Click here to download and save the Spanish Property Market Report.
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 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 considered in 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, I’ll discuss the general economic outlook to see what’s changed 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. However, analysis of the Spanish property market can be a challenge as statistics are renowned for inconsistency. I think 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.
However, 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 completed at the end of any quarter won’t be registered until the following quarter. However, the worst distortion is in the annual figures. November and December purchases are unlikely to be registered until January of the following year at the earliest. And this is how statistical contradictions occur.
These rollovers can cause significant discrepancies. For example, full year 2017 data showed 513,814 purchases recorded by notaries, all of which actually occurred in 2017. In contrast only 464,423 properties were inscribed at Property Registries, a difference of 10%. Problem is, we don’t know when these happened and some will definitely be hangovers from 2016. At the same time, some 2017 transactions will not appear because they won’t have been registered by year-end. 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, prices, locations and nationalities, it refers to notarial returns. Unless otherwise stated I ignore the returns from the Property Registries. And I treat the domestic and overseas property markets separately because they function completely independently of each other. While the former is inextricably linked to the Spanish economy that same economy is largely irrelevant to 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. Fewer than 10% of new contracts in both 2016 and 2017 were for permanent and full-time jobs. (Source: Ministry of Employment)
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. Additionally, 36% of all contracts signed each month are not actually new. On the contrary, they are renewals of temporary contracts signed in lieu of the permanent job employees really wanted.
In the event, 2017 ended with an average unemployment rate of 16.5%. That’s more than double the EU average of 7.4% and only in Greece is it worse. And it’s approximately triple the 5.6% average of the 35 members of the OECD. 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 reality is that Spain had five of the ten worst unemployment black spots in the EU in 2017. (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, under 35s unemployment 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. Unfortunately, those leaving tend to be in demographic Spain needs to keep; young, educated, professional and entrepreneurial. It’s true the population didn’t decline for the first time in five years but that wasn’t because emigration slowed. Rather it was because immigration increased from countries with even worse job prospects, 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 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. (Source: National Institute of Statistics INE)
In the short term, there doesn’t seem to be much improvement on the horizon for jobless young people. Spain is one of the few countries in the developed world with unemployment over 20% three times in twenty years. (Source: Javier Díaz-Giménez, Professor of Economics at Spain’s IESE Business School). 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 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. Even 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, while researching for this report I found a very depressing statistic relating to youth unemployment. 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 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 youth job prospects. I think that’s what the OECD means by structural problems.
A Few Green Shoots
Nevertheless, in spite of high employment acting as a brake on the domestic property market, there were improvements in 2017. Total transaction numbers for 2017 were 513,814, although overseas buyers took 20% market share. Prices rose, albeit slowly in most locations and with big regional variations. For example, the national average was 7.2% up in Q4 2017. But that disguised double digit increases in both Madrid (11.9%) and Barcelona (10.2%). and 9.1% in the Balearics. Yet for the same period, two regions registered price rises below 1%. On the bright side, no region was in negative territory for the first time in 2017.
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%. 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 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. Across Spain the construction sector was more or less wiped out. So, it’s important to remember that Spain is recovering from an abyss so deep even the smallest improvement looks amazing. There’s still a long way to go.
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 inconclusive December 21st election, 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 2017 over 3,100 companies had relocated their legal HQs elsewhere in Spain. And some changed their tax locations as well.
As the election seems to have resolved little I think it is safe to assume more companies will follow. The Catalan government denied there would be a flight of capital if the referendum result was for secession. And somewhat bizarrely, they 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 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? Prior to the October referendum Spain’s blue-chip Ibex 35 stock market index had seven Catalan domiciled companies listed. At the end of December 2017 only one remained.
Barcelona was a favourite to be the new home for the European Medicines Agency when the current London HQ closes. In the event, it didn’t survive even the first round of voting. Without doubt the independence issue was a factor.
However, other regions are benefitting 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. It’s true that a change of registered address does not immediately affect corporate tax revenues. However, some companies also changed their fiscal HQ and that will affect tax revenues in future.
