Pilar Martinez says she knows why real estate prices are rising in Seville.
"Black money is sustaining the market," said the employee of Inmobiliaria Europa, a property company in Spain's fourth-largest city. "I've had more clients pay in cash this year than in previous years. An Italian client came in the other day and bought a beautiful chalet in cash." Facing the introduction of euro notes and coins on Jan. 1, next year, Europeans with large amounts of cash not declared to tax authorities are spending it on houses, health spas and luxuries, according to real estate agents and retailers.
That's pushing up prices. Property prices on the Costa del Sol in Spain rose about 20 percent last year and on France's Cote d'Azur they rose 15 percent, according to London real estate agency Hamptons International.
Investors are among those betting citizens are laundering their cash with real estate. UBS Warburg recommends Grupo Dragados SA, Spain's second-biggest builder; Cie. de Saint- Gobain SA, Europe's top distributor of building materials and Lafarge SA, the largest maker of construction materials. Shares in each are up while national indexes are down.
At the end of February, national currencies in the 12 countries adopting the euro cease to be legal tender. The only way to convert them will be in banks, where large amounts will have to be registered under laws to prevent money laundering.
The European Commission estimates the size of this "undeclared economy" to be between 500 billion euros (US$456 billion) to 1.1 trillion euros, or 7 percent to 16 percent of the European economy. While this isn't all cash-based and doesn't include criminal activities, "a lot is in cash," the commission said.
In French hoarded cash is called bas-de-laine, or bottom of the sock; in Italian it's sotto il materasso, or under the mattress. Using it to buy an asset like property ensures the money is put into something of value.
"The implementation of the euro is helping us, with more people willing to buy property," said Michele Landeler, who runs Agence de la Comtesse, a real estate company in Marseille."I almost dread what will happen when the euro is in place."
While no figures can prove black economy funds are being spent more, a declining amount of high denomination notes in circulation in France and Germany suggests people in those countries are bringing money out of hiding, bank officials said. As people spend their hoarded money it goes back to banks and then to the central bank, dropping out of circulation.
In France, the number of the biggest 500 franc notes in circulation dropped 7 percent between 1999 and 2000, according to the most recent figures from the country's central bank. At Mr. Bricolage, a French retailer of home-improvement products, they've noticed an "upsurge in 500-franc bank notes," according to managing director Herve Courvoisier.
Bundesbank figures show cash in circulation also fell 7 percent in the year to June. The amount of 1,000 and 500 mark notes in use are declining, the bank said.
In suggesting that investors buy construction shares, UBS Warburg said: "Spending of these cash hoards may already be a factor in the strong construction spending in Spain or France." Of the construction companies it recommended, Grupo Dragados is up 69 percent, Saint-Gobain has risen 15 percent and Lafarge is up 24 percent in the past year. That compares with declines of 24 percent in Spain's benchmark IBEX 35 index, and 29 percent in France's CAC-40 index.
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