BMI View: The announcement that two Spanish mega-projects have entered the planning phase provides slight upside potential to our gloomy outlook for the country's construction industry. Six new amusement parks have been announced as part of a US$6bn plan between the federal government of Catalonia, La Caixa and Spanish-Brazilian developer Veremonte Participacoes SA, with Las Vegas Sands group (LVS) stating that they will invest US$22bn (35% of projected costs) in the development of a 'EuroVegas' gambling resort close to Madrid. Although these will be well-placed to benefit from Spain's buoyant tourism industry, we highlight the numerous risks that weigh upon their implementation.
|Right Place, Wrong Time?|
|Spain - Location Of Proposed Builds In The Leisure Industry|
The 'Barcelona World' project of six geographically themed leisure complexes will be constructed by Veremonte over 450 hectares of land owned by banking group La Caixa 's investment vehicle Criteria. The land connects to the pre - existing Port Aventura resort, located outside of Tarragona on the Mediterranean coast, and Veremonte have been given the option to purchase it in two year's time. C onstruction is slated for convention centres, shops, casinos, golf courses , 12,000 hotel rooms and a range of other amusements. R eports suggest that the project will take 36 months to build.
The Catalan government's announcement comes after the region failed in its bid to secure the lucrative 'EuroVegas' contract floated by LVS magnate Sheldon Adelson. LVS have affirmed that the build - which is to include six casinos, 36,000 hotel rooms over 12 hotels, three golf courses, shopping centres, bars and restaurants - will be placed within the environs of Madrid.
|Deepening Industry Woes|
|Spain - Construction Industry Activity - Real Growth By Quarter (%, q-o-q & y-o-y) / Real Growth By Month (% m-o-m, y-o-y)|
We highlight that, although the sheer size of the projects has the potential to provide serious windfalls to Spain's ailing construction sector in the short term, the political and economic environment of Spain is dotted with potential pitfalls.
Primarily, we note that difficulties pertaining to funding will threaten the builds from their inception. For the 'EuroVegas' build, LVS CEO Adelson has highlighted that the US$22bn investment offered represents only 35% of the amount required for the project ' s entirety . We believe that European investors will prove bearish on the build, and that Asian funds - which are increasingly active in the Pacific gaming market - will likely defer on the opportunity . Instead, we believe they will favour the Eastern growth market over the relatively muted Mediterranean sector , which is already well catered for by casinos stretching from the South of France, through Monte Carlo and into the Adriatic ( see our online service, July 9 , Manila Casinos Bid To Rival Las Vegas ).
As indicated by Adelson's request that Spain loosens its laws on smoking, zoning and the ad mission of minors into casinos, European regulations are also tighter than those evident in Macau, Manila and Las Vegas. Such regulations have historically discouraged the development of a booming European market. Recent protests by some of Madrid's citizens and religious groups also point to political risks involved in the construction of casinos.
However, we note that we are witnessing a spate of casino builds worldwide , as national and regional governments relax gambling laws in an attempt to foster growth through the sector. This trend threatens to diminish the average profitability of casinos, as an increase in supply breaks down the dominance of the major cities. On top of this, despite a dramatic uptick in receipts from East Asian gamblers, a slowdown in China threatens the spread of casinos globally. LVS , wh ich has opened a US$6.9bn casino complex in Manila and is completing a US$4.4bn build in Macau, is particularly exposed to the downturn, as it represent s one of only a couple of American firms licensed to operate in Macau. On the upside, receipts from Las Vegas operations will likely stabilise following a stabilisation of US economic activity.
|Sector Being Dealt A Bad Hand|
|Spain - Public Works Tenders (Central Government / Territorial Administration, EUR, mn) (RHS) / Total Buildings To Be Constructed (LHS)|
Veremonte, a venture of former Astroc Mediterraneo SA chairman Enrique Banuelos has benefitted significantly from Brazil's real estate boom - a trend that we expect to carry into 2013. The company will therefore likely be able to draw on significant resources for the project.
However, the Barcelona World build will also be threatened by Spain's tight credit environment. Although we believe that construction firms will bid fiercely for contracts flowing from the scheme, lending in the country is expected to remain limited. In light of burgeoning financial and economic stresses, our country risk team are forecasting a more pronounced 3.0% year-on-year (y-o-y) contraction in credit growth by end 2012, a further 1.0% decline in 2013 and meagre growth of just 2.0% in 2014 ( see our online service, August 30, 'Further Bank Bailouts Ahead').
Despite the scheme being strongly advocated by Catalan Finance Minister Andreu Mas-Colell, and projected at creating 20,000 jobs, government financial support is out of the question. Spain's regions are fighting to control public finances as tax revenues dry-up and access to capital markets narrows - earlier this month, the Catalan government applied for over EUR5bn in central government funding to cover its budget.
Bearing all this in mind, the builds will be haunted by the spectre of the failed attempt of Harrah's Entertainment Limited (now Caesars) to build a Las Vegas type casino 190km from Madrid in 2005. An airport was constructed and a high-speed train reached the location in under an hour, yet the build came to nothing.
Saying this, we believe that the Spanish tourism industry does continue to exhibit the levels of demand that would support the projects. Catalonia is the most visited region in Spain, with almost 14mn tourists visiting the region over 2011. Madrid, Barcelona and the Mediterranean coast are established destinations for holiday makers, and good support from the country's airports, roads, railways and ports suggest that the infrastructure is already in place for the builds to be successful.
Overall, we expect the Spanish construction industry to remain mired in decline as the country slumps to its second recession since 2008's financial crisis. In the short term, the tourism and leisure industry offers a glimmer of hope for struggling equities that have been unable to diversify outside the country. However, over Q212, the industry experienced its third consecutive quarterly contraction, falling 12.9% on 2011's already low growth rate. The long-term trend points towards a significant contraction in activity over the coming years, with spiralling unemployment, falling credit levels and austerity measures aimed at slashing public debt to continue to weigh on the sector.