MARK343 Autumn 2017

INDEX
Geo-Political Events .................................................................................................................................... 3
 Catalonia Independence Crisis ...................................................................................................... 3
 Brexit ................................................................................................................................................ 3
State of Economy......................................................................................................................................... 3
 Euro Outlook ................................................................................................................................... 3
 US Dollar Outlook........................................................................................................................... 3
 Chinese Market Growth ................................................................................................................. 4
 Brexit ................................................................................................................................................ 4
 Crude oil .......................................................................................................................................... 4
 Unemployment rate ........................................................................................................................ 4
International Trade .................................................................................................................................... 4
 European Economic Area .............................................................................................................. 4
 Comprehensive Economic and Trade Agreement (CETA) ......................................................... 5
 New Silk Road ................................................................................................................................. 5
 China-EU Free Trade Agreement Negotiations ........................................................................... 5
 China-EU Investment Agreement negotiations ............................................................................ 5
Legal Requirements .................................................................................................................................... 5
 2020 Climate and Energy Package ................................................................................................ 5
 The Royal Decree-Act 9/2017 ......................................................................................................... 6
 Antitrust Lawsuits .......................................................................................................................... 6
Technology Adoption .................................................................................................................................. 6
 Bitcoin .............................................................................................................................................. 6
 Smart homes & Internet of Things ................................................................................................ 6
 3D Construction Printing ............................................................................................................... 6
Conclusion ................................................................................................................................................... 6
References .................................................................................................................................................... 7
Appendices ................................................................................................................................................. 10
Appendix A ............................................................................................................................................ 10
Appendix B ............................................................................................................................................ 10
Appendix C ............................................................................................................................................ 11

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Appendix D ............................................................................................................................................ 11
Appendix E ............................................................................................................................................ 12
Appendix F ............................................................................................................................................ 12
Appendix G ............................................................................................................................................ 13
Appendix H ............................................................................................................................................ 13

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Global Factors affecting International Trade

Implications on Western Europe: Spain

The Kingdom of Spain is a Western-European country on the Iberian Peninsula. It is a Parliamentary

Monarchy with 19 Autonomous Communities, each with its corresponding regional governments, operating
under one central government (Madrid). This report will conduct a PETLT analysis on the global factors
that could affect the Spanish Real Estate market by DAMAC Properties Dubai Co. PJSC.

Geo-Political Events
 Catalonia Independence Crisis: In case of a separation from the country, Spain will be overshadowed
with economic instability, as the region would take away nearly 20% of the country’s GDP.
Additionally, with the EU backing the Spanish central government, Catalonia may not be able to join
the union as an independent state, and would lose the advantages of the single market (Bosche, 2017).
This will have a negative impact on Spanish Real Estate – as Barcelona, the main city of Catalonia, is
the second largest property market in the country.
 While starting up in an independent Catalonia might be tempting, various ownership and operation
risks could elevate given the possible instability of the government and the economy, and expansion
into the EU might be impossible. DAMAC could develop estates in other coastal cities of Spain,
which could prove to be cheaper in costs and more secluded, which would suit luxury customers’ tastes.
 Brexit: As Brexit negotiations arrive at an alarming standstill, PM Theresa May addressed the
parliament to develop a contingency plan for Britain in case of a ‘no-deal’ Brexit (Edwards, 2017). A
possible ‘no-deal’ could lead to short term negative impacts on the real estate market until negotiations
are complete. Britons, the biggest investors in Spanish Real Estate, will be uncertain about buying
homes in the region. However, one way to mitigate risk is to offer home rentals to Britons, who are
most likely not going to abandon Spain as a favourite vacation and retirement spot.

State of Economy
 Euro Outlook: As Europe’s political issues ease and with its strong economic forecast, as well as ECB
considerations of QE tapering, the currency is in an upward trend (Arnold & Pettit, 2017; Isaac, 2017).
It saw a hike of 7.7% since the January 2017 (Appendix A) (Bloomberg, 2017). This trend will have a
negative impact on Spanish property as cost of Foreign Direct investments will increase.
 US Dollar Outlook: The US dollar is strained due to low interest rate increases, a strengthening EU
and China, and Yuan oil purchases (Chatterjee, 2017; Reid, 2017). The US dollar fell 9% since the
start of the year and the trend could be moving downward for the dollar (Appendix B) (Bloomberg,
2017). This will have a negative impact as international emerging markets will experience a downturn
and demand for Spanish property will decrease.

