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Well, where to start this annual review of the Spanish property market? Everything seemed to be moving along just fine in 2017, at least in respect of the overseas property market. And even in the domestic market, away from the Mediterranean hotspots favoured by international buyers, things were improving slowly. Then, on October 1st, Cataluña hit the headlines. Prior to that date, I had thought much of this report would resemble last year’s. Unemployment down, economic growth forecasts up, property prices rising, tourism numbers soaring, that kind of thing.
But now, Cataluña has to be a consideration in any predictions about Spain’s property market in 2018. And even more so since December’s election result demonstrated just how divided the region is. Without doubt there are also wider economic implications, it’s not just about the property market. As well as Cataluña, this report will refer to the general economic outlook to see what’s changed, if anything, since last year. And I will be giving lots of property market statistics to help you make sense of what’s going on.
What I aim to do is bring together the statistics and opinions from various sources published throughout the year. I hope this gives a coherent review of the property market in 2017 and helps predict what’s ahead in 2018. Analysis of the Spanish property market can be a bit of a challenge as the statistics are renowned for inconsistency. However, I find the most reliable are those from the notaries as they reflect exactly when a purchase took place. So, a deal signed in a December will be counted in December’s returns.
Contradictory numbers come about because Spain’s Institute of Statistics (INE) also uses returns from the Property Registries. These don’t relate to when a deal is done but when the transaction is inscribed in the registry. Delays of weeks and even months are common and 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 these rollovers can cause significant discrepancies. For example, full year 2016 data showed 458,781 purchases recorded by notaries but only 403,703 properties inscribed at Property Registries, a difference of 12%. According to the notaries, 33,670 purchases were completed in January 2017. In contrast, the Property Registries inscribed 38,457, a discrepancy of 14.5%. The higher figure looks more interesting but we don’t know when those deals were done. Without doubt, some will be hangovers from Q4 in 2016 and more correctly belong in the data for 2016. And I expect the same discrepancies will be apparent when we get full year statistics for 2017. Confusion arises when commentators mix the statistics, don’t differentiate between the two or even identify which they are using. On balance, I think it’s better to stick with one source and my choice is the notaries’ returns.
So, where I give a statistic relating to purchase numbers, when and where done and by nationality, it will refer to notarial returns. Unless otherwise stated I ignore the returns from the Property Registries. Some statistics are partial in respect of 2017 but they’ll be the latest available. However, I update the report regularly as and when new data is published so please check back throughout 2018. Alternatively, follow us on Twitter, where I report news and statistics almost daily. As always, I treat the domestic and overseas property markets separately because they function completely independently of each other. While the former is inextricably linked to what is happening in the Spanish economy that same economy is largely irrelevant to the the latter. I’ll also refer to prices, hot spots, mortgages, who’s buying what and where and what might be ahead in 2018.
The Domestic Property Market – Unemployment spoils everything
The Organisation for Economic Cooperation and Development (OECD) published one of its periodic in-depth reports on Spain in 2017. While noting improvements in the economy since the previous report in 2014 it highlighted persistent structural problems hindering sustained recovery. It seems not much has changed, they were the same issues mentioned in the 2014 report, above all the dire unemployment figures.
The most intractable problem is Spain’s inability to get people into full-time, permanent jobs. It’s true Spain created around 500,000 new jobs in each of the last three years. However, too many of those jobs are neither permanent nor full-time. Ministry of Employment statistics indicate that permanent and full-time positions accounted for less than 10% of new labour contracts in both 2016 and 2017. In November 2017, only 7% of new job contracts in Málaga province were permanent, 93% were temporary. And it’s a worrying trend that the number of very short-term contracts of five days or less is rising. In 2017, 26% of all contracts were of this type. In addition, 36% of all contracts signed each month are not actually new. On the contrary, they are renewals of temporary contracts signed by employees in lieu of the permanent job they really want.
