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In many respects this review of the Spanish Property Market in 2016 and the look ahead to the trends for 2017 is not that different when compared with what I wrote last year; as regards the general economic outlook it seems brighter in parts but the structural problems that are hindering meaningful and sustained recovery are unchanged and likely to remain so. In the property sector itself it’s no different, almost all statistics are on the up, mortgage approvals, sales numbers, construction starts, for example, but when you dig deeper into the numbers the same issues remain, fragmenting the property market into sectors that are still performing very differently. As I will show there is sustained growth and strong demand from overseas buyers in prime city and Mediterranean locations while such growth as there is within the domestic market and the lower end of the overseas market still feels fragile, as though it wouldn’t take much to knock it off course.
What I aim to do in this Spanish Property Market report is bring together the statistics and opinions from various sources published throughout the year and try to give a coherent review of what happened to the property market in 2016 and a look ahead to 2017. I find the most reliable property statistics are those from the notaries as they reflect exactly when a purchase took place; a deal signed in December will be counted in December’s returns. If you see contradictory numbers the explanation is that Spain’s Institute of Statistics (INE) also takes returns from the Property Registries and they are not counting when a deal is actually done but when the transaction is inscribed in the registry and delays of weeks and even months are common. This can affect both quarterly and full year data. For example, a purchase signed at the notary at the end of any quarter won’t make it to the registry until the following quarter but the worst distortion is in the annual figures; a purchase signed for in front of the notary in a December, and possibly even the November, is unlikely to be registered until January of the following year at the earliest. And the discrepancy caused by these rollovers is not insignificant; full year 2015 data showed 458,781 purchases recorded by notaries but only 403,703 properties inscribed at Property Registries, a difference of 12%. The Registry figure for the number of foreigners who bought in Q1 and Q2 of 2016 was 39,666 but a few weeks later the notarial returns showed the higher figure of 43,519 in the same period, a 10% discrepancy.
So, throughout this report where a statistic is given that relates to purchase numbers, when and where done and by nationality, it will refer to notarial returns unless otherwise stated and I ignore the returns from the Property Registries. Some statistics will be partial in respect of 2016 but I will update throughout 2017 as 2016 full year data is published so please check back or follow us on Twitter, where I report news and statistics almost daily. I’m going to cover the domestic and overseas property markets separately because they function completely independently of each other; the former is inextricably linked to what is happening in the Spanish economy while that same economy is irrelevant to the the latter. Brexit gets a mention and among other matters I’ll discuss prices, mortgages, who’s buying what and where and what might be ahead in 2017.
The Overseas Market – it’s even better that I thought
The notarial returns counting the number of overseas buyers for the first half of 2016 produced a statistic that took me completely by surprise; a total of 43,519 transactions were completed by non-Spanish buyers in the first six months of the year, representing 19.1% market share. Given that the previous highest annual total of foreign buyers was around 80,000, or 8.9% market share of the approximately 900,000 units sold in 2007 right at the top of the market, a half year total of 43,519 puts 2016 on track to be the best year ever for overseas buyer numbers in Spain. Even if there is a fall in the second half of 2016, which looks unlikely given continued overseas market growth into Q4, in spite of a reported downturn in British buyers since the Brexit referendum, I see the full year total at least matching the previous record high. In fact, I think it is going to beat it although we’ll have to wait until about May 2017 to find out as the notarial returns for the full year usually appear in Q2 of the following year. I could sense that 2016 was going to be a good year but I wasn’t expecting record highs of foreign buyers quite so soon.
But there is always a ‘but’ and in the case of the overseas market right now it’s not so much about who is buying but where they’re doing it and these same notarial stats show very starkly that the recovery continues to be confined to a handful of locations and then only in the most prime spots within those locations. The result is that we now have the same number of foreigners buying in Spain as at the pre-crash peak but concentrated in just a few places, and that helps explain why it feels so active in the 5* locations and still so flat in what I call the secondary and peripheral areas.
Andalucía, Spain’s largest autonomous region, is a good example of market unevenness. Since 2014 Andalucía has consistently been the most active region in Spain by sales numbers per region but when you analyse the data it becomes clear that this has been driven by activity in just one province, i.e., Málaga, home to the prime part of the Costa del Sol, a hot spot of overseas activity. Based on 1st half 2016 figures, and I have no doubt that the trend will be replicated by full year stats when we get them, 75% of all overseas buyers in Andalucía bought in Málaga province, a total of 5,570 and the highest ever recorded in the first two quarters, more than at the 2007 peak. The next most active province was Almería, with just 797 foreign buyers, while Córdoba only managed 49, the lowest of the eight Andalucían provinces. And whereas Andalucía as a whole was below the 19.1% national average in respect of overseas market share, registering only 14%, in Málaga province it was double the national average, at 39% of the 14,364 total transactions. And within the province different municipalities clearly demonstrate how uneven activity levels are. For example, more than 50% of all transactions happen in just two municipalities, Málaga city and Marbella. Just two municipalities, Marbella and Benahavis, account for 25% of sales in the province. And it’s no different in any of the other regions of high overseas investment, that is, the Mediterranean coasts, the Balearics and Canaries and Barcelona; all show 2016 overseas purchases above the national average. For example, in Alicante province, the most active region on Spain’s eastern coast, overseas buyers were responsible for an astonishing 46.7% share of the total market. So, if you are trying to make sense of the Spanish property market it’s important to realise that the region tells one story, the provinces within that region another and the municipalities yet another, with local hotspots of much higher market share.
