Spanish Housing market
All good things come to an
end
Daniel Gandoy Lopez
Research Analyst
(34) 91782 8445
daniel.gandoy@db.com
From "Living la vida loca" to "Reality bites": 0.4% real price fall in Q1 08
The housing boom in both prices and volumes that began in 1998 came to an end
in Q1 2008, with a 0.4% fall in real housing prices, a 30% fall in housing sales and
a 49% decline in housing starts. With the stabilisation in 2007 of fundamentals
that drove the last housing cycle and the side effects of the credit crunch
impacting housing developers and households, we believe Spain is poised to face
a severe adjustment to its future economic growth expectations, which is likely to
further exacerbate the housing sector recession.
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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Current Events
Top picks
ACS (ACS.MC),EUR36.91 Buy
Ferrovial (FER.MC),EUR49.05 Buy
Companies featured
ACS (ACS.MC),EUR36.91 Buy
2007A 2008E 2009E
DB EPS (EUR) 2.86 3.26 3.59
P/E (x) 15.1 11.3 10.3
EV/EBITA (x) 12.7 10.4 9.8
Ferrovial (FER.MC),EUR49.05 Buy
2007A 2008E 2009E
DB EPS (EUR) -0.24 -0.50 0.09
P/E (x) – – 554.8
EV/EBITA (x) 21.2 21.4 20.9
FCC (FCC.MC),EUR42.89 Sell
2007A 2008E 2009E
DB EPS (EUR) 3.00 3.09 3.13
P/E (x) 22.6 13.9 13.7
EV/EBITA (x) 13.2 11.3 11.1
Sacyr Vallehermoso (SVO.MC),EUR23.21 Hold
2007A 2008E 2009E
DB EPS (EUR) 3.27 2.31 2.34
P/E (x) 11.1 10.0 9.9
EV/EBITA (x) 21.7 15.6 15.7
Global Markets Research Company
Housing prices expected to decline 2-8% and housing starts 50% in 2008E
We maintain our expectation for a 2-8% decline in prices in 2008E, and now
forecast a 5-10% decline in both 2009 and 2010. The housing sector is facing a
recession that could be longer than that of 1992-1997, during which real housing
prices fell 22%. The key difference this time is the high level of housing
inventories, in excess of one million units. The significantly weak economic
prospects of the Spanish economy (already underperforming the Euro zone after
consistently beating it for 11 years) suggest the current challenge is a major one.
Macroeconomic indicators send concerning signals to the housing market
The unemployment rate increased from 8.6% to 9.6% during Q1 2008;
meanwhile, the Euribor is c.5.1%, leading affordability ratios to reach a level high
enough for concern (98% of mortgages in Spain are at variable rates). Demand has
dried up significantly as fundamentals that supported the bubble have come to an
abrupt end while the credit crunch and price fall expectations are further fueling
the downturn. We expect the return to equilibrium will take at least three years
(although in real terms prices could continue to fall for longer).
FCC is our Sell idea in the Spanish housing recession
With 22.5% of consolidated EBITDA (50% of cement activity, 60% of Realia, 12%
of construction) linked to the Spanish housing market, FCC’s future earnings
within this area are at risk. The lack of both visibility in 2008 earnings and guidance
provided by FCC suggests that current challenging market conditions could
potentially lead to an earnings disappointment. Moreover, the future evolution of
the housing market] falls outside of the control of FCC management and
subsequently, FCC’s business model and future earnings growth do not provide a
particularly appealing opportunity for equity investors in the current market
environment, in our opinion. We believe that the housing market’s negative
prospects are not yet priced into consensus earnings, given the expected 9% EPS
growth in 2008E.
Valuation using SOTP; risks include high interest rates and Euro strength
We value Spanish contractors with a SOTP methodology due to the diverse nature
of their activities. We use EV/EBITDA and P/E multiples to appraise all of them and
double check with a DCF. For minority investments, we use P/B values. Key risks
affecting the industry are a hike in interest rates, a slowdown in the Spanish
housing market and/or the non residential market, and the strength of the Euro.