The prediction for the year end is an average unemployment figure around 16.5%, although it may be worse due to the sharply slowing Catalan economy. Even if it holds steady it will still the second worst in the EU. It’s more than double the EU average of 7.4% and only in Greece is it worse. And it’s more than triple the average of the 35 members of the OECD whose average in 2017 was 5.6%. Furthermore, averages mask variations. In some regions in Spain, e.g., Extremadura, Andalucía and the Canaries, average adult unemployment is still above 25%. Perhaps this is inevitable in regions highly dependent on tourism and agriculture, both sectors of seasonal jobs. Nevertheless, the grim reality is that at the end of 2017 five of the ten worst unemployment black spots in the EU were in Spain. (Source: Eurostat)
This is the real nightmare. 2017 opened with an average unemployment rate for the under 35s of 41.7%. The year closed with a 38.2% average nationally. Meanwhile, the rate for the same age group in Germany is 6.6%. It’s true there’s been progress given that youth unemployment peaked in 2013 at 55.8%. But, once again, averages mask regional variations. At its worst, unemployment for the under 35s was over 60% in some regions and is still over 50% in places. This age group has lost a decade in employment terms and I fear they may lose another one.
Such poor job prospects inevitably lead to higher emigration. The number of Spanish nationals moving abroad for work increased in 2017 for the 8th year in a row and emigrants still outnumber returnees. Unfortunately, those leaving tend to be in demographic Spain needs to keep; young, educated, professional and entrepreneurial. And while it’s true the Spanish population didn’t decline for the first time in five years, registering a 0.19% increase to 46.53 million, that wasn’t because emigration slowed. Rather it was an increase in immigration from parts of the world with even worse economies and job prospects than Spain, such as Venezuela, Morocco, Romania and Colombia.
Another negative effect of high youth unemployment is the fall in the number of new households formed annually. Before 2008 there were about 300,000 but it’s fallen to under 100,000 today. In addition, approximately 80% of the under 30s still live in the parental home. With this kind of labour market meaningful recovery in the domestic property market is unlikely in the short term. The unemployed, those fearing unemployment and those on short-term temporary contracts don’t buy property. And nor do those in employment whose purchasing power has reduced by nearly 10% since 2008, according to figures from the INE, Spain’s National Institute of Statistics.
In short, in this one area, lack of employment opportunities for the under 35s, I don’t see much improvement on the horizon. According to Javier Díaz-Giménez, Professor of Economics at Spain’s IESE Business School, few countries in the developed world have experienced unemployment over 20% three times in twenty years but Spain is one of them. The last time it peaked above 20% before the 2008 meltdown was in the mid-1990s. Depressingly, it took 14 years to decline to the European average. If we date the start of the current unemployment crisis to 2010 and history repeats itself it’s going to be 2024 before Spain gets close to the EU norm. Even worse, a 2014 report from PricewaterhouseCoopers predicted that Spain won’t return to pre-crisis employment levels until 2033!
The reality is that Spain has never been close to full employment even for adults. For example, when it was the fastest growing economy in the Eurozone in 2007 average unemployment was 8%. That’s a figure most developed countries would consider high in a recession. However, I came across a statistic while researching for this report that keeps me pessimistic in terms of the domestic property market. At the start of this section I gave the youth unemployment average at the end of 2017 as 38.2%. I was shocked to learn that this is only slightly above the 30-year average in Spain between 1986 and 2017. The average for these three decades was a staggering 34.69%. So, in spite of several boom periods in that timeline, Spain has made little progress in improving job prospects for young people. I think that’s what the OECD means by structural problems.
A Few Green Shoots
Nevertheless, in spite of this situation on the employment front acting as a brake on the domestic property market, there were improvements in 2017. Total transaction numbers for 2017 will be around the 500,000 mark if Q4 continues the trend for the year so far, about 10% up on the year. However, it may fall short if Cataluña slows, we won’t know until results are released in early 2018. Prices are rising, albeit slowly in most locations and with big regional variations. For example, Q3 statistics showed a national average of a 5.6% rise in 2017. But that disguised double digit increases in both Madrid (12.3%) and Barcelona (10%) and 9.1% in the Balearics. Yet for the same period, prices fell in Asturias (-0.3%) and four regions were at 1% or below.