In early 2017 we started to get full year stats for 2016 and all my predictions were confirmed. I thought price rises for 2016 would be around 4% on average and the figures showed it was 4.7% but I also predicted bigger increases in city centres and prime Mediterranean coasts. And that’s how it turned out with Madrid registering 9%, Cataluña 7.4% and the Balearics 5.7%. I predicted that the transaction numbers would have grown by at least 10% during 2016 and the full year data came in with 458,781 purchases, an annual increase of 12%. Bank lending recovered to the extent that roughly 50% of 2016 purchases were funded with a mortgage, up from about 30% the previous year although the banks are still cautious; the average loan amount increased by barely 5%, just enough to keep pace with average price rises. Nevertheless, in spite of the improvements in the overall picture I still maintain, as I did twelve months ago, the property market in Spain was very reliant on overseas buyers for much of the growth seen in 2016 and it will be the same in 2017, particularly at the higher price levels. At the end of 2016 I started work for an international buyer wanting a house right in Málaga city and it quickly became clear that Spaniards themselves don’t have much confidence in the domestic market recovering anytime soon. All the vendors I spoke to, with properties for sale at €1m and more, were very sceptical about the likelihood of a Spanish buyer and thought their best chance was a deal with a foreigner.
The Domestic Market – the scourge of unemployment
By every measure, such as sales numbers, mortgages granted and price rises etc., the domestic property market in Spain is in better shape in 2017 than it was a year ago which begs the question: why doesn’t it feel that much better? I think the answer is that it’s struggling back from an abyss that was so deep it’s going to take much more than a few quarters of better data for the feel good factor to return. For some perspective, it’s worth repeating just what happened to Spain’s economy in the last decade, or should that be the lost decade. In 2007 it was the fastest growing economy in the Eurozone at 3.5% with a budget surplus. Five years later it had the highest unemployment rate in the developed world and a banking sector close to meltdown in spite of the OECD rating it as solid in 2010. You know it’s been really bad when the unemployment rate falls to below 20% for the first time in six years and it’s hailed as a victory when in reality the October 2016 figure, at 18.9%, was still the second highest in the E.U., just behind Greece.
It seems clear to me that Spain’s inability to get people back to work, particularly into full-time, permanent jobs will continue to be an important brake on the domestic property market in 2017. The harsh reality is that, according to Ministry of Employment statistics at the beginning of 2016 fewer than 5% of labour contracts were for full time, permanent positions and 37% of contracts were for durations of less than one month. Even worse, 20% were for jobs lasting less than seven days. A 2016 report by economic think tank Fedesa highlighted the fact that 25% of those unemployed haven’t worked in at least four years and a 2016 survey by Eurofound, an EU agency focused on living and working conditions, reported 26% of Spanish workers thought they would lose their job within six months. And the OECD’s forecast for Q4 2016 cited the lack of permanent contracts and the lack of jobs for the under 25s as just two of the factors contributing to Spain’s stubbornly high unemployment rate and the same report predicted only a very slight decrease in the national average to just under 18% by the end of 2017.
It’s true that the national average declined throughout 2016 but even when it’s below 20% that still leaves nearly 4m people out of work. And averages mask regional variations; in Extremadura, Andalucía and the Canaries the rate is still 25%+, while in the Basque country, Cantabria and Navarra it’s below 13%. In the case of the under 25s it’s still a catastrophic 45% nationally and over 50% in some regions. More than 700,000 households have no one in work and 80% of the under 30s still live in the parental home. One result of these figures is that there are fewer new households being formed in Spain leading to lower demand for housing.
Another factor leading to lower housing demand is Spain’s shrinking population, due to low birth rates and emigration exceeding immigration. The lack of jobs has forced both immigrants and Spanish citizens to leave Spain to look for work and at the start of 2016 the stats showed 98,934 Spanish citizens had left the country in the previous twelve months, against 52,227 returnees. Perhaps the most worrying statistic to emerge in 2016 was the decline in the number of people aged between 20 and 39 years old, down by some 400,000, the very demographic Spain needs to hang onto; young, educated, professional and entrepreneurial. According to Javier Díaz-Giménez, Professor of Economics at Spain’s IESE Business School, there are few countries in the developed world where unemployment has been over 20% three times in 20 years but Spain is one of them. The last time it peaked above 20%, in the 1990s, it took 14 years to decline to the European average. If history repeats itself and if we date the start of this cycle’s explosion of unemployment to 2010 it’s going to be 2024 before Spain gets close to the European norm, and I recall I quoted a prediction from PricewaterhouseCoopers in my 2014 report that Spain wouldn’t return to pre-crisis employment levels until 2033! The reality is that Spain has never got close to full employment and even when it was the fastest growing economy in the Eurozone in 2007 unemployment was 8%, a figure that would be considered high in an economic downturn by many developed countries.
