(Corrects share price in fifth paragraph)
* Building magnate Villar Mir to inject 300 mln euros fresh capital
* Restructuring to precede new funding
* Property market shows signs of recovery
MADRID, Jan 2 Investors from Spain, Andorra and Peru will inject 500 million euros ($689 million) of fresh capital into bank-owned Spanish property developer Colonial in the latest sign that the real estate business may be slowly reviving.
The Villar Mir group, a family-owned company controlled by the chairman of Spanish builder OHL, will invest 300 million euros in Colonial, the property company said on Thursday.
Peru-based Grupo Santo Domingo will invest 100 million euros and Andorran company Amura Capital another 100 million euros, if the board approves a debt restructuring and recapitalisation plan in an extraordinary shareholder meeting on Jan. 21, Colonial said in a statement to securities regulator CNMV.
The investors subscribing to the capital increase have also stipulated that it take place at a price no higher than 0.50 euro per share versus Tuesday's close at 1.047 euros.
Trade in Colonial shares reopened after a suspension, and after an initial blip higher closed down 17.29 percent at 0.866 euro per share.
Dozens of property firms collapsed in Spain after a property bubble burst and the country's banking system - highly exposed to the real estate market - took a 41-billion-euro rescue loan from Europe in the wake of the crisis.
Colonial's shares are owned by banks, which took it over after it struggled with debts in the wake of the 2008 crash.
Spanish property prices rose on a quarterly basis in the third quarter of 2013, the first such increase in three years. Prices have slumped some 37 percent since mid-2007.
Several banks have sold or contracted out property management businesses this year, capitalising on interest from foreign investors hungry for deals.
Colonial has a 1.759 billion euro syndicated loan due in December 2014, and that must be renegotiated as a condition for the investment, it said.
Another condition is that Colonial not reduce its stake in French property investment firm Societe Fonciere Lyonnaise (SFL) to below 20 percent from the current level of 53.5 percent.
Also, the new investors say Colonial must reduce to at most 20 percent its stake in Asentia, a unit created in 2011 to house real estate assets that have lost most of their value.
In order to bring in the new investors, Colonial will first reduce capital, cutting the value of its shares to 0.25 euro per share, according to the proposal to be presented to shareholders.
Then it will offer current shareholders a capital increase via a regular rights issue of up to 1 billion euros, it said, and also offer the conversion of 500 million euros of bank loans into equity, in case the capital increase is not fully subscribed.
Following that process, the new investor group including Villar Mir will come on board.
Juan Miguel Villar Mir, chairman of builder Obrascon Huarte Lain and the privately held Villar Mir group, is one of Spain's richest men due to a construction empire built up after he was finance minister in the mid 1970s. ($1 = 0.7257 euros) (Reporting by Fiona Ortiz, additional reporting by Elisabeth O'Leary; Editing by Anthony Barker and Tom Pfeiffer)