Another good sign is that the mortgage drought of the recession is just about over. This is because fewer banks have balance sheets encumbered with toxic assets. However, although loans are easier to come by, purchasers still need a big deposit in the region of 20% – 25%. And even though the number of mortgages granted in 2017 is predicted to be up around 11% there is still of lot of volatility, big increases one month followed by a slowdown in the next. And overall, only about two-thirds of purchases in Spain are financed with a mortgage, a big drop from pre-2008. It’s still a ‘cash is king’ market, nowhere more so than in the overseas sector, more of which later.
There are signs of increased confidence in the construction sector. Building licence approvals for Q1-Q3 were 60,695, an annual increase of 27% so new-build stock is set to increase. However, this nine month figure is less the half the total for just one month in 2006! In September 2006 there were a total of 126,753, an indication of the devastation experienced in the industry in the recession. The reality was that building licence approvals fell 98% when the property market crashed and the construction sector was more or less wiped out. So, whatever upturns we see, be it in prices, mortgages granted, more jobs and more construction it’s important to remember that Spain is struggling back from an abyss that was so deep even the smallest improvement looks amazing. There is a long way to go yet.
Cataluña – The Implications for the Spanish Property Market
The emergence of a serious secessionist movement may have come as a big shock for many outside Spain. For those who watch Spain closely, perhaps not so much. The Catalan independence issue has been festering for years. And following the December 21st election, with both sides needing coalitions to be able to govern, it may well fester for the foreseeable future.
The economic fall-out was immediate. Indeed, the warning signs were already there in September as many multinationals started to freeze investments, ‘just in case’. In the month following the referendum on October 1st, business creation in Cataluña fell 14.3%. This was the worst October figure for the region since the height of the economic crisis in 2011. By the end of the first month following the referendum more than 1,000 companies had relocated their legal HQs elsewhere in Spain. Some changed both legal and tax locations. At the end of December 2017 this figure had grown to 3,100 with many more saying they would await the election result before making a decision.
As the election seems to have resolved little I think it is safe to assume more companies will follow. Prior to October’s referendum Oriol Junqueras, the former Catalan deputy premier and economics minister currently in prison, insisted there would be no flight of capital in the event of the referendum being in favour of secession. And somewhat bizarrely, he continued to deny it would happen even as it was happening.
The departure list includes some of Spain’s best known corporate names. Banco Sabadell and Caixabank headed the list of Catalan banks, the former off to Alicante, the latter to Valencia. Energy company gasNatural and publishing group Planeta were quick out of the blocks as well. And surely there’s nothing more Catalan than Cava sparking wine but Codorníu, founded in 1551, is off to Haro in La Rioja. Freixenet can’t seem to make its mind up. First it was going, then it was staying, now, who knows? The end result is that prior to the October referendum there were seven Catalan domiciled companies listed on Spain’s blue-chip Ibex 35 stock market index. At the end of December 2017 there was only one left.
Just about everyone considered Barcelona one of the front runners to be the new home of the European Medicines Agency when the current HQ in London is moved. In the event, it was eliminated when the first round of voting took place in November. Without doubt the independence issue was a factor.
However, other regions have benefited from the political uncertainty in Cataluña. The majority of companies have relocated to Madrid, but Valencia, Alicante, Mallorca, Málaga, Córdoba and Bilbao have also been chosen. While it’s the case that a change of registered address does not immediately affect corporate tax revenues some companies have also changed their fiscal HQ. The negative implications for the Catalan economy are many. Firstly, there is the loss of reputation as a stable and safe investment destination. As a consequence, foreign investment will probably fall. Furthermore, once a business has decided to leave it rarely returns. As a result, what was initially a technicality often develops into a move of personnel and operations. For example Banco Sabadell has already announced some of its executives will relocate to Madrid. Cervezas San Miguel are off to Málaga where they already have a factory, likewise food manufacturers Gallo in Córdoba.
To Buy or Not to Buy?