Although labour market reforms have reduced redundancy entitlements, businesses and employers remain reluctant to offer permanent positions and this is borne out by the imbalance between indefinite and temporary contracts that now exists in Spain and there are no signs of it changing; in fact, it worsened during 2016. With this kind of labour market how can one expect sustained recovery in the property market – the unemployed, those fearing unemployment and those on short-term temporary contracts don’t buy houses. And neither do those in employment who have seen purchasing power reduce by nearly 10% since 2008, according to 2016 figures from the INE, a combination of lower or stagnant salaries and rising prices.
Meanwhile, the powers that be in Brussels continue to demand more austerity to reduce the current budget deficit of 4.6% to the target of under 3% of GDP by 2018, two years later than previously demanded, while the Spanish government maintains the target will be met as the economy grows, thus avoiding the need for more cuts. Growth was predicted to be a respectable 3.2% in 2016 but the IMF, the Bank of Spain and the European Commission all believe it will slow, possibly quite sharply, in both 2017 and 2018. At least Brussels relented on the threatened €2bn fine for missing the 2015 deficit target, how kind of them. However, it is still demanding €5.5bn in further cuts to ensure the target isn’t missed again. They must be going soft – earlier in 2016 the European Commission was demanding budget cuts of €8bn. Now all Spain’s new minority government have to do is get the 2017 budget proposals through parliament.
Nevertheless, in spite of everything, the domestic market is in better shape when 2016 statistics are compared with 2015. Building licence approvals for new build to the end of October 2016 were up 33% at 53,131 nationally although I can’t resist pointing out that for the same period in 2006, just as the building frenzy was at its peak, the figure was over 550,000! The silliest month on record was September 2006 when 126,753 building licenses were granted, just about double the total for January – October 2016. Madness that is still having repercussions today.
The Brexit Factor
The British are the single largest group of overseas buyers in Spain by some margin, always have been and probably always will be but, in my opinion, a lot of nonsense has been written about the effect the result of the EU referendum is having, or will have, on the Spanish property market in 2017. Some commentators used Q3 Property Registry returns as an indication that British demand had fallen 16% as a direct result of Brexit. However, as I pointed out at the beginning of this report Property Registry statistics don’t tell you anything about that actual quarter, they are a reflection of what has happened previously. The fact that a property was registered in Q3 and the fact that fewer British purchases were counted in those Q3 returns says nothing about post-Brexit sentiment as we aren’t told how many of those Q3 registrations related to purchases completed in the previous quarter. A lot will have been, so Q3 stats from the Registries say just as much, and possibly more, about pre-Brexit Q2 as post-Brexit Q3.
Four of every five foreign buyers in Spain aren’t British so while a 20% market share isn’t insignificant there are so many other nationalities buying in Spain now the potential damage to the overall international sector is limited; the statistics clearly show international demand is rising even though the British may make up a smaller part of the total overseas market. In comparison with the Spanish market crash in the early 1990s, the implosion of the UK economy that was the main factor behind the collapse really did cause the property market to hit the buffers because the overseas market was 80%+ British, but that is not going to happen this time as there are plenty other international buyers to minimise the impact even if there is a noticeable fall in buyers from the UK. However, in my view, the more reliable figures, those from the notaries, seem to indicate the British element of the overseas market is holding up rather well, all things considered.
In 2015 the notaries reported 76,780 purchases by overseas buyers, of which 20.1% were by British, i.e., 15,810. In the first half of 2016 the notaries counted 43,519 overseas buyers with the British responsible for 8,268 of them, very slightly down on market share at 19%, but slightly ahead in actual numbers on a half-yearly basis when compared with 2015. Now, I’m no mathematician but even I can see that a smaller market share in percentage terms doesn’t necessarily mean lower numbers of actual purchasers. Nevertheless, the total of British buyers in 2016 is the statistic I’m most looking forward to seeing in the first half of 2017. My prediction is that numbers will be similar, maybe a bit down but could even be up, compared with the previous year but because the overall overseas market grew in 2016 the British share of the market will probably be lower.
What I do not foresee is a collapse of the market as some are predicting. And even if the 2016 result does turn out to be lower British buyer numbers, British developers and British-based investors don’t seem at all deterred by the post-referendum atmosphere. London-based Pacific Investments are putting €25m into a 5 villa project in Marbella. British retail specialist Intu are planning a €600m investment in what will be the largest shopping and leisure complex in Andalucía at Torremolinos. The Round Hill Capital Investment fund, also London-based, are behind a €250m development in Ojén, 7kms inland from Marbella, developing land acquired from SAREB, Spain’s bad bank. Although some hesitation was reported in the immediate aftermath of the referendum, the fund decided to go ahead because the properties are not just targeted at the British market; of the 75 units in the first phase 50% are already sold to 16 different nationalities, underlining the point I made earlier in this section; the overseas property market in Spain is no longer as dependent on the British market as it was 25 years ago, buyers come from around the globe and a British blip, if there is one, will barely be noticed.
