Spain's men of straw

For more than a decade, Spain's property sector enjoyed rapid growth at home and overseas. Companies such as Fedesa, Martinsa, Colonial, Riofisa and Astroc even became major players for a few years in the United States, Latin America and Eastern Europe, thanks to their almost unlimited access to credit and the know-how acquired in their domestic market.

Real estate developers gobbled up other companies that, in some cases, generated higher revenues than the companies that bought them. The developers bought land at record prices and planned projects for thousands of housing units. They managed more than a million square meters of offices under construction and created the largest shopping centers in Europe.

The real estate market collapsed, with demand going into free-fall

"How can I tell my wife that she can't use the plane to go shopping in Milan?"

"Easy access to loans along with soaring prices made a lot of people very rich"

But it wasn't to last. Spain's real estate market collapsed in 2007, with demand for housing and office rental going into free-fall. This has left more than a million new housing units still unsold, and a 50-percent drop in the prices for real estate leases.

The first leak from the property bubble came hissing out on Tuesday, April 24, 2007, when real estate firm Astroc shed 37 percent of its share value on the Madrid Stock Exchange. As panic spread throughout the sector on the news that day, the Bank of Spain's governor, Miguel Ángel Fernández Ordóñez, desperately sought to play down events, describing the situation to the media in terms of "a smooth and gradual slowdown in the property sector."

Astroc was not the biggest real estate company in Spain, but it had become a symbol of the boom that it had been born into. Outwardly it appeared to be an efficient, modern company run by a dynamic and youthful businessman, Enrique Bañuelos. An outsider, who played up to his role as an upstart, he nevertheless had something that many of his rivals from the country's longer-established companies lacked: aside from his easy manner, energy and enthusiasm, he gave the impression of being outward-looking, forward-looking, comfortable speaking English, and comfortable in the glamorous world of New York high finance. Born in Valencia, he enjoyed trading on his Spanish origins: he had made a splash in New York by organizing paella for 25,000 people in Central Park. Confident and with an unnerving business sense, he liked to boast: "You could dump me naked in Central Park and in 24 hours I would be riding down Fifth Avenue in a limousine." Along his short but stratospheric rise in the property markets, Bañuelos managed to attract some of the biggest names in the Spanish business world to his projects, among them Inditex founder Amancio Ortega, the country's wealthiest man. But the ride was all over very quickly: within three months of Astroc's "correction," as the governor of the Bank of Spain had called it, Bañuelos resigned. His fall would be the first of many.

The men who controlled Spain's property boom during the first decade of this century - most of whom, like Bañuelos, had come from nowhere and had made fortunes speculating on land, building vast residential complexes on the outskirts of the country's towns and cities - had no option but to cover up their ears and believe the Bank of Spain, choosing to interpret April 24 as the markets' way of bringing Enrique Bañuelos into line. And so they continued buying and selling, getting deeper into debt, pressing on with ever-more ambitious projects that tied their fortunes in with those of the country's banks. "As long as the band kept playing, we had to keep dancing," says one casualty from the fallout.

Four-and-a-half years after the band packed up and went home, Spain's property tycoons have long since fled the ballroom. Some, like Enrique Bañuelos, have gone abroad in search of greener pastures. Others may face trial and possible prison terms for their sharp business practices. But all are keeping a very low profile. They no longer give interviews, they don't attend social events, they aren't invited to conferences on the property sector, and they no longer receive invitations to address students at business schools. Most are fighting to hold on to the money they made, and have long since sold the private jets and the luxury yachts. One lawyer says he remembers his client asking him: "How can I tell my wife that she can no longer use the plane to go shopping in Milan?"

But back to April 24. Astroc's collapse triggered a chain reaction, sending the Madrid bourse into a nosedive, shedding 63 percent of its worth within 10 days. Astroc's shares would continue plummeting in price from a historic high of 70 euros each to less than two euros.

The consensus is that Bañuelos was betrayed by one of his major shareholders. Somebody sold two million shares in Astroc at a sensitive moment, a move that set alarm bells ringing and sent investors running for the fire escape. There are plenty of theories about who the culprit was, but nobody has ever owned up and nothing has ever been proved. In hindsight, it is hardly surprising that somebody stuck the knife into Bañuelos: nobody gets to the top that quickly in real estate - or any business for that matter - without making a few enemies along the way. Spain's courts are still backlogged with lawsuits dating from the height of the property boom.

