Spain | Building housing: a risk with little return

Summary

Spain needs more housing, but investment in the sector is not taking off, largely because it is not profitable; even though margins have recovered, developers face years-long construction timelines, keeping assets (land) on their balance sheets without generating revenue.

Key points

• Key points:
• Demand remains strong; however, supply is growing slowly, and unmet demand over the past five years is estimated to exceed 600,000 units.
• Between 2000 and 2006, construction was one of the sectors with the highest returns on equity (RoE). However, since the real estate bubble burst, it became the worst performer.
• Current profitability is still low compared with both historical levels and other sectors in Spain, as well as compared with construction companies in neighboring countries.
• The gap in profitability compared with other countries can be traced to low asset turnover and heavy reliance on equity financing rather than loans.
• The root cause of both gaps lies in the slow development process. In a capital-intensive sector, the immobility of land on balance sheets acts as a brake on investment.

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