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 the first half 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. Foreign visitors to the annual Barcelona Meeting Point property event, held just three weeks after the referendum, were down 20%. 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. This could be a sign that economic activity will slow more in Cataluña than in other regions. For example, Cataluña lost nearly half a million visitors in Q4 2017 compared to the same period in 2016.
Some might say that it’s a brave overseas buyer who enters the Catalan property market in 2018. One opinion poll reported 45% of foreign owners in Cataluña want to leave the region because of the independence issue. On the other hand, assuming there’s a price correction, prices could become irresistible for buyers who only want 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 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 Spain altogether. For example, for buyers who still want the buzz of a city I can see both Valencia and Málaga benefitting.
The Overseas Market – buoyant and growing
In the introduction to this report I said I would deal with the domestic and overseas sectors separately. Here’s the reason why. In current market conditions about 65% of all property transactions in Spain take place in just a few locations. Not surprisingly one of those is Madrid, but the rest are where most international buyers head for. They overwhelmingly choose the Mediterranean coasts, the Balearics and the Canary Islands.
The total of foreign buyers in 2016 was an all-time high 87,551 but 2017 easily beat that with 100,095. That’s an annual increase of 14.1%, impressive against the background of Brexit and Catalan secession. Without the Catalan issue, I’m certain foreign buyer numbers would have been even higher. Instead of which, there was a big drop in transactions in Cataluña in Q4.
In the event, the 100,095 international buyers represent about 20% of property transactions during the year. 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 of 19.5%. For example, look at the Canaries (37.6%) and Alicante (46,27%) and the Balearics (40.5%).
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 17,807 foreign buyers in 2017 while Cantabria had just 329. The Valencia region, which includes Alicante and Castellón, saw 27,582, but in Asturias just 437 foreigners purchased. The Canary Islands saw 10,588, La Rioja only 416, Cataluña 15,367 against 254 in Extremadura.
So it’s clear 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
In the development and investments sectors foreign companies were also very active in 2017. As Spanish banks sell the 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 2017. 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 acquired 64% of BBVA’s property business. Norwegian Axactor made its second purchase from Unicaja taking on another €252m of real estate defaults. 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 merged. They announced the Torremolinos project for the largest retail and leisure centre in Europe will continue. London-based Pacific Investments is putting €25m into a 5 villa project in Marbella. The Round Hill Capital Investment fund, also London-based, is behind a €250m development in Ojén, 7kms inland from Marbella. And Chilean investment group Osim are investing €480m in various developments. One of these 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 14,242 properties in 2017. That’s well ahead of second place French (8,565) and third place Germany (8255).
However, although British market share declined in the first half of 2017 it grew again in the second half. As a result, the British market represented 14.3% of foreign buyers in 2017. It’s true that’s lower market share but in a larger market it makes more sense to look at numbers. Many commentators predicted a collapse in British buyers because of Brexit, with dire consequences for the overall international market. In the event there were just 901 fewer buyers from the UK in 2016 after the referendum, compared with 2015. In 2017 there were 816 fewer British buyers than in 2016. That’s not what I would call a collapse. And given the overall overseas market grew by 12,478 in 2017, 815 fewer British buyers is barely noticed.
EU nationals account for 70% of purchases by foreigners. However, 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. Of every 100 foreign buyers in Spain today 85 aren’t British. That’s 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.
In my view lower buyer numbers from the UK reflect the GBP£/€ exchange rate. I have yet to hear anyone from the UK mention post-Brexit regulations in the context of their purchasing plans. The British have been the most active foreigners buying property in Spain since before either country was in the EU. And this continued throughout the period when the UK was in but Spain wasn’t. There is no way Spain will allow anything to damage their most important market.
Consequently, I don’t believe the number of British buyers in 2017 was connected to British status after Brexit. Rather it is all about the the weak GBP£, a factor closely linked to uncertainty about the departure process. However, this could be temporary and the exchange rate could change in Sterling’s favour. For example, if there is renewed Eurozone instability, something which most analysts consider a cast-iron certainty some time soon.