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 Given the opposite trend directions for the Euro and the Dollar, DAMAC should mitigate the risk of
a falling dollar by investing in Euro now, bracing for a possible deepening in the exchange rates gap.
 Chinese Market Growth: Despite concerns over stagnation, the IMF has increased the growth outlook
of China for the next two years, but warns for a possible “sharp slowdown” (Appendix C) (Mayeda,
2017). With a growing upper-middle class harbouring an appetite for European property (Chandran,
2016), China will prove to be an unsaturated market for Spanish Real Estate. This will definitely have
a positive impact.
 Brexit: The British economy is experiencing a slump, with interest rates and domestic inflation on the
rise, and an inferior pound (Appendix D) (Partington, 2017; Chu & Cox, 2017). This will have a
negative impact on the Spanish Real Estate, as a majority of the buyers are middle and upper class
Britons.
 Opportunities in emerging markets such as China could be capitalized, and thus mitigating the risk
of the slumping British economy for the property market.
 Crude oil: Crude oil finds a balance of around $50 and OPEC plans to take ‘extraordinary measures’
in 2018 to maintain the current prices (Cunningham, 2017). Spain is the only European country that
relies on crude oil for primary energy – Components of its CPI basket are heavily reliant on oil prices.
The correlation between Accommodation and oil is high in Spain, and nearly zero in Europe (Appendix
E). It can thus be said that there is a positive relationship between oil prices and inflation in Spain
(Appendix F) (CaixaBank, 2017). A balanced oil price will have a positive impact on the Spanish
inflation, thus maintaining a balanced disposable income with households and corporations.
 Unemployment rate: The 17.2 % unemployment rate in Spain remains as the second highest in Europe,
following Greece (Apppendix G) (Mount, 2017). This will have a positive impact on the Real Estate
market, as the availability and the cost of labour decreases, specifically because of the trend of short
term contracts in Spain (Tadeo & Goyeneche, 2017). DAMAC should follow this trend to capitalize
on unemployment.

International Trade
 European Economic Area: Spain is part of the EEA, which allows it market access to 31 European
countries (France Diplomatie, 2017). This is beneficial for Spanish real Estate as companies could
expand operations freely. DAMAC has operating offices in the UK, a member of the EEA until Brexit.
Theresa May’s position against re-joining the EEA despite a possible two-year transition period in the
EU Single Market (Asthana & Mason, 2017) makes long-term trade blurry with the Union. Thus, to
mitigate risks, DAMAC could operate an office in Spain to brace for the unknown EU-UK trade
relationship.

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 Comprehensive Economic and Trade Agreement (CETA): As the USA halts talks on TTIP, this
agreement is now one of Europe’s most vital. It is currently in the provisional stage, and if approved
by the Parliament, will relieve 98% of trade Tariffs, and allow exchange of goods and services as well
as public contract bidding (European Commission, 2017). This could have a positive Impact on Spanish
Real Estate, as they could have a larger selection of contract bidders to choose from, as well as cheaper
construction materials.
 New Silk Road: This is part of the ‘One Belt, One Road’ initiative, which will open trade
opportunities for Chinese raw materials & machinery at lower costs, via land and sea routes,
between Asia-Pacific and Europe. It will stop at 3 main European stations (Appendix H) (Philips, 2017;
Van der Leer & Yau, 2016). This will have a significant positive impact on European Real.
 China-EU Free Trade Agreement Negotiations: China is the EU’s second biggest trading partner
after the USA, and due to the TTIP negotiation halt, it could be its biggest if the FTA negotiations are
successful (European Commission, 2017). This could have a positive impact on European Real Estate
as cheaper construction materials & equipment will be available.
 In case the FTA negotiations reach a positive conclusion by the time the New Silk Road is completed,
DAMAC could make use of this trade relationship to purchase Chinese construction materials and
equipment, as they would be cheaper than European ones.
 China-EU Investment Agreement negotiations: This will allow the ease of trade and investment and
is being strongly sought after by both the EU & China (European Commission, 2017). If finalized, it
could fast-forward the China-EU Free Trade Agreement (Lungu, 2017). This will have a positive
impact on Spanish Real Estate Market, as the investment agreement would allow Chinese investors
easy access to Real Estate in Europe. DAMAC should target China for Real Estate investment to
capitalize on the upward trends of the country.
 China is becoming a vital trade and investment partner for the EU, and future prospects of this
relationship should be closely regarded by Real Estate corporations.

Legal Requirements
 2020 Climate and Energy Package: As the EU plans for a sustainable future, regulations to achieve a
20% cut of carbon emissions in the housing sectors in Spain are slow to come to fruition (European
Comission, 2017). As Spain’s main energy resource is oil, the transition to solar or wind energy will
be expensive for a country barely exiting critical economic dangers. While this could be a negative
factor for domestic companies due to the rise in construction costs, DAMAC could make use of the
vision and turn it into a positive factor - building strong ties with the central government by aiding
it adhere to EU regulations.

