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New Build versus Resale Property Prices

New-Build versus Resale property prices

New build in SpainIn 2018, building licence approvals across Spain totalled 75,051, up 19% on 2017’s figures, the best annual total since 2011. However, it’s important to remember that Spain lost 96% of its construction sector in the global meltdown after 2008. After a high of 735,000 licence approvals in 2006 the low was  31,200 in 2013.  As a result, while building approvals are growing it’s a slow process and the supply side is unlikely to improve significantly in the short term.  Inevitably, a supply/demand imbalance impacts property prices.   

The most active region for building licence approvals in 2018 was Andalucía with 19,314, an increase of 56.2%.  This blog discusses the implications of these numbers for property prices in prime areas such as Marbella and Málaga.  In 2014, six years after the global downturn kicked in, the Spanish construction sector had hit absolute rock-bottom. As a consequence, Málaga issued only 798 licences during the entire year. Compared with the record of 27,000 approvals in 2007 it’s clear to see how bad the downturn was for the construction sector. It had more or less disappeared.

The recovery begins

Activity returned in 2012 and in Q1 of 2014 Marbella registered price rises, the first municipality in Mediterranean Spain to do so.  However, it was a recovery of the resale sector, there just weren’t any new projects around. In addition, there is always a time lag between licence approval and a project being ready for sale.  So, a few approvals trickling out of Málaga was nothing to get excited about. And, in my opinion, it still isn’t.

Making sense of the numbers

I think these statistics can tell us a few things about property prices in the prime areas of the Costa del Sol. Full year stats for 2018 showed 20% of all purchases in Spain were in Andalucía. That’s approximately 105,000 transactions and it’s likely to be a similar percentage this year. But there are eight provinces in the region and more than 33% of Andalucían transactions happened in just one province: Málaga. The city itself, plus Marbella, Estepona and Mijas accounted for 45% of all purchases in the province. In the prime locations foreigners dominate the market. For example in the Marbella area about 65% of all buyers are from abroad while at the very top of the market that number goes to about 75%.

The building licence statistics confirm that activity is focused in just a few locations.  Of the 19,314 issued by the Málaga College of Architects in 2018 about 80% related to Málaga city itself, Marbella, Estepona, Mijas, Benahavis and Fuemgirola.  It’s clear there’s no much happening elsewhere.

New-Build demand outpacing supply

So the demand is there but is the supply? In the case of new-build properties the simple answer is no. The figures  indicate a serious shortfall in the supply of new-build properties measured against demand. At first glance perhaps it doesn’t really matter as the resale market still outperforms the new-build sector by about 4:1. However, I think it does matter because for some reason new-build property attracts overseas buyers like moths to a flame. They just want it although larger and better-located properties are available at much lower prices just round the corner.

The scarcity of new-build projects coming through the system means prices for new-build are rising much faster than for resales. Recent statistics from the notaries indicated an 11% rise in prices for new build against 3% for resales. I attribute this to lack of supply coupled with high demand in the case of new-build properties.   On the other hand, supply and demand on the resale side are more or less in balance.

Marbella property prices, new and resale

Marbella, the sixth most expensive town in Spain, is a good example of the new-build versus resale price conundrum. With thorough research it is still possible to identify well-located properties between €2,500 and €4,000 per square metre, depending on condition, location and other variables.

At the end of 2018 I located a 3 bedroom detached villa front line to one of the coast’s best golf courses priced at €2,450 per square metre.  It had been on the market for a while at the equivalent of €2,810 per square metre. After its reduction it sold quickly for €2,264 psm.  That’s about 20% below the original asking price so perhaps Tecnocasa is right.   I found a larger villa in the same prime area with an asking price equivalent to just below €3,000.  It had also been reduced from a higher asking price. 

The fact is that just before prices crashed, buyers in this area were paying between €6,000 and €7,000 per square metre for the very best locations and quality. In the resale sector prices should still be well below those levels to secure a sale.  However, buyers are already paying more per square metre than the pre-crash peak just to get their hands on a new property.  In some cases the new-build premium is as much as 50% above the equivalent resale price.  

I’ve worked in the Spanish property market for many years and been through a few high/low cycles and I can’t remember a time with such a discrepancy between new and resale prices. I worry that some buyers are paying such inflated prices for new build properties that they may never see a return on their investment.  While I can accept some purchasers don’t mind too much about not making a profit I’ve yet to meet one happy to make a loss.

No change in the near future

Some of the pressure on new-buld prices should ease as the supply side improves.  However, as I’ve already mentioned the time lag between licence issue and something being ready for sale can be as much as 2 years.  In the meantime, I worry that some buyers are paying such inflated prices for new build properties that they may never see a return on their investment. While I can accept some purchasers don’t mind too much about not making a profit I’ve yet to meet one happy to make a loss.

New may be nice but when you come to sell it will have to relate to resale price levels. 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. Only a big and sustained increase in the supply of new-build properties will reduce the pressure on prices . Unfortunately, I can’t see that happening in the short-term.

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