Luis del Rivero knows something about betrayal. He turned up at his office believing that his position as president of Sacyr Vallehermoso was secure, thanks to the recently concluded deal with Mexican oil giant Pemex, and that he could now focus on taking over Repsol. His partners, among them the man who had been his right hand and founder of the company, Manuel Manrique, were behind him. Or so he thought. At the last moment, Manrique changed his mind: he now has the top job. Betrayal? The full story has yet to emerge. Del Rivero's merit lay in having diversified his company before the change in the cycle kicked in: first he had a go at taking over BBVA bank, and when that failed, he set his sights on Repsol.

In contrast to the high-flying, sharp-suited Bañuelos, Luis del Rivero is more the what-you-see-is-what-you-get type of businessman, and is famous for his authoritarian approach and absence of communication skills. Few of his colleagues remember him with any affection. That said, for a while, he looked like the only one of his contemporaries to have survived the crisis, the man who would emerge a winner from the wreckage: the last man standing, still able to look the banks in the eye.

Between Bañuelos' betrayal and that of Luis del Rivero, the Spanish property sector has been through a four-and-a-half-year nightmare. The few big players who have survived have done so by selling short and getting out as quickly as they could: men like Manuel Jové, the former owner of Fadesa, who is now sitting pretty as a major shareholder at BBVA. Or Mario Losantos, the former owner of Riofisa. Those who stayed in the game have found themselves working for the banks that now own their companies.

Take Luis Portillo, for example. A year after Bañuelos fell from grace, he was forced to resign as president of Colonial, at the very moment when the company was entering the big league after a series of acquisitions that defied all logic. The little fish had become a big fish by taking on some enormously heavy debt.

Portillo is the classic self-made man, down to earth, and the son of a laborer who started out by refurbishing and repairing buildings, gravitating to the top by the sweat of his brow. Portillo's approach was typical of many property developers in his native Andalusia: where Bañuelos was an exponent of the Valencian school, which involved building residential complexes without owning the land, Portillo's success was based on working closely with municipal authorities to get land rezoned for construction.

Once he was established in Andalusia, Portillo began to look further afield. He became a familiar figure in the first class carriages on the high-speed AVE train from Seville to Madrid. In the capital he bought stakes in BBVA and Santander, consolidating his position before launching a bid for Metrovacesa. While he was at it, he also bought Inmocaral, which in turn gave him access to the top flight of players in Spain's financial world: Amancio Ortega, Alicia Koplowitz and Joaquín Rivero. After Inmocaral, he made a successful bid for the much bigger Colonial, as well as buying a 15-percent stake in FCC and purchasing Riofisa outright. In less than a year, up until that fateful Tuesday in April 2007, Luis Portillo spent four billion euros buying his way into the property world.

With his new-found wealth and power, Portillo underwent a transformation, shedding his image of the "hail fellow well met" Andalusian, throwing his money and weight around. First came the private jet, and then on one occasion, following an argument with the director of his daughters' private school, he bought the institution outright, and sacked the man in question. On another occasion, while staying in a hotel he informed the manager that he would buy the business outright and sack the entire staff. The episode, prompted by his dissatisfaction with the room service, played out in front of several witnesses.

But he was never able to carry out the threat: in December 2007, Luis Portillo resigned as president of Colonial. The company owed 10 billion euros. Its share price had fallen through the floor, and like Astroc in April of that year, it too was about to go belly up.

Juan José Brugera would take over Colonial, a post he had already occupied before Portillo had bought it. His fall and rise has an explanation: Colonial had belonged to savings bank La Caixa before private investors had entered the scene. Following Portillo's brief appearance, the banks are once again calling the shots at Colonial: Popular owns 9.15 percent, and La Caixa, 5.40 percent. And they have decided to reinstall the man they had previously appointed to manage the company.

Little has been heard of Luis Portillo since. He no longer travels to Madrid, and is kept busy in Seville, desperately trying to hold onto his fortune. Colonial meanwhile, has slapped a lawsuit on him, demanding 669 million euros in compensation for inflating the purchase price of FCC and Riofisa. Not to be outdone, Portillo is suing BBVA for 40 million euros. In one of the few statements he has made since resigning, he said he had been betrayed by the banks and his analysts: "The same people who are now suing me lent me the money to buy FCC and Riofisa."

Metrovacesa, once the country's biggest real estate company, has also been returned to the banks that originally controlled it. Between 2003 and 2007, Metrovacesa was at the center of a bitter fight between Joaquín Rivero and the Catalonia-based Sanahuja family. Both parties had their own companies, which were much smaller players than Metrovacesa. The Sanahujas initially came to Rivero's rescue, buying a four-percent stake in Metrovacesa to help him see off a bid by an Italian group. But behind his back, they gradually built up a 20-percent share in the company. In the end, Rivero was eased out and given Gecina, a French company, in compensation.