However, British buyers who wait for the rate to improve may find any benefit negated by price increases in 2018. Indeed, prices in prime areas of high overseas activity are already 20% higher than at the end of 2015. At that time 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. However, prices rose at a faster rate in 2017 than the currency fell. So a British buyer waiting for a higher exchange rate would have lost out. They would have paid more in December 2017 than buying at a lower price but better exchange rate in January.
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. 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. As a result, new loans for property buyers were hard to come by. Only a massive bail-out from the European Central Bank prevented widespread collapse. Even when a foreigner passed the status checks the amount a bank would lend dropped from 100% to 60% LTV. Consequently, buyers 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 a deal has fallen through it’s often due to a failed mortgage application by a foreign buyer. In many cases they had based their budget on being able to get 80%+ but fell 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. If they are cash buyers I always ask if they know about the fixed rate mortgages currently available in Spain. Most do not. Once they know what’s on offer the typical response is ‘where do I sign?’
Euribor is the interest rate used to fix the majority of Spanish mortgages. 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. Since the recession it’s been impossible to even get a fixed rate mortgage as this type of loan disappeared. Euribor fell throughout 2017, going lower each month to a new historic low and the trend continued into 2018. At the end of March it closed at -0.191%. 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. That is subject to status, of course. My advice to cash buyers, irrespective of the currency they are in, is to protect as much capital as possible. Take a Spanish mortgage for as much as you can get.
There are many products to chose from with fixed terms from 5 – 30 years. Interest rates are between 1.7% and 2.75% and up to 70% LTV. There are a lot of variables, such as country of residency, amount required and location of purchase. But most have no restrictions on nationality or purchase price. However, 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. The banks will scrutinise the buyer’s status 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.
The Overseas Market – Why Spain?
It’s hard to beat Spain’s lifestyle; 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. It ranges from one of four seasons with a proper winter 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). When the UNESCO committee adjudicates on the latest candidate, the Medina Azahara near Córdoba, the number will rise to 46. Living well is affordable with food and drink prices below the E.U. average. (Source: Eurostat) The cuisine is world class. For the second year Spain had three restaurants in the world’s top ten restaurants, more than any other country. And there was a total of six in the top fifty. Sports and outdoor enthusiasts have so much choice. Golf, tennis, equestrianism, skiing, wind & kitesurfing, mountain biking, rock-climbing, hiking, fishing – the list goes on and on. As a result, Spain has a quality of life that’s hard to beat.
Prices in prime locations have recovered about half of the losses incurred between 2008 and 2014. During those years the average fall was 40% in prime spots 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. However, I predict prices will be back to where they were in 2006 by the end of 2019..
The Tourism Link
You might think that a report on Spain’s overseas property market doesn’t need to mention tourism. However, 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 annual record was 59m overseas visitors. The 2017 total was 81,786,363 and it would have been well over 82m but for the Catalan crisis. Nevertheless, Spain still overtook the U.S. and become the second most visited country in the world, just behind France.
To go from 59m to 81.75m+ 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 elsewhere. Rightly or wrongly, most people still perceive Spain to be relatively safe. The figures show that even the August 2017 atrocity in Barcelona didn’t affect tourism there. Secondly, Spain has improved its marketing as a year-round destination highlighting amazing culture, architecture and cuisine. It’s no longer just a traditional sun ’n sand family holiday destination. It’s also great for city and weekend breaks.
This has helped extend the season beyond the summer high season months. As a result, record numbers visited in all months in 2017. This means 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. As a result, private 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 received an irresistible offer for his stylish beachside home in August. So he moved out. And that was without offering it for rent. Subsequently, he moved out again for a two month winter let. In the same area a six month let produced US$450,000. Former clients who renovated a house I found 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 as well.
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. Once considered luxury items, e.g., free wifi, flat screen t.v. & satellite, high quality interiors and equipment, are now standard. And there is just as much demand for smart two bedroom apartments in the right location as for luxurious villas.
I thought yields would fall as prices rose 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. This is due to legislation 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.