Table of Contents
Investment thesis ......................................................................................................3
The Spanish housing market has already landed ..................................................4
Spanish housing: running the numbers..................................................................8
DB forecasts for housing.........................................................................................12
Spain’s economy and the housing market slowdown........................................13
Excess supply...........................................................................................................18
Affordability .............................................................................................................21
The latest housing cycle vs. the previous one......................................................24
Key reasons behind the housing boom.................................................................27
Eventual impact on stocks......................................................................................39
Spanish contractors ................................................................................................42
ACS............................................................................................................................44
FCC............................................................................................................................46
Ferrovial....................................................................................................................48
Sacyr Vallehermoso ................................................................................................50
Running the numbers..............................................................................................52
Appendix A: Spanish housing market at a glance ...............................................57
Appendix B: Research evidence of housing prices overvaluation .....................60
Appendix C: The Spanish government’s plan to counter the economic
slowdown.................................................................................................................61

Investment thesis
Outlook
􀂄 Spanish housing prices contracted in real terms in Q1 2008 (0.4% yoy) for the first time
since 1997. This decrease follows accumulated nominal housing inflation of 197% over
the last 11 years. Although the housing market has been showing signs of weakness in
the last three to four quarters (and the rate of housing price inflation has been
decelerating for years), in Q1 2008 all indicators confirmed the severity of the
adjustment, with a 49% decline in housing starts, a 30% decline in housing sales, and a
30% decline in new mortgages. The adjustment in housing prices is likely to continue for
the next three years. We expect nominal house prices to contract in 2008, with the pace
of price decline increasing in 2009-2010 and then in 2011. Overall, we envisage a fall of
around 20% in nominal house prices from 2008 to 2011E. This would imply a correction
in prices in the order of 35% in real terms.
􀂄 In quantitative terms, we think the sector is likely to suffer for a substantial amount of
time (possibly for longer than the previous 1992-1997 adjustment period) due to the
stickiness of house prices and especially the size of housing inventories, which we
estimate at over one million houses. The supply of new housing has been slow to adjust
to the new scenario. Housing completions scheduled for 2008 -- which had been initiated
during the last two years -- are adding to the housing stock at a time when house sales
(transactions) are collapsing. Expectations of further declines in prices as well as the
deterioration of affordability ratios due to the new financial conditions have left demand
for housing at a virtual standstill.
􀂄 Spain’s Q1 2008 GDP release confirmed the negative impact of the recession on the
residential housing market on the economy, with GDP expanding at a rate significantly
below that of the Eurozone for the first time in more than ten years (by a mere 0.3% vs.
0.8% qoq). Investment in housing and private consumption suffered significantly. On the
supply side, employment in construction contracted by 2.6% qoq in Q1, affecting total
employment which also contracted, albeit by a milder 0.1% qoq.
􀂄 Based on the current housing scenario and the forecasts described above, we
recommend playing the slowdown of the Spanish housing market via FCC.
Valuation
We use a sum-of-the-parts methodology to value Spanish contractors, given the diverse
nature of the businesses in which they are present. We apply market multiples (either P/E or
EV/EBITDA) that we double check with a DCF methodology, market value for Iisted
companies [and P/B values when appraising businesses like toll roads where they are
minority investments and we do not have enough information for a DCF. We maintain our
recommendations and TPs with the exception of Sacyr Vallehermoso where we raise our TP
to EUR 23.5 from EUR 20.5 due to the mark to market pricing of Repsol, debt adjustments
after the sale of Eiffage and the fine tuning of Itinere: (1) Buy, Euro 45.0 TP for ACS, (2) Buy,
Euro 60 TP for Ferrovial, (3) Hold, Euro 23.5 TP, for Sacyr Vallehermoso, and (4) Sell, Euro
42.0 TP for FCC.
Risks
There are a number of generic risks affecting all Spanish construction companies including:
(1) sharper-than-expected deceleration in the Spanish housing market and/or a very sharp
decrease in interest rates (which would affect the investments in toll roads that trade on a
inverse trend to long-term interest rates, further exacerbating the housing recession and
increasing financing costs); (2) sharper-than-expected deceleration in Spanish non-residential
construction due to weaker economic perspectives and the credit crunch; and (3) a lowerthan-
expected contribution from government tendering of new construction projects (due to
a tighter budget during any significant economic slowdown).