Introduction to the Andalucía Property Market
In this review of the Andalucían Property Market I discuss the statistics about the property market in Andalucía in 2019. The region is an important part of the Spanish property market as 20% of all purchases happen in Andalucía. At the same time Andalucía is a perfect example of the fragmented property market in Spain. There are areas of price growth and lots of activity, others are flat and barely off the bottom. It really is a two-speed market and what you see depends on what you look at and where.
The domestic and international sectors of the Andalucía property market operate completely independently of each other. And the separation is even more pronounced since the 2008 global crash. Although the domestic market is improving, it is 50% smaller than before the downturn. One reason for this is that domestic buyers are held back by stricter lending criteria. In compete contrast, the overseas sector is already 25% bigger than it was at the pre-crash peak.
In the context of the overseas market I’ll look at who is buying, where they’re buying and what they’re buying. I’ll also touch on the fantastic fixed rate mortgages currently on offer in Spain.
Andalucía’s overseas tourism market is important because 2018 was another all-time record, with over 11.5m foreign visitors. As a result, property owners can generate significant rental income, from both long and short term lets. So I’ll give the yields you can expect and also how to rent legally.
Full year statistics for 2018 will start to come through in the first half of 2019. So, for this report I am using the latest available and will update as the figures for the final quarter of 2018 are published.
Andalucía really does have something for everyone, with lots of options for property buyers. It’s so much more than a sun ’n sand summer destination, everywhere in the Mediterranean is good for that. But much of the Med hibernates outside the main summer months and few places have a genuine 12-month season. However, it buzzes year round in the micro-climate areas on Andalucía’s southern Mediterranean coast. That’s where you find the mildest winter temperatures on the European mainland.
Meanwhile, on the Atlantic coast there are some of the best wind and kite surfing conditions anywhere in the world. Head into the Sierra Nevada for Europe’s most southerly and sunniest ski-resort just 45 minutes from the coast. And it’s also one of Europe’s highest resorts with slopes between 2,100m and 3,300m above sea-level. These altitudes mean it rarely closes before May. So, with its Mediterranean and Atlantic coasts and inland Sierras, Andalucía has the most varied climate in Spain. But this variation means property buyers need to think carefully about the right location for them. It’s hot everywhere in summer, but it’s a very different story in winter. Even on the coasts, being outside one of the special micro-climate areas can mean a temperature drop of up to 10ºC in winter. Get it wrong and you could freeze.
For sports enthusiasts Andalucía is a dream location. There’s horse-riding on the coasts and in the sierras. Tennis year-round, scuba diving, wind and kite surfing, rock-climbing, hiking, cycling and mountain biking, snow skiing. They’re all there, with the perfect climate in which to enjoy them.
But for Andalucía the biggest sport of them all is golf.
Andalucía has 102 golf courses. In fact 25% of all Spain’s courses are in this one region and 47 of those are in Málaga province. That’s why the Costa del Sol also brands itself the Costa del Golf. Just over the border in Cádiz province there are seven courses in the Sotogrande area. Valderrama is the most famous, probably the best course in Europe and one of the best in the world. Who can forget the Seve Ballesteros Ryder Cup in 1997, played on this course?
Without doubt, golf is the one of the reasons for the 12-month season on the Costa del Sol. The benefit to the economy is that most of the more than half million golfers come between October and May. In comparison, Mediterranean coasts without a thriving golf sector are relatively quiet and many bars, restaurants and businesses close. The golf sector currently generates around €1bn+ for the Andalucían economy. Even better, the daily spend of golfers is about twice that of summer visitors.
I think it’s true that Andalucía has been slow to highlight alternatives to the coasts for property buyers. However, with better marketing that is starting to change. Some of Europe’s finest and oldest cities are in Andalucía. Cádiz is thought to be the oldest continuously inhabited city in Europe, settled by the Phoenicians over 3,000 years ago. The annual New York Times list of 52 places to see has Cádiz at number 50 in 2019. Read the NYT list.
And in the UK The Sunday Times has highlighted great things to do in Andalucía that have nothing to do with lying on a beach. For example, some serious hiking or the triangle of Andalucía’s most iconic cities.
Good access boosts property markets. One airline serving a minor airport 100 kms from where your property is located doesn’t really cut it. If that airline decides to pull out there are implications for both rental potential and sales prices. Arrivals into Málaga airport topped 19m for the first time ever in 2018. It’s one of the few cities in the world with flights to all five London airports. There are also four excellent regional airports at Seville, Jerez, Granada and Almería, plus Gibraltar, with flights all over Europe.