The British started buying property in Spain long before either country was in the EU and throughout the period when the UK was in but Spain wasn’t. I cannot imagine a scenario in which Spain will allow anything to damage their most important market post-Brexit, either in the the property or tourism sectors where the British are way ahead of any other nationality, and I don’t believe a possible downturn in the numbers of British buyers in 2016, if that’s how it turns out, can be attributed to uncertainty about the conditions that may apply to British citizens post-Brexit. In my view lower numbers will be a reflection of short-term currency instability, a factor that’s obviously closely linked to Brexit, but one which looks unlikely to get worse and may get better, perhaps a lot better, if there is renewed Eurozone instability, which most analysts regard as a cast iron certainty. However, British buyers who wait for an improvement in the exchange rate may find any benefit wiped out by price increases in 2017 but there is a solution and it’s one that more than one client of mine has opted for recently, choosing to buy now while prices are still well below 2006 peak values but clearly on the way up. The solution is called a fixed rate Spanish mortgage and in my view, it’s one that anyone thinking about buying in Spain in 2017 should consider, irrespective of the currency they are buying with.
Spanish Fixed Rate Mortgages – grab one if you can
The GBP£ went on something of a rollercoaster in 2016 after peaking in December 2015 at €1.41/£. Six months later, just prior to the EU referendum it had fallen 10% to €1.28 and a further 14% came off post-referendum to an October low of €1.10. The harsh reality is that a British buyer could have bought a €500,000 property in December 2015 with £355,000 but would have needed to exchange £445,000 in October 2016. The last time we saw such a weak €/£ rate was after the 2008 global banking crisis when it fell from mid-2007 highs around €1.48 to a low of €1.10 in January 2009. I recall much talk then of parity but slowly the pound recovered and never went below €1.10 and it will be interesting to see if €1.10 is as bad as it’s going to get in this cycle.
I think there were three groups of British buyers immediately affected by the post-Brexit currency fall. Firstly, those wanting to buy but not yet committed and who could delay their purchase, but running the risk of seeing any improvement in the exchange rate wiped out by price rises in the meantime. Secondly, cash buyers who had already exchanged contracts and were committed to completing the deal within a few weeks, needing to find extra funds they hadn’t budgeted for. And finally, and worst hit of all, those who had already taken a mortgage up to their borrowing limit and signed a purchase contract on the strength of the mortgage offer. This last group faced two stark choices, both unpleasant – either default and lose their deposit or find a way to fund the shortfall. However, there have been very few such buyers in the market in recent years, that is, people borrowing to the maximum because they needed a mortgage. It’s a fact that the majority of all overseas buyers in Spain since the crash have been cash-rich although, as interest rates fell, many chose to hold on to some capital and take a Spanish loan; they didn’t need one, it just made good financial sense and several clients of mine have done just that.
My advice to current cash buyers, irrespective of the currency they are in, would be to protect as much of their capital as they can and take a Spanish mortgage for as much as they can get and that’s because fixed rate mortgages, which disappeared after the 2008 financial meltdown, reappeared in Spain in 2016 with long fixed terms available. At the same time, Euribor, the rate that sets the interest rate for the majority of mortgages in Spain, went negative for the first time in February 2016 and after eleven straight months of further decline closed 2016 at another historic low, -0.080%. And the trend continued into the new year, falling to -0,106% at the end of February 2017. Fixed rate mortgages accounted for 28.6% of all new loans in 2016, and in November 2016 a client of mine was offered 70% LTV at 2.4% fixed for 20 years, or 2.10% for 15 years and 1.9% for a 10 year fix, life cover included. He chose the 20 year option. The broker involved said the majority of overseas applicants were taking the fixed term option, reasonably confident they could invest the freed-up capital to equal or better the interest rate charged so early redemption charges weren’t an issue, they don’t intend redeeming early. For those who would prefer to pay off or reduce the loan in the short to medium term, say 3 – 5 years, a variable rate loan could be an option, quotes of 1.75% above Euribor for 60% LTV and 2% above Euribor for 70% were given, assuming life cover is taken. Early redemption fees for variable loans are 0.05% in the first five years and 0.25% thereafter and it is possible to negotiate zero on partial overpayments.
Obviously, external factors in 2017 could alter what’s on offer month on month. In early 2017 there were already signs that rising bank charges will push rates higher during the year and you need to check in advance what your status is. But if the banks are willing to lend why not take it, particularly if you are British, as not needing to exchange GBP£ when the rate is so disadvantageous gives you a great chance to enter the market while prices are still well down off their 2006 highs. That may not be the case at the end of 2017. Nevertheless, right now it is still possible to get a 20 year fix under 3%. And it doesn’t need to take a long time; it took only 12 days from initial enquiry to formal offer for clients of mine, who were in a competitive situation with other buyers, to be in a position to sign the purchase contract.
The What and Why of the Overseas Market
If you’ve read this far you’ll already know something of who is buying and where they are buying so now I’ll look at the what and why of the overseas market.
What are they buying?
The shift towards contemporary architecture, lots of glass and flat roofs, was just getting underway as the property market crashed but the trend has only accelerated as construction has started again. But every trend has a shelf life and I’m wondering if what was once seen as very futuristic and exclusive is now a bit overdone – at the end of 2016 I worked for clients who specified that they didn’t even want to look at ‘white boxes’, they wanted a house with an exterior that made some reference to a more traditional Spanish architectural style but with totally modern interiors. As the ‘white box’ look is now so ubiquitous at every level of the market I think I can just see the beginnings of move towards a more individualistic approach, at least at the top of the market and I think two new projects in Andaluca will stand out in 2017, rising above the rest.
