Catalexit crisis is here to stay

Real estate market players investing in Spain through equity or debt should be aware that the struggle over Catalonian independence is not a minor setback.

Catalonia’s quest for independence creates an unwanted situation for real estate investors with exposure in the region, particularly in the office segment which is set to be the most affected if political tensions between Madrid and Barcelona keep escalating.

Just as several property lenders have turned their attention back to Spain, the situation warrants careful assessment.

Some investors dismiss the possibility of a noticeable impact in real estate in the near future, claiming that common sense will eventually prevail in the conflict. Identity, however, seems to be favoured over economic stability by the independence-minded Catalans currently ruling the region.

Many Catalans have long-thought of themselves as a separate nation from the rest of Spain and the separatist dream has been growing over the last 10 years – partly fuelled by austerity measures following the financial crisis. The loss of faith in the central government, unwilling to negotiate any further powers for Catalonia – which represents around 20 percent of Spain’s GDP – has also helped the independence cause.

If Madrid invokes Article 155 to bring Catalonia’s pro-independence government to heel – which is expected to happen on Saturday – tensions will only be increased.

Against this backdrop, some investors have delayed property investment decisions in Catalonia. Those with ongoing transactions “are nervous”, as they worry what might happen if the region becomes independent, market players told Real Estate Capital.

More than 800 companies have already decided to move their headquarters’ addresses outside Catalonia in recent days, among them banks Sabadell and Caixabank. The exodus is a sign of the concern in the corporate world and, in the short term, office investors with exposure to Barcelona may see occupancy rates and asset valuations come under pressure.

Some argue that political uncertainty will not massively hit real estate fundamentals, particularly in a city like Barcelona, with office vacancy rates decreasing and a well-diversified tenant base, including international firms.

The optimists may be being complacent, however. According to Dutch bank ING, the independence of Catalonia would plunge the region into a long period of uncertainty, with impacts on the economy that could “proportionally exceed” those of Brexit.

If Catalexit materialises, the newly created state would not only be ejected from the EU, it also risks losing the euro. With a new and most probably weaker currency, an independent Catalonia could impose capital controls to prevent the prospect of bank runs, potentially scaring off international investors, among them real estate players facing the added obstacle of the illiquid nature of property investments.

Spanish economy minister Luis de Guindos recently said Catalonia’s economy could shrink as much as 30 percent and unemployment double if it gains independence. This is disputed by the regional government, but the concerns are obvious.

Catalonia’s split from Spain might seem unfeasible now, but so once was the possibility of a referendum on independence. Real estate investors and lenders should not misjudge the consequences of a bad marriage between Madrid and Barcelona.

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