Property market statistics for Q4 are published during Q1 of the following year. Consequently, it’s only then we will know what the impact is on the Catalan economy. In the meantime, hoteliers report a 15% drop in reservations since October. There were 20% fewer foreign visitors than normal at the annual Barcelona Meeting Point property showcase event, held just three weeks after the referendum. Anecdotally, we already hear that the overseas property sector is more or less stalled, particularly in Barcelona. Buyers have walked away from signed contracts, preferring to forfeit their deposits. Developers selling new projects off-plan are anticipating defaults on stage payments down the line.
The Bank of Spain’s end of year report was cautious when commenting on GDP prospects. On the one hand it seemed to be holding steady on a national basis with Q4 growth predictions at 0.8%. But the statement highlighted poor performance in the Catalan employment, tourism and property sectors in Q4, a sign that economic activity will slow more in Cataluña than in other regions.
Some might say that it’s a brave overseas buyer who enters the Catalan property market in 2018. Indeed, one opinion poll reported 45% of foreign property owners in Cataluña want to leave the region because of the independence issue. On the other hand, assuming there’s a price correction on the way, prices could quickly become irresistible for buyers who only want to be in Cataluña. The attractions of the region remain the same. And I also don’t see any adverse impact on the property market in other regions. In fact, there might even be a benefit. If people do sell up and leave the region I wonder how many will relocate to other parts of the country. And surely some investors dropping their plans to buy in Cataluña will consider alternatives rather than abandon purchasing in Spain altogether. For example, if buyers move away from Barcelona but still want the buzz of a city I can see both Valencia and Málaga benefitting.
The Overseas Market – buoyant and growing
The total of foreign buyers in 2016 was 87,551, an all-time high and of that total, 44,141 occurred in the first half of the year . However, it was even higher in the first six months of 2017, with 50,037 foreign buyers. Typically, second half figures are broadly similar to first half so it seems reasonable to assume overseas buyer numbers are headed towards 100,000 in 2017. By comparison, even at the peak of the boom in 2006 the number was only around 80,000, crashing to 30,000 in 2008. Therefore, the 2017 partial figures look impressive, about 12% higher than in 2016.
The figure of 50,037 foreign buyers in the first half of 2017 represented a 19.4% share of the total market. That shows just how important the overseas buyer is in today’s Spanish property market. However, when you dig a bit deeper into the statistics for the specific regions that attract most international buyers the figures are even more significant. Several areas have overseas buyer market share way above the national average. For example, look at Tenerife (44.1%) and Alicante (46,27%) followed by Girona (32.9%), Balearics (31.7%) and Andalucía (28.1%).
Even more striking is how international buyers dominate the high value end of the market. In the most prime areas, such as Marbella, foreign buyers account for about 75% of €1m+ purchases. And these statistics translate into startling differences in actual numbers. Andalucía welcomed 8,995 foreign buyers in the first half of 2017 while Cantabria had 152. The Valencia region, which includes Alicante and Castellón, saw 13,355, but in Asturias, the only region in Spain where prices fell in Q3, just 203 foreigners purchased. The Canary Islands saw 5,682, La Rioja only 215, Cataluña 7,974 against 113 in Extremadura.
As a result it’s obvious that overseas buyers are an important component of any optimism about the property market in Spain. This sector is outperforming, and by some margin, those areas dependent on the domestic buyer. And for the reasons already cited I believe the domestic sector will lag behind for several more years. So, this is why I maintain that the overseas and domestic property markets function completely independently of each other. Consequently, one sector can be buoyant and in strong growth while at the same time the other is still struggling.
Commercial, Investment & Development
As well as growing numbers of foreign buyers in the residential property sector, the development and investments sectors had an active 2017. As Spanish banks continue to divest themselves of toxic assets accumulated during the banking crisis, overseas funds are doing much of the buying. US financial services group Blackstone first entered the Spanish market in 2013 acquiring housing stock in Madrid. In August 2017 they paid €5bn for a 51% share of the real estate portfolio of Banco Popular. This portfolio, once valued at €30bn, transferred to Banco Santander when they acquired Popular for a symbolic €1 in June 2017 to prevent its collapse. Blackstone’s property assets in Spain now total €12bn, making it the biggest fully private real estate owner in the country.