The Sanahuja family also underwent a transition, buying and renting jets to usher them back and forth between Madrid and Barcelona as they put together complex deals at home and abroad. They bought the former London headquarters of HSBC for 1.6 billion euros (later selling it for one billion euros), along with assets in Germany worth 280 million euros, and other property in London, while penning an agreement with Norman Foster to build an office block in the British capital. By the end of 2007, Metrovacesa had racked up debts to the tune of seven billion euros, 14 times the size of its gross operating margin.

On October 26, 2010, Román Sanahuja stepped down as president of Metrovacesa. Sacresa, the family business, went into receivership with debts of 1.8 billion. The family's share in Metrovacesa has now fallen to below two percent from a high of 80 percent. The company now belongs to the banks again.

"The problem can be summed up thus: easy access to loans along with soaring property prices made a lot of people suddenly very rich," says José Luis Suárez of the IESE business school. "A lot of mistakes were made. The first was that these companies grew too quickly. In 2006, bank loans to the property sector rose by 40 percent. The second mistake was that nobody realized how vulnerable these companies were, given their massive exposure to debt. And finally, when it hit, the crisis was handled badly. Loans to the property sector were around 430 billion euros when the bubble burst. More than four years later, that figure has only dropped to 415 billion euros. No action has been taken at the macroeconomic level. It has to be remembered that sovereign debt in Spanish banks stands at around 220 billion euros. The problem is that the sector cannot pay the money back because the annual interest alone is something like 20 billion euros, and there simply isn't the cash flow to cover it."

Some analysts say that the banks have nobody to blame but themselves for the mess they are now in. As well as providing limitless credit to property speculators, they were also in cahoots with the property valuers, many of which were actually owned by the banks themselves. Nobody wanted to accept that property prices were being artificially inflated, that the loans were getting riskier; in short, that the market had been turned upside down, with the little fish eating the big fish.

The banks' behavior has a simple explanation: while the bubble kept growing they were making huge profits from the property sector. Take the case of Banesto, now the owner of Urbis. Rafael Santamaría, who owned the much smaller Reyal, approached the bank for a loan to buy Urbis. Banesto obligingly provided the capital allowing him to buy 50.27 percent of Urbis, making 1.6 billion euros in the process. Urbis had signed a syndicated loan for four billion euros with SCH, Cajamadrid and Sabadell, saying that he would be making more purchases in 2007. An IPO was seen as the way for these men to consolidate their fortunes. Increase size and then diversify. But it never happened. Reyal Urbis is now on its third refinancing loan on a debt that has now risen to 3.654 billion euros, and has narrowly escaped being sold for scrap. The banks continue to decide its activities, noting in a recent statement that its turnover, now based solely on selling apartments, has fallen by 46 percent this year.

During the boom years, Rafael Santamaría was a man who like to talk to the media, waxing lyrical about where the market was heading (he was still talking about "a leveling out" of the market as it entered the China syndrome. A friend to politicians such as José Bono, the former defense minister and head of the regional government of Castilla-La Mancha, he was fond of leaking news to the press about the activities of his competitors, and publically boasted that he wasn't going to end up like Luis Nozaleda or Fernando Martín, who were declared bankrupt. His approach was to refinance his loans. He's on his third, and can't make a move without the say so of his bank.

Santamaría was also a friend of Francisco Hernando, known to his friends as "El Pocero," the well digger. El Pocero never made any bones about his humble origins, and enjoyed playing the role of the rough and ready villager who had made good through hard work. El Pocero will forever be remembered as the man who, after hearing a message from God, decided to build a vast residential complex on the outskirts of Seseña, a small town in Toledo. But the crisis kicked in before he could finish the project. Very few of the 13,000 apartments are occupied. It can be seen from miles away, a vast dark monolith hunched on the flatlands of La Mancha, still surrounded by cranes.

But the man who arguably best represents the excesses of the construction boom is Fernando Martín. In the limelight for two months when he took over as president of Real Madrid after Florentino Pérez had to stand down in early 2006, he paid four billion euros for property company Fadesa, creating Martinsa-Fadesa, which overnight became a major player. Two years later, Martín announced the largest bankruptcy in Spanish history: the company folded with a debt of 5.2 billion euros.

Fernando Martín hasn't given an interview for some time, and is reportedly suing the former owners of Fadesa for 1.5 billion euros for "having consciously sought to overestimate the value of the company through the use of false information."

Pedro Pérez, president of the so-called G-14, an association that represents the main players in the Spanish property sector, says that most companies are already into their third refinancing. "We are now in the fifth year of this crisis and there is still no light at the end of the tunnel. We have never seen anything like this, ever. The sector has already shed more than one million jobs, and will continue to shed more. Sales have fallen to a fifth of the figure in 2006. No sector could bear this kind of pressure," he says.