New-Build versus Resale property prices
The College of Architects in Málaga has announced 5,418 building licence approvals in the province between January and September 2018. That represents an annual increase of 41%. In fact, it’s more licences than the number approved between 2009 and 2017 in total. This blog discusses the implications of these numbers for property price 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.
Activity returned in 2012 and in Q1 of 2014 Marbella registered price rises. 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.
The highest number of projects approved so far in 2018 were in Málaga city itself (1,538). Estepona (666), Mijas (623), and Fuengirola (425) were next. However, Marbella, which always headed the list previously, is still hampered by the uncertainty surrounding the PGOU revision. Consequently, it is in fifth place with 405. Individual houses, including total renovations, make up 22% of the approvals, 78% are for multi-unit developments.
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 2017 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%.
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 for the year so far 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. At the end of 2017 statistics from the notaries indicated an 11% rise in prices for new build against 3% for resales. I attribute this to lack of supply but high demand in the case of new-build properties while supply and demand on the resale side are more or less in balance.
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. Recently 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 and one with 4 bedrooms in the same area at €3,000 per square metre. Both cases tell me that we have motivated sellers keen to do a deal. 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 best locations, no more. Therefore, 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 premium is as much as 50% above the equivalent resale price. I’ve worked in the Andalucían property market for many years and been through a few high/low cycles. I cannot remember a time with such a discrepancy between new and resale prices.
No change in the near future
The College of Architects estimates the full year total will be around 7,000 licence approvals.However, I can’t see this improving the supply side in any meaningful way. This is because it will be 2020/1 before these properties are in the sales pipeline. 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.