valencia fell slightly in third quarter from the second, according to information from online real-estate portal Idealist.com, as demand cooled in the face of tighter lending conditions for Spaniards already grappling with household debt levels of over 120% of disposable income.

At a meeting with journalists earlier this week, Pedro Perez, head of the G-14 association of Spain's largest construction and real-estate companies, said he expects 490,000 new homes should be sold in 2007, down from 600,000 in 2006.

The Bank of Spain's September lending survey found that, as a result of the sharp spike in interbank financing of recent months and an increasingly pessimistic outlook for Spanish real-estate sector, banks are tightening their mortgage lending standards. They are charging higher interest and requiring more guarantees for loans to both individuals and to home builders.

"Our lifeblood is the financing we receive and it has become more difficult to access credit, especially in the past six months...the banks are more selective about financing now," Perez said.

In this context, fears of an extended liquidity crunch have spread in the heavily indebted real estate sector, and hurt the share prices of top industry players like Sacyr-Vallehermoso SA (SYV.MC) - down 35% so far this year - and Colonial itself, down 33%. They are the two worst performers of the year in Spain's benchmark index IBEX-35.

Just hours after Colonial announced its talks with Metrovacesa's unit, a person close to troubled Spanish property firm Astroc Mediterraneo SA (AST.MC) said his company would unveil later Friday the terms for a previously announced three-way merger with the property development unit of Grupo Rayet SA and rival Landscape SA.

This deal, first announced in June, would create Spain's fifth-largest real-estate developer by assets.

-By Jonathan House, Dow Jones Newswires; +34-91-3958121; jonathan.house@dowjones.com

(Christopher Bjork and David Roman contributed to this report)

(END) Dow Jones Newswires

14-12-07 1700GMT