Also from the US, Cerebus Capital Management agreed a deal to be finalised in 2018, acquiring 64% of BBVA’s property business. Norwegian Axactor made its second purchase from Unicaja, taking on another €252m of real estate defaults which Unicaja itself acquired when it rescued several savings banks during the banking meltdown. And as 2017 closed Deutsche Bank purchased loan defaults from Spain’s bad bank Sareb to the tune of €375m. Overall, purchases of banks’ toxic assets reached €48.2bn in 2017, more than in the four preceding years (Source: Evercore). And according to consultants Savills, more than two thirds of that figure came from foreign investment funds.
British retail specialists Hammerson and Intu have merged and will continue the Torremolinos project for the largest retail and leisure centre in Europe. London-based Pacific Investments is putting €25m into a 5 villa project in Marbella. The Round Hill Capital Investment fund, also London-based, are behind a €250m development in Ojén, 7kms inland from Marbella. And Chilean investment group Osim are investing €480m in various developments, one of which will feature a Crystal Lagoon lake, the first of its kind in Europe.
Who is Buying?
So just who are all these foreigners buying in Spain, where do they come from? The British have always been the single largest group by nationality buying in Spain by some margin, probably always will be. And yet again, the British lead the way buying 6,972 units in the first half of 2017. That’s well ahead of second place French (4,386) and third place Germany (4,120). In fact, its also well ahead of the total for all non-EU buyers (5,301). EU nationals account for 70.1% of purchases by foreigners but non-EU citizens are buying more than at any time since 2007. Buyers from the United States, China, Russia and several South American countries increased by between 20% and 30% compared with 2016.
However, the British market declined by 16.4%, the 6,972 purchases being a 13.9% share of the total overseas market. Is this the collapse that so many commentators predicted post-Brexit, with dire consequences for the overall international market? It’s true that British market share was 17.2% in 2016 and 20.7% in 2015 but in total there were 10,461 more foreign buyers in 2016 than 2015. So, even if the number of British buyers stayed the same the market share would have diminished. In the event there were just 901 fewer buyers from the UK in 2016 after the referendum, compared with 2015. Usually, the there are more overseas buyers in the second half year than the first but if the British numbers in the second half of 2017 match those already recorded there will be another fall of about 1,000 over the year. Given that the overseas market looks set to grow by at least another 10,000 in 2017 compared with 2016, the fall in British numbers is barely noticed.
Of every 100 foreign buyers in Spain today 87 aren’t British, quite a contrast with the split the last time the Spanish property market experienced a collapse in the early 1990s. In those days, 80% of international buyers were from the UK so when the British economy hit the buffers in 1990 the overseas market virtually disappeared. However, now there are so many other nationalities buying in Spain the potential damage to the overall international sector is limited. All the indicators are that demand from foreign buyers will continue to increase in 2018 and fewer British buyers will hardly register.
In my view lower buyer numbers from the UK reflect the GBP£/€ exchange rate. I have yet to hear anyone from the UK mention uncertainty about conditions that may apply to British citizens post-Brexit in the context of their purchasing plans. The British have been the most active foreigners buying property in Spain since long before either country was in the EU. And this continued 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.
Consequently, I don’t believe the smaller number of British buyers in 2017 can be attributed to uncertainty about how the British will be treated after Brexit. Rather it is all about the the weak GBP£, a factor closely linked to uncertainty about the departure process to be sure but not a permanent one. Things could change in Sterling’s favour if, for example, there is renewed Eurozone instability, something which most analysts consider a cast-iron certainty some time soon.
However, British buyers who wait for an improvement in the exchange rate may find any benefit wiped out by further price increases in 2018. Indeed, prices in the prime areas of high overseas activity are already some 20% higher than they were at the end of 2015 when the exchange rate peaked at €1.41/£1. Then, the GBP£ went on something of a rollercoaster in 2016, losing 14% comparing January with December. At one point in 2016 it was down 24%. In contrast 2017 was a more tranquil year with it just 4% lower in December than in January. But with prices rising in 2017 at a faster rate than the currency fell a British buyer waiting for a higher exchange rate found themselves paying more in December 2017 than they would have buying at a lower price but better exchange rate at the start of the year.