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 The Royal Decree-Act 9/2017: This is the new revised Spanish Free Competition law adhering to the
European Free Competition rules, correcting the compensation for damage charges. (Garcia-Gallardo
& Garcia, 2017).
 Antitrust Lawsuits: Currently, a disciplinary proceeding against Aspen Pharmacare Holdings and
two of its affiliates is ongoing at Spain’s markets and competition commission, for planning drug
shortages in the country to overcharge their medicines (White, 2017). Adding to that, Nokia Solutions
and Networks in Spain were fined EUR 1.74 million due to anticompetitive behaviour in a public tender
(CPI, 2017). These have a positive impact for the Real Estate market, as companies could ensure fair
competition and turn to reliable legal assistance when needed. However, DAMAC could mitigate
the risk of being in an antitrust lawsuit by familiarizing itself with free competition rules.

Technology Adoption
 Bitcoin: The Spanish national treasury defines Bitcoin as a “convertible virtual currency that can be
exchanged between users and can also be converted into dollars, euros or other currencies both real and
virtual” (Fernanders, 2014; Luna, 2014). The acknowledgement of the currency could have positive
impacts on the Spanish property market. DAMAC could offer Bitcoin as one of the accepted
purchase methods, and thus expand its potential market to Bitcoin millionaires.
 Smart homes & Internet of Things: While the technology has not had its break in Spanish real estate,
adapting it could have a positive impact for the property market, as tech-savvy investors could consider
the market as an investment choice. DAMAC could adopt a modern luxury approach to its designs,
and collaborate with smart home companies.
 3D Construction Printing: Madrid has solely build a park pedestrian bridge using the technology
(Weston, 2017). While no impact is felt in Spanish real Estate yet, it could lead to negative impacts in
the long term as traditional construction methods become redundant and less-efficient. DAMAC could
familiarize itself with the technology to gain a first mover advantage.

Conclusion
The analysis showcases that Spain could be a possible expansion location for DAMAC. The economic,
trade and legal factors highlight the strength of the Real Estate market. While geo-political tensions are an
obstacle in Spain, the market growth prospects and future benefits outweigh the risks and costs. Given
Brexit, DAMAC might need to establish a new European base for business to mitigate negotiation risks,
and maintain possible entry to EEA countries.

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References

Arnold, A & Pettit, D 2017, ‘Euro Rises to Fresh High After Catalan Speech; Dollar Drops’,
Bloomberg, 10 October, <https://www.bloomberg.com/news/articles/2017-10-10/dollar-drops-for-
third-session-as-tax-outlook-dims-yields-fall>

Asthana, A & Mason, R 2017, ‘Theresa May asks EU for two-year Brexit transition period’, The
Guardian, 22 September, < https://www.theguardian.com/politics/2017/sep/22/theresa-may-asks-eu-
for-two-year-brexit-transition-period >

Bloomberg 2017, ‘DOLLAR INDEX SPOT (DXY) Spot Rate’, Bloomberg, <
https://www.bloomberg.com/quote/DXY:CUR >

Bloomberg 2017, ‘EUR to USD Exchange Rate’, Bloomberg, <

https://www.bloomberg.com/quote/EURUSD:CUR >

Bosch, S 2017, ‘Spain's economy losing Catalonia would be like the US losing California and Florida
combined’, CNBC, 21 September, < https://www.cnbc.com/2017/09/21/heres-how-bad-economically-
a-spain-catalonia-split-could-really-be.html >

CaxiaBank 2017, ‘Spanish inflation and rising oil prices: different this time?’, CaixaBank Research,
26 April, < http://www.caixabankresearch.com/en/spanish-inflation-and-rising-oil-prices-different-
time >

Chandran, N 2017, ‘China will be middle class by 2030, with high earners to rise 1,000% in some
cities’, CNBC, 2 November, < https://www.cnbc.com/2016/11/02/china-will-be-middle-income-by-
2030with-spending-on-cars-luxuries-health-to-rise.html >

Chatterjee, S 2017, ‘Cautious Fed pins dollar to 2-week lows; euro rises’, NASDAQ, 12 October, <
http://www.nasdaq.com/article/cautious-fed-pins-dollar-to-2week-lows-euro-rises-20171012-00518 >

Chu, B & Cox, J 2017, ‘Here are the latest signs that Brexit is damaging the UK's economy’, The
Independent, 10 October, < http://www.independent.co.uk/news/business/news/uk-economy-outlook-
forecast-growth-trade-data-obr-bae-systems-imf-a7993321.html >

CPI 2017, ‘Spain: Nokia Networks fined in antitrust case | Competition Policy International’,
Competition Policy International, 15 June, < https://www.competitionpolicyinternational.com/spain-
nokia-networks-fined-in-antitrust-case/ >

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Cunningham, N 2017, ‘OPEC will take drastic action despite the shale slowdown’, Business Insider,
11 October, < http://www.businessinsider.com/opec-will-take-drastic-action-despite-the-shale-
slowdown-2017-10 >