In addition, the number of non-stop long-haul flights from Málaga has increased. There are new routes to Istanbul, Tel Aviv, Doha and Saudia Arabia. And Norwegian have permission for a Málaga – Buenos Aires service. So it’s no coincidence that buyers from the United States and several South American countries increased by between 20% and 30% in 2018. When it becomes easier to get somewhere, more people go there.
The Good News in Spain
Overall, unemployment continues to fall. It finished 2018 just below 15%, that’s the lowest in a decade. Youth unemployment is down to just over 30%. Mortgage approvals rose 10% in 2018 and interest rates remain low. Euribor, which sets the interest rate for the majority of Spanish mortgages ended 2018 at -0.147%. The number of domestic property transactions was up 11%.
But there are always buts
Yes, unemployment is down but it is still the second highest in the Eurozone, only in Greece is it worse. And 14.5% has to be viewed against the Eurozone’s average of 8.1% and the OECD average of 5.2%. Moreover, in some Spanish regions unemployment is still above 20%. Unfortunately, Andalucía is one of those regions. For example, in Cádiz province adult unemployment is 27%, among the young it is closer to 50%.
Yes, youth unemployment is down but it is still an average 30% nationally, as high as 50% in parts of Andalucía. In Germany, it is 6% for the same age group. In fact, one third of the under 30s age group in Spain has never had a job.
Yes, job creation is up but seasonal, temporary and part-time contracts still outnumber permanent ones by a big margin. For example, there were 1.6 million job contracts (new and renewals) signed in August 2018. Sounds good and, in fact, it’s a 4.3% rise compared with 2017. But only 153,921 were for permanent jobs, 90.39% were temporary. And permanent doesn’t necessarily mean full-time; 60,958 of the 153,921 were for part-time positions. So, it’s no surprise that tourism took over from construction as the biggest source of employment in Spain in 2018, with 13.7% of the total workforce. Unfortunately, jobs in tourism tend to be low-skilled, low paid, temporary and seasonal and Andalucían jobs depend heavily on tourism.
The intractable problem
In 2017 The Organisation for Economic Cooperation and Development (OECD) published one of its periodic in-depth reports on Spain. 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 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. But it’s so much worse for young people. In the thirty years between 1986 and 2017 the average youth unemployment rate was 34.96%, more or less where it is today. So, in spite of several boom periods in that timeline, Spain has made little progress in improving job prospects for young people. This suggests that the domestic housing market will remain relatively weak for years to come.
The Andalucía Property Market
But when it comes to the overseas property market everything looks so much brighter. About 60% of all property purchases in Spain currently happen in a handful of locations. Andalucía is one of them. And these few locations have one thing in common; they are where the overwhelming majority of overseas buyers head for. In all of them, the proportion of foreign buyers is way ahead of the national average for market share. Based on the notarial returns for the first half of 2018, overseas buyers represented 18% market share in Andalucía. However, at the higher price levels foreigners dominate the market, with 75% market share of purchases above €1m.
However, there’s a two-speed market within the regions attracting international buyers. For example, Andalucía had the highest number of total purchases in any region in Spain in every month in 2018. However, when you look at the individual provinces it’s very clear that activity levels vary a lot within the region.
Andalucía’s Hotspot – That would be Málaga
Andalucía, Spain’s largest autonomous region, is a good example of the uneven nature of the property market. About 20% of all property transactions in Spain take place in Andalucía. However, Andalucía has eight provinces and more than 33% of transactions occur in just one province, Málaga. Moreover, Málaga city itself plus Marbella account for one third of the total market in the province. Include Estepona and Mijas and the figure rises to 45%. So, one third of Andalucían purchases occur in just one province while half of purchases in that province occur in relatively small area. It’s obvious there’s not much going on elsewhere.
For example, in Jaén province there were just 123 foreign buyers between January and October 2018, 3% of the overall market. In the province of Córdoba, the total was even lower with only 113 buyers from overseas, 2.1% of the market. In the same period 8,103 overseas purchasers bought in Málaga province, representing 33% market share and way ahead of the national foreign buyer average of 18.7%.
For a certain type of buyer Málaga city is definite worth a look. Few of the 19+m overseas visitors who fly into the airport visit the city. They turn right or left as they leave the airport and head along the coasts. That’s a shame as Málaga city has undergone something of a transformation in recent years. There are some great property options to suit all budgets. It is possible to find one bedroom apartments in the historic city centre under €300,000 These are great for weekend breaks and offer excellent rental yields.
The Sunday Times highlighted Málaga as a great weekend destination. There are frontline beach apartments with amazing panoramic views of sea and the city from the €1m level. Many houses and townhouses are within walking distance of the city centre and the beach. It’s a city with great beaches, great food, culture and history and more overseas buyers are taking a serious look.