However, there is a solution and it surprises me that so few people have heard about about it. Indeed, I recently spoke to an experienced estate agent in Marbella and they didn’t know what I was talking about. The solution is called a fixed rate Spanish mortgage and I think it’s one that anyone thinking about buying in Spain in 2018 should consider. And that includes everyone, not just those in GBP£.
Spanish Fixed Rate Mortgages
It’s a fact that the majority of all overseas buyers in Spain since the property crash have been cash-rich. Obviously, the principle reason for this is that Spanish banks were drowning in bad debts and new loans for property buyers were hard to come by. Only a massive bail-out from the European Central Bank prevented widespread collapse. And even when a foreigner passed the status checks the amount a bank was prepared to lend dropped from 100% to 60% of the value. As a result the buyer needed a much bigger deposit than previously. In fact, I don’t see much change in attitude, even in 2018. An overseas buyer who actually needs a mortgage to purchase may struggle to get approval. When I hear that a deal has fallen through it often turns out to be due to a failed mortgage application by a foreign buyer. In many cases they had based their budget on being able to get 80%+ and then falling well short.
In contrast, the banks are very keen indeed to lend to international buyers who don’t require a mortgage. One of the first questions I ask potential clients is whether they are cash buyers or if they need finance. I do this because I believe it is better to get an indication of borrowing potential before I start a property search. When the answer comes back that they are cash buyers I always ask if they are aware of the fixed rate mortgages currently available in Spain. Most are not. However, once they knew, all my recent clients who had intended to buy with cash have opted to take the maximum they could borrow. The typical response has been ‘where do I sign?’
Euribor is the interest rate used to fix the majority of Spanish mortgages and it’s been in negative territory since February 2016. It closed 2016 at -0.080% and at that time fixed rate mortgages accounted for 28.6% of all new loans. Earlier in the recession it was impossible to even get such a loan as fixed rate mortgages had disappeared from the market. Euribor fell throughout 2017, going lower each month to a new historic low, closing the year at -0.19%. And by year end the proportion of fixed rate loans had grown to 40%.
As a result of the Euribor fall, low interest rate mortgages are readily available to all overseas buyers, subject to status. The broker I recommend to my clients tells me the majority of international buyers are opting for fixed rate rather than variable rate loans. My advice to current cash buyers, irrespective of the currency they are in, is to protect as much capital as possible and take a Spanish mortgage for as much as they can get. There are many products to chose from with fixed terms from 5 – 30 years, interest rates between 1.7% and 2.75% and up to 70% LTV. There are a lot of variables, such as country of residency, amount required, location of purchase but most have no restrictions on nationality or purchase price. A good broker is essential. Several recent clients have secured loans of up to €1m, representing 50% LTV, at 2.4% fixed for 20 years. Status is scrutinised very carefully but in general the process is straightforward and quick. In the case of some of my clients we have even had banks competing for the business. What’s not to like?
The Overseas Market – Why Spain?
For lifestyle Spain is hard to beat, it’s relaxed and easy-going, safe and child-friendly. Life expectancy rose by ten years between 1970 and 2015. At 80yrs for men and 85yrs for women Spaniards have the highest life expectancy in Europe and are second worldwide. Only Japan does better by a few months. 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. The micro-climate zones on the Mediterranean coasts of Andalucía have the best winter temperatures on the European mainland. And not for nothing are The Canary Islands often referred to as Europe’s Caribbean. Spain’s beaches and marinas have more Blue Flags than any other country in the world with a total of 671. In fact, Spain has been in the top spot ever since the scheme began in 1987.
For the cultural tourist Spain has some of the oldest cities in the world and 45 UNESCO World Heritage sites. This puts it in third place globally, behind only Italy (51) and China (47). One more should be added in 2018 when the UNESCO committee adjudicates on the latest candidate, the Medina Azahara near Córdoba. Living well is affordable with food and drink prices below the E.U. average according to Eurostat and the cuisine is world-class. For the second year running Spain had three restaurants listed in the top ten restaurants in the world, more than any other country. And there’s a total of six in the top fifty. 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
From an investment point of view, I believe prices in prime locations have regained about half of what was lost between 2008 and 2014. During those years even in the best places the average fall was 40% and as much as 65% elsewhere. 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 in 2006.