The first is beautifully located in Cascadas de Camoján, just on the west edge of Marbella, with five houses priced between €5 and €7m, each with a different architectural style. A British funded development, it should start in early 2017 with completion before the end of 2018. But it’s what is happening in Sotogrande over the next few years that will really turn heads. La Reserva de Sotogrande will set new standards and will stand with the best on a global level. As well as individual villas priced from €2m there will be a small number of exceptional homes, known as The Seven, each designed by a different world-renowned architect, which will be among the finest properties in the world.
The property market is still heavily weighted towards resales, with about 82% of 2016 purchases being resales although that figure does include bank sales because the repossession was counted as the first sale, so a subsequent purchase by an end user is deemed a resale. Although building licence approvals are rising nationally there’s always a time-lag between project approval and it being sales-ready so I can’t foresee any substantial change in what people are buying in the short term. And the market is even more heavily weighted towards coastal properties than inland and in my view, the rural sector is no more now than a niche market for a very special kind of buyer. Long gone are the days when buyers priced off the coasts headed inland, not because they particularly wanted a rural property but because that’s all their budget allowed and I don’t see those days returning.
Marbella, which with Málaga city accounted for about half of all 2016 purchases in Málaga province, is in limbo following the September 2015 annulment of its planning laws, the PGOU. In the January to September period before the annulment 492 building licences had been approved but the 2016 number for the same Q1 – Q3 period was just 128, 78 for individual houses and 50 apartments. In contrast, Estepona had granted 457 licences by the end of September 2016. It’s not that the applications aren’t there it’s that the Marbella Town Hall has had to go back to the drawing board and projects waiting for approval are backing up. A developer colleague finally received the licence for a 3 villa project in Nueva Andalucía in December 2016, after an 18 month wait.
So, the market in 2016 was all about resales and that will still be the case in 2017 and, in my opinion, that’s the way it should be. The fact is that the best positions in prime locations have had property on them for years and my advice to my clients is that it makes better financial sense to go for a resale and not be deterred if it needs some updating or even, in the case of a detached house, tearing down, as building costs are still competitive. You almost certainly will have a finished product at a better price per square metre than new build and in the case of apartments and townhouses they will be more spacious and better located than new or recent builds. However, it is very clear that when new product is available overseas buyers are drawn to it like moths to a flame, even when it is overpriced, smaller and not in the best position, relative to resale property. It is an issue that I find inexplicable and I will cover later in the report when I discuss price trends.
For lifestyle Spain is hard to beat, relaxed and easy-going, safe and child-friendly. The climate suits all tastes, ranging from one of four seasons with a proper winter and lots of snow in the north to the sub-tropical south where the micro-climate zones on the Mediterranean coast of Andalucía have the best winter temperatures on the European mainland. Spain’s beaches and marinas have more Blue Flags than any other northern hemisphere country with a total of 679. For the cultural tourist Spain has 45 UNESCO World Heritage sites, putting it in third place globally, behind only Italy (51) and China (47). By region, Andalucía has the highest number with 7 and by 2018 it may be 8 as the Medina Azahara just outside Córdoba has been nominated as Spain’s next candidate for consideration.
Living well is affordable with food and drink prices below the E.U. average according to Eurostat and the cuisine is world-class. In the last 10 years a Spanish restaurant has been placed first in the list of the world’s top 50 restaurants 5 times and in 2016 Spain was the only country to have three restaurants ranked in the top 10. Sports and outdoor enthusiasts are spoilt for choice; golf, tennis, equestrianism, skiing, wind & kitesurfing, mountain biking, rock-climbing, hiking, fishing – the list goes on and on. The result is that Spain has a quality of life that’s hard to beat; the climate, the good food and outdoor lifestyle mean Spaniards have the longest life expectancy in Europe and are second worldwide, just behind the Japanese.
From an investment point of view, I believe prices in prime locations have regained about half of what was lost between 2008 and 2014, when, even in the best places, 40% was the average fall. So, in my view, there is still potential for capital growth of up to 20% in the relative short term before prices are back to where they were, from which point, no doubt, they will move on to new highs. Rental yields had another strong year in 2016. Across the board, owners of top-quality, luxuriously furnished properties in prime costal locations enjoyed 100% high season occupancy which is easy to understand given Spain’s phenomenal tourism figures in 2016, surging through the 70m barrier for the first time, closing the year on 75.3m visitors from overseas, way beyond even the most optimistic predictions and 10% up on 2015. According to the Tourism Ministry, 65% of Spain’s visitors stay in hotels, 35% d>on’t. Obviously, some of these will stay with family and friends and some will own their own property but that still leaves a very big number interested in renting privately. As a rough guide a 5%+ gross yield is achievable if all high season weeks are occupied by short term holiday lets and it will be similar in the case of a year-round long term rental.