Edwards, J 2017, ‘Theresa May just admitted she might get 'no deal' after Brexit’, Business Insider, 1
October, < http://uk.businessinsider.com/theresa-may-says-the-uk-government-is-preparing-for-no-
deal-after-brexit-2017-10 >

European Commission 2017, ‘CETA - EU-Canada Comprehensive Economic and Trade Agreement’,
Trade - European Commission, < http://ec.europa.eu/trade/policy/in-focus/ceta/ >

European Commission 2017, ‘2020 climate & energy package’, Climate Action – European
Commission, < https://ec.europa.eu/clima/policies/strategies/2020_en >

European Commission 2017, ‘China - Trade - European Commission’, Trade – European Commission,
< http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ >

Fernandes, NE 2014, ‘Bitcoin Advances in Spain and Europe’, CryptoCoinsNews, 1 December, <
https://www.cryptocoinsnews.com/bitcoin-advances-spain-europe/ >

France Diplomatie 2017, ‘List of European Economic Area (EEA) Member States’, France Diplomatie
- Ministry for Europe and Foreign Affairs, < http://www.diplomatie.gouv.fr/en/coming-to-
france/getting-a-visa/article/list-of-european-economic-area-eea# >

Garcia-Gallardo, R & Garcia, C 2017, ‘Competition Litigation 2018 | Laws and Regulations | Spain |
ICLG’, International Comparative Legal Guides, 4 September, < https://iclg.com/practice-
areas/competition-litigation-laws-and-regulations/spain >

Isaac, A 2017, ‘Eurozone QE tapering on track for early 2018, accounts confirm’, The Telegraph, 5
October, < http://www.telegraph.co.uk/business/2017/10/05/eurozone-qe-tapering-track-early-2018-
accounts-confirm/ >

Luna, AG 2014, ‘Hacienda reconoce por primera vez el valor económico del bitcoin. Noticias de
Tecnología’, El Confidencial, 9 November, < https://www.elconfidencial.com/tecnologia/2014-09-
11/hacienda-reconoce-por-primera-vez-el-valor-economico-del-bitcoin_189577/ >

Lungu, A 2017, ‘A New G2: China and the EU?’, The Diplomat, 17 August <
https://thediplomat.com/2017/08/a-new-g2-china-and-the-eu/ >

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Mayeda, M 2017, ‘The IMF's View Brightens: Takeaways From World Economic Outlook’,
Bloomberg, 10 October, < https://www.bloomberg.com/news/articles/2017-10-10/the-imf-s-view-
brightens-takeaways-from-world-economic-outlook >

Mount, I 2017, ‘Spain unemployment rate falls to 8-year low in Q2’, Financial Times, 27 July, <
https://www.ft.com/content/184d4c11-7dea-32c6-8d6d-f1c742f033b1 >

Partington, R 2017, ‘As the UK economy sputters, it's all systems go in the eurozone | Richard
Partington’, the Guardian, 3 September, < https://www.theguardian.com/business/2017/sep/03/brexit-
as-the-uk-economy-sputters-its-all-systems-go-in-the-eurozone >

Phillips, T 2017, ‘China's Xi lays out $900bn Silk Road vision amid claims of empire-building’, The
Guardian, 14 May, < https://www.theguardian.com/world/2017/may/14/china-xi-silk-road-vision-
belt-and-road-claims-empire-building >

Reid, D 2017, ‘Three reasons the world could turn its back on the US dollar’, CNBC, 11 October, <
https://www.cnbc.com/2017/10/11/the-us-dollar-may-be-at-risk-as-the-global-reserve-currency.html
>

Tadeo, M & Goyeneche, A 2017, ‘Spanish Jobs Numbers Mask Deeper Insecurity’, Bloomberg, 5 May,
< https://www.bloomberg.com/news/articles/2017-05-05/spanish-jobs-numbers-mask-deeper-
insecurity >

Van Der Leer, Y & Yau, J 2016, ‘China's new silk route: The long and winding road’, PwC.

Weston, P 2017, ‘Would YOU walk over it? World's first 3D printed bridge is unveiled in Madrid -
and experts say the technology could be the future of construction’, Daily Mail Online, 2 February, <
http://www.dailymail.co.uk/sciencetech/article-4184104/World-s-3D-printed-pedestrian-bridge-
Madrid.html >

White, A 2017, ‘Aspen faces EU probe over excessive pricing of cancer drugs’, Business Live, 15 May,
< https://www.businesslive.co.za/bd/companies/2017-05-15-aspen-faces-eu-probe-over-excessive-
pricing-of-cancer-drugs/ >

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Appendices
Appendix A

Appendix B

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Appendix C

Appendix D

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Appendix E

Appendix F

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Appendix G

Appendix H

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