The Tourism Link
You might think that a report on Spain’s overseas property market doesn’t need to mention tourism but I think there is a close link. There are several categories of overseas buyers. Firstly, permanent residents and second home owners who don’t intend renting at all. But there are large and growing groups for whom the tourism numbers are very interesting. Some purchase buy-to-let investments, not for their own personal use at all. Then there are those who want the property to pay for itself, generating income by renting when there are absent. And then there are what I call accidental landlords. No intention of renting out when they purchased but changed their minds when they saw the potential.
The fact is that Spain’s tourism statistics are nothing short of astonishing. At the very peak of the boom market pre-2008, the all-time record was 59m overseas visitors in one year. The detailed breakdown isn’t available yet but it has already been announced that the 2017 total is in excess of 82m. As an added bonus, Spain overtook the U.S. to become the second most visited country in the world, just behind France.
To go from 59m to 82m+ in a decade really is remarkable. Even more extraordinary, there’s been a 10m rise in just the last two years. There are several reasons for the surge in overseas visitors. Without doubt, some of the increase is due to instability and safety fears elsewhere. Rightly or wrongly, Spain is still perceived to be relatively safe and even the August 2017 atrocity in Barcelona didn’t affect tourism there. Secondly, Spain has improved its marketing as a year-round destination with amazing culture, architecture and cuisine, great for city and weekend breaks, not just the traditional two weeks sun ’n sand family holidays. This has helped extend the season beyond the summer high season months. As a result, record numbers visited in 2017 in all months so there is much greater potential for rental income throughout the year.
So, what does this have to do with the property market? Well, according to Ministry of Tourism research about 35% of this 82m+ will not have stayed in hotels. Some will have their own homes, or stay with family and friends, but that leaves a serious number of overseas visitors renting privately.
As a result, rental yields performed very strongly in 2017. Across the board, top quality, prime-located properties were 100% occupied in high season. A friend of mine, a permanent resident in Spain, received such a big offer for his stylish beachside home in August that he moved out. And that was without offering it for rent. Subsequently, he moved out again for an irresistible two month winter let. In the same area a six month let produced US$450,000. Former clients who renovated a house I found them in the hills behind the coast have become ‘accidental’ landlords. They bought a permanent home, no intention of renting, but they could not believe the income potential. Not only have they seen 100% high season occupancy but regular lets throughout the year and a three month winter let.
There is high demand for both long and short term rentals. However, it is absolutely essential that the location is the best and the property must be in 5* condition. What used to be considered luxury items, such as free wifi, flat screen t.v. & satellite, high quality interiors and equipment, are now standard requirements. It doesn’t have to be a grand detached villa, there is just as much demand for smart two bedroom apartments in the right location.
I was concerned that yields would be squeezed as prices rise but demand is so outstripping supply that doesn’t seem to be happening. In general, an apartment or townhouse can achieve 8%-10% gross yield if available for short term lets throughout the year. A similar property let long term can achieve 5%-7%. At the top of the market a detached beachside property can gross 10%-12% in the short term market. In all cases, location and interior finishes are key
When I am working for a client whose brief requires reliable rental income I target certain areas and ignore others. In addition, 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.
But if you are one of those thinking that renting out your property makes good sense the days of leaving a set of keys at the local bar and hoping that no emergencies will arise are over. You need to be ‘rental ready’ and you can read more about what this means in my blog.
What’s in Demand?
The shift towards contemporary architecture, lots of glass and flat roofs, was just getting underway as the property market crashed. And the trend accelerated as construction started again but every trend has a shelf life. I’m starting to wonder if what was considered very futuristic and exclusive is now a bit overdone. I have recently worked for several clients who specified that they didn’t even want to look at what they called ‘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 away from it.