The key to achieving an even higher yield is to focus on a mix of short term holiday lets and some longer lets at other times of the year in the few areas with a genuine 12-month season, and in the case of Spain that means heading for the mildest climate and golf. And I don’t mean areas with one or two golf courses within 30 minutes, I mean the area that attracts the serious golfer between October and June, that is the Costa del Sol, which also markets itself as the Costa del Golf, and specifically, the prime stretch between Marbella and San Pedro. A gross yield of 8%+ is achievable in this area, with about 5%+ coming in the high season weeks and the other 3%+ spread through the mid and low season weeks, mostly short term but there’s also demand for winter lets of up to three months. With demand outstripping the supply of quality rental properties in prime locations yields should hold up even though property prices are rising as rental prices are also on the increase and it goes without saying that free wifi, flat screen t.v. & satellite, high quality interiors and equipment are considered standard requirements by tenants.
When I am working for a client whose brief requires reliable rental income I target certain areas and ignore others, I look for a type of property and reject others. Get the location wrong, even by just a few kilometres and income may be halved. As well as pinpointing the right location in a particular area you need to be in the right region because some have legislated against short term holiday lettings, pressured by the powerful hotel lobby and disgruntled locals. This is particularly true in city centres, such as Barcelona and Madrid where some localities are overrun with holiday lettings. So, if rental income is a requirement of your buying plan then check the legislation in that autonomous region because there are differences.
So, with prices still on the way up, excellent rental yield potential, both for the buy-to-let investor and non-resident owner, hard-to-beat quality of life, there are lots of reasons why overseas buyers are flocking to Spain in record numbers. But if you are one of those who are thinking that renting out your property when you are not using it makes good sense so it isn’t left empty for long periods and helps to cover running costs, the days of leaving a set of keys at the local bar and crossing fingers that no emergencies will arise are over – you need to be ‘rental ready’.
Are you Rental Ready?
In 2013 the central government in Madrid devolved responsibility for legislation to regulate rentals of various categories to the autonomous regions, a sensible move given the different demands and conditions of each region. Several had already moved in the direction of more control, most notably Cataluña and Valencia in the main tourist destinations, but most had not and many of those without a significant tourism sector still haven’t. Spain’s very powerful hotel lobby had been calling for stricter control of the private rental sector for years, arguing for a level playing field but in part, I suspect, the demands were driven by the underlying lack of competitiveness that still pervades much of the Spanish economy. As already mentioned, according to Ministry of Tourism figures, 65% of Spain’s overseas tourists stay in hotels but many of those hotels could stand improvement. Making it harder for individuals to rent privately would reduce the need for better standards and more competitiveness but, in my view, there is little crossover between the two sectors; if a customer looking for the flexibility and privacy of a rented property can’t find what they want in Spain I think they are more likely to switch to a private rental in France, Italy or Portugal than head for a Spanish hotel of indifferent quality.
In May 2016 Andalucía became the last of the main tourist destinations to legislate in respect of short term holiday lets. It is one of the biggest rental markets in Spain with the new registration system expected to uncover 80,000 properties offering a total of 400,000 beds. And, given its unique 12-month season, it is the region with the highest yield potential so I’ll cover some of the requirements in detail and although there are differences in how each region has legislated there are also many similarities so you can get the general idea of what is required. Firstly, there are different registries; rural properties were covered by a separate law already in existence and another law covered the rules in respect of three or more properties owned by the same person within a 1km radius. The 2016 Andalucía legislation, in common with laws already in place in other regions, affects the typical overseas property owner in Spain who rents when they are not in residence to short term holiday makers, the demographic that so irritates the Spanish hotel lobby. According to the hoteliers, they should all be staying in a Spanish hotel and they wanted to make it as difficult as possible for the private market. In many respects they got what they wanted.
Every property advertised for rent by the day, week or month via travel agencies, estate agencies, printed media, rental portals such as Airbnb and Homeaway, must apply for inclusion on the relevant registry. In some regions it’s done at the town hall while in others it’s direct with tourism authorities. Some regions charge a fee for registration, Galicia for example, but most don’t while Cataluña leaves it up to individual town halls to charge a fee if they wish. In Cantabria owners must also register with the tax authorities and I think it is safe to assume that all regions will make registration details available to tax offices. Cantabria also requires public liability insurance to be in place at the time of application. In Andalucía, registration is free and done direct with the tourism office in each of the eight provinces. Once the registration number has been issued it must appear in all advertising and on invoices and registration cards that tenants must complete on arrival. In some regions single room occupancy is prohibited while the Andalucía decree covers only properties sleeping fewer than 15, more than that and it’s the hotel registry for you. Anyone renting to the same person for a period of more than two months can ignore everything as long term tenancies with a standard rental contract come under Spanish tenancy law.
Apart from the blindingly obvious requirements, such as pre-arrival cleaning and provision of clean bed sheets and spare linen, properties in Andalucía must have air conditioning between May and September and heating between October and April in all bedrooms and the living area. Freestanding appliances are not allowed so it’s goodbye to those radiators on wheels and wobbly cooling fans we are all familiar with. The obvious solution is wall-mounted split hot/cold units but I also like the slimline wall-mounted storage panels as very effective and low-cost background heating, particularly in bedrooms. All bedrooms must have external ventilation. Most owners who rent already have a visitor’s book but now they must also have a complaints book and a sign informing tenants that one is available. Most owners already have an information file, with useful stuff about local facilities, maps, restaurants, points of interest and things to do and this can now be provided online which should be easier to keep complete and up to date. The nearest medical facilities, such as walk-in health centres, hospitals and pharmacies must be be noted and a first aid kit must be provided. There must also be a local contact number available 24/7.