However, the days of leaving 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 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 no ‘white boxes’. What they wanted was an exterior that made reference to traditional Spanish architectural style but with totally modern interiors. As the ‘white box’ look is now so ubiquitous I see the beginnings of a move away from it.
Resales still dominate the property market. 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 buy in the short term. And demand for coastal properties overwhelms the inland sector. 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 because that’s all their budget allowed. And 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’s very clear that when new product is available it draws in overseas buyers 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 but demand for new properties is just going to go on growing throughout 2018.
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 are not doing the necessary research to ensure they pay the right price for current conditions. For me, the only way to make a comparison is to look at prices per square metre in specific areas. I said in the previous section that something strange seems to come over international buyers when they see new projects. Of course, clever marketing is very seductive but it’s more important to look at the price per square metre. If only more buyers did that they wouldn’t pay 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. The purchase price was equivalent to €2,800 per square metre and the buyers plan to completely renovate the apartment. But even if they spray money at it they will have a superior property for around €4,000 per square metre.
The only reason I can find for 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 foresee the buyer of the €9,000 per sq.m. apartment ever going into profit. For context, when the bubble burst the top price 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.
You can apply the same reasoning to any region, assuming of course that there is a functioning market. You can only make price per square metre comparisons in areas where the market is recovering. It doesn’t work if nothing is selling, you need evidence of actual sales. Follow simple rules and you won’t make a mistake.
As you move further away from the most prime locations reduce the price per sq.m. Do the same calculation for new property and compare the developer’s price with prime location resale prices. If there is a huge difference, think twice. 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 count for anything. It 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 can expect substantial capital growth in the medium term. However, I can’t see those paying inflated new-build prices breaking even in the foreseeable future. In the worst of cases I think some may never go into profit. But it’s a different story for resales in prime positions. Then there’s competition between buyers for property at the right price. Having said that, there were also many substantial price reductions throughout 2017. Too many sellers became over-excited by signs of recovery and were too ambitious with their asking price
Spanish Property Market 2018 – Conclusions
The issues that kept the domestic property market depressed in 2017 will still be factors throughout 2018. High unemployment, job insecurity, emigration of educated young people and tight lending criteria are just some of them. However, the factors that attracted record numbers of overseas buyers to Spain in 2017 still apply. Spanish property remains relatively affordable with substantial capital growth achievable in the medium term and excellent rental yield potential. In addition, Spain is perceived as a relatively safe and stable country. A big unknown is the Catalan issue. This 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 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 still shines and many rate the quality of life as one of the best in the world. What’s not to like?
The lack of high-quality inventory at the right price in prime locations will be an issue throughout 2018. As always, scarcity of inventory puts pressure on prices. So I think 2018 is the year the ripple effect may start to kick in. So far the recovery is restricted to the very prime locations in any region. It certainly hasn’t been across the board but price rises are now putting pressure on budgets. As a result 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. Many are not in the best locations. Look at equivalent resales first, calculate the price per sq.m. to include any renovation. 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 although they will be harder to find in 2018. Nevertheless, 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 assume there will be more. Electricity pylons are also a big no-no.
Read the marketing blurb carefully and be sceptical. The promotional material for a new project in Marbella highlights panoramic sea views, Golf Valley location, contemporary architecture, all true. But there’s no mention of what I think is the most important feature. I’d certainly want to know the site backs on to the AP7 motorway. A strange omission but 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. Check the orientation is right for good winter sun as many properties will be dark and cold without it.
If there is vacant land nearby find out with absolute certainty what, if anything, can be constructed. The selling agent saying it is green zone is just not good enough. Why risk losing a fabulous view? I always ask the following questions when assessing properties for my clients. If circumstances change and they need to sell quickly is the price right for them to do that? Secondly, is this a property for which there will always be demand irrespective of market conditions? Without doubt, the shambles of recent years taught us a valuable lesson. And that is that there will always be demand for top quality in prime locations. 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. You can also follow us on Twitter for the latest news as it happens. If you would like to download and save the Spanish Property Market report in pdf format click here.
Click on any of the images to the side to see larger versions and find out where they are.