The property market is still heavily weighted towards resales. At the end of 2017 the split was 90% resales against 10% new-build. Although building licence approvals are rising nationally there’s always a time-lag between project approval and it being sales-ready. As a result, 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. In my opinion, the rural sector is no more 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. I don’t see those days returning
So, the market in 2017 was all about resales and that will still be the case in 2018. And my opinion, that’s the way it should be. The fact is that there’s been property on the best positions in prime locations for years. My advice to my clients is that it makes better financial sense to go for a resale. Don’t be deterred if it needs some updating or even 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. 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. And that’s even when, relative to resale property, it is overpriced, smaller and not in the best position. I find it hard to understand
Prices – Resales versus New-build
Resale prices are one thing while prices for new-build projects are quite another. And the statistics bear this out. At the end of 2017 average resale prices were rising at 3% against an 11% rise in the new-build sector. 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. For me, it’s the only way to make a good comparison. I said in the previous section that something 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. If they were they wouldn’t be paying what they are paying.
During 2017 a beachside development near Puerto Banús was on the market. Located on a busy main road, average quality internally, small communal pool and no gardens to speak of. Yet buyers were paying the equivalent of €9,000 per square metre. This put a price tag of €1.2m on a penthouse overlooking a set of traffic lights on a main road. It sold. At the same time a resale duplex penthouse built in 2005 only 500m away was available. It had more square metres, much closer to the beach, no traffic noise, lovely gardens and pool area. It 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 per square metre.
The only reason I can explain the €1.2m price tag is that it was new. New may be nice but it isn’t worth paying more than 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.
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. Nevertheless, purchasers in 2017 thought it was a good idea to pay up to 30% more than that. Yet at the same time resale prices in the very best areas are still 20% below that peak level. I can accept that some purchasers don’t mind too much about not making a profit. But I’ve yet to meet one that is happy to make a loss.
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. 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. However, 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. In the worst of cases, I think some may never go into profit. But when it comes to resales in the very best positions buyers will find 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 throughout 2017 because many vendors have become over-excited by signs of recovery and were too ambitious with their asking prices.
Spanish Property Market 2018 – Conclusions
The issues that kept the domestic property market depressed in 2017, relative to the overseas sector, will still be factors throughout 2018. High unemployment, job insecurity, emigration of educated young people and tight lending criteria are just some of them. At the same time, what attracted record numbers of overseas buyers to Spain in 2017 will continue to impact during 2018. Spanish property is still relatively affordable with substantial capital growth achievable in the medium term. In addition, excellent rental yield potential and the perception that Spain is seen as a relatively safe and stable country when compared with some of the world’s trouble spots. A big unknown is the Catalan issue which has the potential to affect both the domestic and overseas markets. Indeed, in terms of the overseas market it is the third largest in Spain.
There’s no doubt that Spain’s property and tourism markets have benefitted enormously from instability and insecurity elsewhere. Hopefully, that won’t change. If it doesn’t, I predict international buyers will head for Spain in even higher numbers in 2018. 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 2018 and buyers need to have their wits about them to ensure they make a sound investment. This lack of inventory and consequent pressure on prices may mean that 2018 is the year that the ripple effect starts to kick in. So far the recovery has been restricted to the very prime locations in any region, it hasn’t been across the board. But price rises are putting pressure on budgets and some buyers may struggle to find what they want in their preferred location. Some compromises may be necessary.
My advice to buyers in 2018 is not to obsess about new-builds, especially if they are not located in prime positions. Many are not. Look at equivalent resales first, calculate the price per sq.m. to include any renovation if it’s needed. Then you can take an informed view on what makes the best 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. A strange omission but I have no doubt that lots of planting has been done to screen the project. As a result I can easily imagine buyers not realising what is over the rear boundary until it’s too late. If you intend spending time in Spain in the winter check where the sun will be. If the orientation is wrong many properties will be dark and cold.
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 following questions. If circumstances change and they need to sell quickly is the price right to enable them to do that? Secondly, 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 always in demand, no matter how bad the rest of the market is. It always has been, still is and always will be about location.
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