The legislation allowed for a 12 month grace period for owners to bring their properties up to the required standard and inspections would start from May 2017 although, given the scale of the operation in Andalucía, it’s going to be a while before they get around to everyone. At the end of 2016, more than 10,000 applications for registration had been received, of which just over half had been issued with a registration number but remember, it is estimated that 80,000 were being rented privately when the law took effect. Some will drop out but there’s still a way to go.
And if you don’t bother
They will get you. Fines up to €90,000 have already been levied in Barcelona for persistent repeat offenders. The penalties for non-compliance in Andalucía range from written warnings to being struck off the register and fines go from €2,000 to €150,000, depending on the severity of the offence. And finding non-compliers is easy as the overwhelming majority of owners who rent their properties to tourists do so via portals such as Airbnb, Homeaway and Holiday Lettings. In August 2016 Barcelona Town Hall fined both Airbnb and Homeaway €30,000 for listing properties without a license number on their sites – about 40% of properties listed in Barcelona on these sites don’t have the required license. Homeaway paid up but Airbnb didn’t and appealed and in November 2016 both companies were fined another €600,000 each, for continuing to advertise unlicensed properties. I feel sure that other town halls will follow suit, particularly if angry local residents start to protest, as they are already doing in Barcelona and Madrid, that their neighbourhoods are being ruined by the growth of unlicensed tourist rentals.
Resale prices are one thing while prices for the very limited amount of new-build projects coming through in prime locations are quite another and I’m convinced many buyers entering this rising market are not doing the necessary research to ensure they are paying the right price for current market conditions. I maintain the most reliable way to do this in Spain is to look at prices per square metre in specific areas, it’s the only way to make a good comparison. I said earlier in the report that something very strange seems to come over international buyers when they see new projects, perhaps they are seduced by clever marketing but they can’t possibly be looking at the price per square metre because if they were they wouldn’t be paying what they are paying. It’s the only explanation I can offer for some of the bizarre price differences I noticed between resale and new-build properties during 2016.
Marbella was the first municipality on Spain’s Mediterranean coast to show prices rising, posting a 4.8% increase in Q1 2014, so there have now been 3 years of price growth and the first new projects started to come on stream at the same time. Immediately, there were buyers, almost exclusively from overseas, buying off-plan at more than double the price per square metre for larger and more luxurious resale properties in the same area. Even in 2015 a beachside new-build project in San Pedro de Alcántara was achieving over €4,000 per square metre and by 2016 prices in the last phase of the project had risen to over €6,000 per square metre. The project’s position was good, third line to the beach, but not particularly high quality finish, non-existent gardens and a tiny communal pool, right by the main road down to the beach. It sold out within months, with buyers ignoring much larger resale apartments in a frontline position 100 metres away, better quality materials, award-winning gardens and magnificent pool, a 24/7 concierge service, where it was possible to find asking prices equivalent to €3,000 per square metre. In every respect a better development but buyers went for a more expensive option of lower quality over one built in 2004 and the only reason I can come up with is the fact it was new. New may be nice but it isn’t worth paying double per sq. m. And it certainly doesn’t make financial sense because a property is only new once, it’s a resale in any subsequent sale and the asking price will need to relate to other resales.
And it’s getting worse. In 2016 the same developer marketed another project in the same area but further away from the beach, on a busy main road, nothing special about the internal finishes, small pool and no gardens to speak of and yet buyers were paying the equivalent of €9,000 per square metre, putting a penthouse overlooking a set of traffic lights over €1.2m. It sold. At the same time a duplex penthouse built in 2005 was on the market, more square metres, much closer to the beach, no traffic noise, lovely gardens and pool area and in Q4 2016 it was sold for a price equivalent to €2,800 per square metre. The buyers plan to completely renovate the apartment but even if they spray money at it they will finish up with a superior property in every respect for around €4,000 pm2. Personally, I cannot begin to imagine a scenario in which the buyer of the €9,000 per sq.m. apartment will ever see a profit. To put it in some context, when the bubble burst in 2008 the top price achievable in the Marbella municipality was €6000 – €7,000 per sq.m. and yet 2016 purchasers thought it was a good idea to pay up to 30% more than that, at a time when resale prices in the very best areas are still well below that peak level. In July 2016 a client of mine finished the renovation of a frontline golf apartment in Nueva Andalucía bought six months previously. Including the building costs the price per square metre came out at €2,365. Purchased as a buy-to-let investment the property immediately rented long term, representing a 5.5% gross yield Those figures make sense, €9,000 per sq.m. do not
It’s no different with new villas versus secondhand ones. There are several new projects coming through in the Marbella area for single individual houses or a group of several and, in most cases, they are selling off-plan. My calculations show prices per square metre for new build villas are running about double the resale figure. But if you take an aerial view of the Marbella area and realise how little raw land is left for development in the most prime locations the inevitable conclusion is that people are paying too high a price for new build in an inferior location. Compare the €3,750 per square metre clients of mine paid in December 2016 for a 5 bedroom house in a 1,710 sq.m. plot 250m from the beach in Cortijo Blanco, 10 minutes walk to San Pedro and Puerto Banús against the €5,500 per square metre being paid for 4 bedroom houses in 1,000 sq.m. plots up at the back of Nueva Andalucía, in an area dominated by apartment complexes, not other villas of similar quality. I find myself asking why would anyone spend €2.5m to be overlooked by properties of lesser value. Can it be that they really haven’t noticed that adjacent apartments will be able to see into the garden of their lovely new villa?