What’s in Demand – Resales v New Build
The appetite for new-build properties seems unstoppable, with contemporary and minimalist architecture at the top of everyone’s list. However, the supply of new apartments and houses has lagged way behind demand since the recovery began. Inevitably, this imbalance has skewed new-build prices, to an extent I believe is unsustainable. New may be nice but is it worth paying double, or even more, per square metre than a resale? I don’t believe it is but overseas buyers are doing it. Consequently, I see problems ahead as some of these new-builds start to appear on agents’ listings as resales. Sellers will find out they can’t ramp up their asking price over and above what the resale market can stand just because they paid an inflated price when they bought. The alternative will be that their property will languish on the market for years.
Lack of Supply
In Q1 – Q3 of 2018, building licence approvals in Málaga totalled 5,418, up 41% compared with 2017. And the figure represents a dramatic improvement compared with the low of 798 for the entire year in 2014. However, it’s the same story as before; lots of activity in just a few locations, very little elsewhere. 79% of these building licences are for projects located in Málaga city, Marbella, Estepona, Mijas, Benahavis and Fuengirola. Detached houses account for 28% of the total, 72% are for multi-unit projects.
However, even this increase doesn’t mean the supply side is going to improve any time soon. Inevitably, there is time lag between approval and a project being ready for sale. In my view, only a sustained increase in the supply of new-build properties will reduce the pressure on prices. Unfortunately, I can’t see that happening in the near future. In my opinion, it’s more likely that demand for over-priced new-builds will start to fall. Many aren’t that well-located or of particularly high quality and it’s hard to justify the asking prices. Already, there are rumours circulating of developers delaying the launch of new phases as sales slow.
Lack of well-priced properties in prime locations is also a feature of the current resale market. However, available stock is more in balance with demand. And there’s no sign that buyers are prepared to pay excessive asking prices for resales. In my experience they are much more likely to walk away than overpay. I estimate prices have recovered 25% of losses in the crash. However, that still puts prices about 15% – 20% below the previous peak in 2007. Look hard and there are still good deals available. Interestingly, a 2018 report from Tecnocasa, one of the big valuing companies in Spain, suggests asking prices are, on average, about 20% above the eventual price achieved. When over-optimistic sellers reduce asking prices to more in line with what the market can stand, they sell. And in price per square metre terms that will be way below new-builds prices.
The Price Conundrum
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 locate properties for between €2,000 and €4,000 per square metre. At the end of 2018 I located a 3 bedroom detached villa front line to one of the coast’s best golf courses. It had been on the market for a while at the equivalent of €2,810 per square metre. After its reduction €2,450 per square metre 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.
Before prices crashed, buyers in this area paid between €6,000 and €7,000 per square metre for the best locations. 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 Andalucían property market for many years and been through a few high/low cycles. I can’t remember there being such a discrepancy between new and resale prices. In my view, some buyers are paying such inflated prices for new build properties that they may never see a return on their investment. I can accept some purchasers don’t mind too much about not making a profit. However, I’ve yet to meet one happy to make a loss.
The Andalucía Property Market and Tourism
There is a close link between rental yields in Andalucía and the health of the Spanish tourism sector. Currently, Spain is the second most visited country in the world. According to Ministry of Tourism statistics about 35% of Spain’s 80m+ overseas tourists do not stay in hotels. About 14% of the tourist total, that is 11.5m, head for Andalucía and many will rent privately. As a result, rental yields make letting a property in Andalucía an interesting option. And not just for the buy-to-let investor. Occasional rentals can cover a property’s running costs. Across the board, top quality, prime located properties were 100% occupied in high season in 2018. And golf tourism throughout the year gives Andalucía a genuine 12-month season.
There is high demand for both long and short term rentals. However, it is absolutely essential the location is the best and the property is 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. And 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 thought property price rises would squeeze yields. However, demand is so outstripping supply that doesn’t seem to be happening. In general, an apartment or townhouse can achieve 8% gross yield if available for short term lets throughout the year. A similar property let long term can achieve 5%-6%. At the top of the market a detached beachside property can gross 10%+ in the short term market. In all cases, location and interior finishes are key.
Important for Yields
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. You also need to comply with the rules about short term holiday lettings. This is particularly true in city centres where tourist lettings have overrun some districts and Málaga is no exception. However, outside the cities there are no restrictions in Andalucía other than being licensed and meeting certain standards.
Nevertheless, many property owners in Spain like the idea of covering running costs. Others don’t want the property empty for long periods of time. But the days of leaving a set of keys at the local bar and crossing fingers that no emergencies will arise are over. You need to be ‘rental ready’. Read more about what is required in Andalucía and other regions in my blog here.
Why is Buying
Surprise, surprise, it’s still the Brits in the lead. In spite of so much negativity it is proving remarkably resilient. I wasn’t one of the doom and gloom brigade, I looked at the figures rather than speculate.
