17th of January 2007

iPropertyCLUB News

How will the Spanish Property market perform in 2007?

Will fall-out from real estate corruption scandals deter foreign buyers and investors; has over-development and excess supply created a buyers market; and will subdued growth make property more accessible to its domestic population?

Assetz recently highlighted a fall in capital growth in Spanish homes from 12% earlier in 2006 to 10.8% in November and the Knight Frank global house price index indicates that house prices grew 9.7% in the third quarter of 2006 (down from 13.5% over the same period in 2005). This is the overall picture, however, and there are major variations across provinces and cities.

Independent data from Spanish property portal Kyero.com reveals that Barcelona is the most expensive place to buy property in Spain with an average price of €608,000 (which is 148% above the national average of €245,000). The province of Cuenca in central Spain remains the cheapest place in which to buy with properties averaging at €39,000 (84% below national average) and the most popular province to buy in is Malaga (where property prices average at €315,000).

Chesterton International recently highlighted Mallorca as a hot market for the new year, as director Nick Freeston explains: “It is interesting to note that according to the government’s figures in 2005, some of the highest growth regions in Spain were Aragon, Andalucia and Galicia. Average capital growth was 12.8% and in 2006 Mallorca is proving to be our hottest market with growth levels anticipated to be in double figures”. Based on a lower entry level (prices from £120k), strict building guidelines (and therefore fewer large scale developments), and easy access from the island’s major airport, 80% of Chesterton International’s Spanish sales in 2006 were in Mallorca.

Retirement and relocation main sales drivers

The number of investors has fallen, as has foreign investment in Spanish property. According to figures from the Bank of Spain, foreign investment in Spanish property for the year to September fell by 14.3% this year (with spending down to €3.55 billion for the first nine months from €4.15 billion). Figures from the Spanish Ministry of Housing tell a different story, however. It found that immigrants bought 28,404 properties in the second quarter of 2006 (11.7% of all Spanish properties sold in the period). With sales to immigrants up 5.7% on the previous year, the Ministry found that sales to foreign residents were growing faster than the overall market.

Chesterton observes that lifestyle buyers have returned and suggests that, with many properties starting to complete, they are more reassured about delivery and can more easily gauge demand (a key consideration for those planning to retire or relocate). With so many scare stories about the pitfalls of off-plan investments, and ‘flipping’ no longer an option for the majority of projects, the resale market is likely to mature this year (which may have prompted the decision by Viva Estates to introduce its 2% commission on resales). Resale prices have slowed, but this could make them more accessible to domestic buyers.

As serious investors look for more tax efficient hands-off property investments promising a higher return and more diversity, leisure buyers are increasingly drawn to existing properties that can be used, or let, immediately. Two thirds (65%) of Chesterton International’s clients that have bought in Spain have been second home purchasers wanting to use the property as a holiday home and as a long term investment, while only 25% are investment purchasers looking for good rental yields (with retirement buyers accounting for 10%).

Direct investment in Spanish property has just become more tax efficient, though. Finally acknowledging the value of the thousands of Brits living and working in Spain, the government has now cut capital gains tax on property sales and personal income for non-residents from 35% to 18%. This will certainly make it more attractive to the rising number of Brits opting to emigrate every year (or flexible workers looking for temporary homes in cities like Madrid and Barcelona).

The new tax rules should make the market more attractive to investors, as Marbella lawyer Rafael Berdaguer (from Rafael Berdaguer Abogados) explains: “The reduced rate for capital gains will certainly be an incentive for foreign investors who will be prone to purchase and sell property with a relatively low tax burden. Real estate and all professionals involved in this sector will also certainly welcome the reduction of the CGT as they will see the benefits of the surge in the real estate market when the new legislation takes effect."

Legacy of the distressed vendor

Over-development on the south and east coast has led to competition among sellers who are loath to drop their prices. The response has been to either pay higher commissions for high end luxury property or find a way to see more money by accepting a lower price (ventures like Direct Auctions have provided a new exit option for distressed vendors by cutting out high agent commissions and accepting lower asking prices).

With homes on the Costa de Sol now taking an average of nine months to sell, according to the Institute for Practical Business, it has now become a buyers market. The IPE found that there are now 92,000 homes on the market in Málaga and average mortgages in the area are now running at €170,000 (the volume of mortgage business is now eight times higher than in 2001). With commissions still relatively high (averaging at 5-7%), more private vendor portals are starting to emerge.

To bring more balance to the market, Mark Stucklin, chief executive of Spanish Property Insight, recently urged vendors to lower their price expectations. He also believes that a market dip will compel developers to improve the quality of their projects to make them more sellable in a saturated market. "I am optimistic about the best quality property and developments in Spain, which I think will benefit from a flight to quality as the market dips," he said. A high proportion of Spaniards are buying properties they can afford rather than homes they actually want to live in, according to recent reports, so aspiration should also drive domestic sales.

There is a view that improvements in the lettings market could help to underpin growth in Spanish property with distressed vendors able to rent out their properties and cover mortgage repayments until the market rises again. Marbella-based property lawyer Mark Wilkins from The Rights Group SL believes a coast to coast rental operation would help to mature the lettings market and attract more landlord investors.

Others believe that falling prices and over-supply are making lower end properties harder to let or sell but high end, luxury property is still a more attractive proposition for foreign buyers (especially in the main golf resorts). “Although they are still abundant, the predilection for buying on ‘council estates in the Sun’ is on the decline and the average purchaser of Spanish investment property has now set their sights much higher. And this can only be good for the future of property investment in Spain,” says Andy Driver from Espana Golf. “Most developers have very much upped their game and it’s not just the quality of golf property we now see coming to market that has increased dramatically. Golf courses are now designed as high-class resorts, complete with health clubs, spas, restaurants and commercial centres; with the emphasis on quality rather than quantity.”

As serious investors find new ways to make money on overseas property, mainly through indirect vehicles, they are starting to focus on leisure and location to enjoy the fruits of their labour. At the same time, new fractional ownership options are helping less affluent buyers to purchase higher end properties.

The market may be driven by aspirational domestic and foreign buyers in 2007 but affordability is fundamental. Sales will be driven by more realistic pricing, more competitive and flexible mortgage products (although interest rates will still be a factor), and supply (over-development should bring prices down, but populations across Spain are growing).

What do you think? Is a correction on the cards for Spain's property market, should agents focus on the resale and lettings market, and what factors are likely to drive sales in 2007? Send your comments to the webeditor@opp.org.uk

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