Although I use the example of Marbella the same reasoning can be applied to any region, assuming of course that there is a functioning market. You can only make price per square metre comparisons in those areas where the market has recovered, it doesn’t work if nothing is selling. So the assumption is that you are focused on a prime area as that’s where the activity is. Follow simple rules and you won’t make a mistake. Find out the resale price per square metre for the type of property you want in the location you want, based on actual sales not asking prices. As you move further away from the most prime locations reduce the price per sq.m. If you are considering a new property do the same calculation and compare the developer’s price with prime location resale prices and think twice if there is a huge difference. Never forget that your new property will be secondhand when you come to sell it and the fact that you paid double the going resale rate at the time won’t mean you can ramp up your asking price over and above what the market can stand.
Buyers entering the market now at the right price should expect substantial capital growth in the medium term, say 2 – 5 years but in the case of those paying inflated new-build prices, artificially inflated because of lack of stock, I’m not sure I can see them breaking even in the foreseeable future and some may never go into profit. But when it comes to resales in the very best positions buyers need to be aware that in many cases there will be more than one buyer chasing the same property, there is definitely competition in the market for quality in the right location. Having said that, there were also many substantial price reductions coming through in the last few months of 2016 and that was a signal to me that many vendors have become over-excited by signs of recovery and too ambitious with their asking prices.
I started my Spanish property market report by saying that much of it would not be that different when compared with what I had written a year earlier. And it turns out that my conclusions are also very similar, nothing much changed in the property market during 2016 and nor do I see much change ahead in 2017.
The issues that kept the domestic property market depressed in 2016, relative to the overseas sector, will still be factors throughout 2017; high unemployment, job insecurity among the employed, emigration of educated young people, an ageing and declining population, tight lending criteria, slower economic growth are just some. The issues that attracted record numbers of buyers to Spain from overseas in 2016 will continue to impact during 2017; Spanish property is still relatively affordable with substantial capital growth achievable in the medium term and excellent rental yields plus Spain is seen as a relatively safe and stable country when compared with some of the world’s trouble spots. There’s no doubt that Spain’s property and tourism markets have benefitted enormously from instability and insecurity elsewhere, and hopefully, that won’t change. If it doesn’t I predict international buyers will head for Spain in even higher numbers in 2017. In the meantime, the sun goes on shining, the food is fantastic and good value and the quality of life is one of the best in the world. What’s not to like?
I think the lack of high-quality inventory, both resale and new build, at the right price in the prime locations will continue to be an issue in 2017 and buyers need to have their wits about them to ensure they make a sound investment. When there are still an estimated 385,000 unsold units in Spain, many of which are of a quality and in locations that make them unsaleable, it’s hard to explain to potential buyers that there is a lack of quality inventory in the best locations. And when they do find the perfect property in the right location they may have competition. Clients of mine whose brief was for a beachside property in the Marbella area found themselves in a bidding war at the end of 2016. Even after they had agreed to pay the asking price the opposition kept on going, even calling the seller to ask just how much did they have to pay to secure the property. Fortunately, we had found a seller who once he had given his word, he stuck to it and my clients got the property. Just as well, because I wouldn’t expect to find another one at the price any time soon.
So my advice to buyers in 2017 is the same, not to obsess about new-builds, especially if they are not located in prime positions, and look at equivalent resales first, calculate the price per sq.m. to include any renovation if it’s needed, and then see what makes financial sense. The result will almost certainly be a lower price, a bigger property and, most important of all, a superior location. A thorough search can still uncover some real deals and although they are harder to find there will always be some sellers more motivated and realistic than others. Don’t buy anything that is blighted; roads tend to get busier over time so if it’s noisy now it will only get worse. If there is a mobile mast in view you can assume there will be more as the tendency is for them to mate and multiply. Electricity pylons are also a big no-no.
Read the marketing blurb carefully and be sceptical; there is a new development of five villas currently being marketed in Marbella and the ads highlight panoramic sea views, Golf Valley location, contemporary architecture, all true. But there’s no mention of what I think is the most important feature – that the site backs on to the AP7 motorway. Strange that and as I have no doubt that lots of planting has been done to screen the project I can easily imagine buyers not realising what is over the rear boundary until it’s too late. Make sure any property gets good winter sun and if there is vacant land nearby, which, if built on, would block a wonderful view then find out with absolute certainty what can be constructed. The selling agent saying it is green zone is just not good enough. When I am assessing properties for my clients I always ask the question: if circumstances change and they need to sell quickly and at a profit is the price right to enable them to do that and is this a property for which there will always be demand irrespective of market conditions? If we’ve learnt one thing from the shambles of recent years it is that there are properties and locations for which there will always be demand, irrespective of market conditions. It always has been, still is and always will be about location.
I update this Spanish Property Market report throughout the year as new data becomes available and you can also click on the link at the top of the page to follow me on Twitter for the latest news as it happens. If you would like to download and save the report in pdf format click here