According to the latest figures for 2018 the British represented 14.8% of all foreign buyers in Spain. However, in Andalucía market share was much higher; 28% of foreign buyers were British, And that’s in spite of an exchange rate some 20% weaker against the Euro since the referendum. One way for British buyers to minimise the effect of the weak GBP£ is to think about a Spanish mortgage. Indeed, the fixed rate loans on offer are so good all overseas buyers can benefit. This type of loan disappeared during the banking crisis but now make up 40% of all loans.
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 mortgages were scarce. 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 offered dropped from 100% to 60% of the value. As a result all buyers needed a much bigger deposit than previously. And overseas buyers who actually needed a mortgage to purchase struggled to get approval.
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 they are cash buyers or if they need finance. 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 which fixes the majority of Spanish mortgages and it’s been in negative territory since February 2016. It closed 2018 at -0.147%, rising slightly in each of the last 3 months of the year. In the recession fixed rate mortgages disappeared from the market. Now about 40% of all new Spanish mortgages are fixed rate loans. Indeed, the majority of international buyers are opting for fixed rate over variable rate loans. My advice to cash buyers, irrespective of the currency, is to protect their capital and take a Spanish mortgage
Spoilt for Choice
There are many products to chose from with fixed terms from 5 – 25 years, interest rates from 2.5% and up to 70% LTV. There are a lot of variables, such as country of residency, amount required, location of purchase. However, there are no restrictions on nationality or purchase price. A good broker is essential. 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.
Andalucía Property Market – Conclusions
In my view, the same issues that impacted the property market in Andalucía in 2018 are still here in 2019. High unemployment and lack of well-paid permanent jobs will keep purchasing power in the domestic sector weak. Record numbers of overseas buyers will push demand even higher, putting pressure on prices in prime areas. Consequently, the price rises that were confined to the most prime areas will start to ‘ripple’ out into adjacent locations. In addition, record numbers of international tourists will ensure excellent rental yields continue.
My advice to buyers in 2019 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.
If you intend spending time in Andalucía in the winter check where the sun will be. Get the orientation wrong and many properties will be dark and cold. If there is vacant land nearby then find out with absolute certainty what can be constructed. It would be a shame to lose that view. The selling agent saying it is green zone is just not good enough.
IMF Price Warning
In December 2018 the International Monetary Fund issued a warning about early signs of a ‘slight overvaluation’ in property prices. It noted that Spanish banks are highly exposed to real estate sector developments and may underestimate the speed at which house prices and relaxed lending criteria can gain traction. The IMF was particularly critical of the lack of progress in setting up a monitoring agency. It has been urging Spain to do this for years, ever since the 2008 banking meltdown. The last PP government put this on hold but current PSOE administration is working on legislation to give the Bank of Spain the necessary powers. This same report puts average price rises between 2014 and 2017 in the region of 15% nationally. However, in the prime spots important to the overseas market in Andalucía I would put the increase at closer to 25% in that period.
Also in December 2018, I noted warnings from valuers about the spectre of overvaluations creeping back into the market. Given that most banks currently offer maximum loans of 80% LTV, those without a large deposit are effectively excluded from the market.In reality, it’s been more than a tendency, most banks have been ordering valuers to be conservative. The loan is then offered on whichever is lower, the valuation or the property price. Unsurprisingly, it’s always the valuation.
So, the IMF comments about ‘slight overvaluation’ in prices or the possibility of deliberate mortgage overvaluations are a bit worrying. They may be only a warning flag but they may also be the first signs of something more serious. Even more reason then for buyers to be very cautious, particularly in the new-build market. It is essential to do the research and compare asking prices for new property with comparables in the resale sector. Look at peak prices prior to the crash and ask yourself if you should be paying even more than that now. Remember that resale prices are still approximately 20% – 25% below that level. Buyers in the new-build sector should be cautious and ignore what an agent friend of mine calls ‘candles and cushions’ marketing. Lots of soft focus life-style images, very seductive, but better to check the price.
Get the Price Right
Buyers entering the market now can expect substantial capital growth in the medium term, say 2 – 5 years. However, those paying inflated new-build prices are unlikely to break 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 2018. That’s because many vendors have become over-excited by signs of recovery and were too ambitious with their asking prices. In my view, this trend will continue in 2019.
Finally, before buying always ask two questions. Firstly, if circumstances change and I need to sell quickly am I buying at the right price now or will I have to take a hit? As I’ve already mentioned, some of the prices buyers are paying for new-build properties in 2019 make me think some will never see a return on their investment. And 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 for which there will always be demand no matter how bad things are. It always has been, still is and always will be about location.