Quarterly Market Report – Spring 2018 Part I

This is our 18th Quarterly Report on the Spanish property market. As requested, we have kept it brief, and specifically relevant to the locations where we are most active.

Section I – Overall Market

As part of the research, we have identified a number of wider and national property comments.

The Overall Market – Continuing strong demand, with a heavy bias in selling towards new build.

• During a recent conversation with a solicitor, he indicated that more than 50% of the work of his conveyancing department was related to acquiring ‘off plan’, under construction property. This sector is strong in marketing, offering agents above-average fees and incentives, and buyers easy finance. Thus it is able to draw in buyers and especially investors, despite the prices being well above the average for existing, secure resale properties.
• We don’t feel that it is good for buyers as they will instantly have negative equity compared to the market now, and when all these properties are completed, where are all the new occupiers to come from?
• We have stated repeatedly, that the rush by Ayuntamientos and councillors to draw in income from the granting of licences to large numbers of new property, cannot be good for the long-term economy of their town and the property owners and businesses within it. Extreme boom and bust, boom and bust has been the regular cycle.
• The weight of international finance, having to accept increasingly risky placings as the secure ones dry up, is to some extent the driver of this problem. With the change to a digital world and the formerly secure High Street shopping sector now stuttering, investors are having to go into areas on which they have limited knowledge and perhaps ignore long-term trends, hoping that “this time it will be different” or that they will be prudent enough to get out before the inevitable downturn occurs.
• In the short-term, everything appears to be rosy, agents reporting strong demand, selective and exacting where resale properties are involved and with a shortage of supply in the ever-popular locations.
• The latter areas are seeing prices rising along with the heavily marketed new build properties, so the statistics show a steady increase in values. However, outside of those areas prices are generally drifting upwards, with the average being made up of ‘risers’, but also ‘fallers’. Problems with the immediate environment and structural, condition or legal problems can account for many of those, but poor general location, without facilities or a reason for being developed other than the land being available, is always what makes up the secondary and even tertiary market.
• Even some of the ‘prime’ locations will soon have to be reconsidered. Environmental studies are showing that sea water could rise by 2.5 m in the next 80 years. That will be gradual, but steady so that in 30 years, the lifetime of a mortgage, coastal properties will be a metre closer to sea level. Stronger storms are also predicted, so coastal infrastructure will be more regularly affected, damages and inundation will become a regular winter problem. This of course also will lead to flooding inland as rivers back up and experience the greater number of extreme flash floods again predicted. Rising salinity levels underground will also affect trees and other vegetation. Insurance premiums will rise or even become unavailable.
• Of course, it might not happen, but the prudent will be, actually and figuratively, heading for higher ground. Some architects and planners will be working on innovative ways of living with the problems, as it’s not just a Spanish Costa problem. It’s worldwide so that more of countries’ and individuals’ economies will have to be spent on combating these problems, made more complex as existing capital assets are being destroyed. It’s happening at the same time as sweeping digitisation and blockchain technology are transforming industries and wealth creation. Indeed, we live in interesting times.
• The reverse side of that is that those with wealth, be they businesses or individuals, will no longer have to be tied to traditional locations, so they will seek the best place to live securely, climatically and culturally, thus Spain and the Costas will receive increasing interest. We have been seeing this for some time, with increasing numbers of younger people, many with families, often replacing the older generations who have for so long been a major element of the expat population. It’s good for the vitality of the area, as long as, to get back to the original comments, the town hall, regional and national politicians can look in the longer term, to encouraging enterprise and a spread of economy and not just focus on construction because of its short-term benefits. The bulk of the profits from much of that are going off to developers’ and financiers’ head offices, far removed from the construction activity. Locally, things can seem very good for a short time, but, unless the economy is widened, when the property ‘bubble’ bursts, as it always has, the municipalities and their citizens will be back to scrimping and poverty as has happened many times before. (https://www.surveyspain.com/blog/insanity-doing-the-same-thing-over-and-over-again-and-expecting-different-results)
• As an aside, a holiday letting agency has stated that their business model has been changed completely by the arrival of Airbnb and similar direct online agencies. They no longer get the letting agreements and commission form the property owners as they are marketing the properties themselves. The agencies are only needed now for the tasks of meet and greet, dealing with complaints and cleaning the property ready for the next client. For agencies to put properties on these sites, the fees charged are so high as to make them uncompetitive. The older Owners Abroad style companies are having to adopt the Airbnb model to survive, so the agencies have nowhere to go. Without the letting commissions, they cannot operate, so we’ll see many disappear. With many ‘absentee landlords’ depending upon the letting income, and that depending upon having a letting licence, which depends upon having the personnel to assist tenants, there could be general problems ahead.

“Pending legal changes that could affect property values?”

This will be included when appropriate. However, we stress that we are not lawyers and thus can only comment to the best of our knowledge.

The big change that has brought excitement to the sector, is that starting next year, all estate agents will have to be registered with the Junta de Andalucia. This will apply to all businesses, be they large multi-office practices or single self-employed individuals. The requirements have not yet been given in detail, but they are reputed to be:

• Have sufficient professional training that is to be established by the regulation.
• Have an establishment open to the public or a physical address in the case of provision of services electronically.
• Have civil liability insurance in place.
• Lack of criminal record, with the exceptions that are provided for by regulation.
• A permanent bank guarantee to cover the amounts that they receive holding deposits and the like.

This can only be a good thing for the market, as the potential for loss of the licence should improve the quality of advice, action and responsibility in the business. However, as with so many laws and regulations, its effectiveness will depend upon the detail and enforcement.

The new Government has indicated that it will be encouraging climate change technology, including photo-electric electricity generation, which was taxed by the previous Government. This could result in higher building specifications and more emphasis on Energy and CO₂ ratings, with encouragement to improve those.

Analysis of Statistics

• Survey Spain is recording prices and valuations throughout our Network. Due to the limited number of properties and the even fewer number of reliable sale figures, we are only able to provide a meaningful analysis of prices and values for some Municipalities this quarter. However, as before, we have commented on the majority of the areas relevant to the Bank, with the opinion sourced from our valuers, agents and other sources in the areas.
• Where we have insufficient information, we have combined information into larger areas.
• As requested and also as this is the area with most activity, we have been able to provide more information on the Costa del Sol market.
• Note that the rates per square metre may be averaged from a small number of properties in some cases. We have continued to supply these as we believe that they will show a trend over a number of quarters, whilst the variation between one quarter and the next may be ‘out of step’ with the perceived trend
• It should be borne in mind that we have few valuations of new property, with the majority being resales.

Value per sqm for this quarter.

• As expected, there is a substantial range over the whole area.
  • The highest valuation per sq m was for a townhouse in Marbella at 4,499€ euro per sq m; with the lowest being 675€ euro per sq m for a country villa in Axarquía, again built outside the urban area, has some permissions. Subject to divorce proceedings, the opinion of the two parties had varied widely.
  • The reduction in the average valuation rate per sq m does not reflect the market in general. Also, the rise in the discount rate between known Asking and actual Selling price is thought to reflect the level of % discount that appears to be more with larger properties than with smaller. That is also a reflection on the number of singular large properties on the market, the exacting demands of many high net worth buyers and the time it can take to sell a larger property, with sellers becoming anxious and prepared to negotiate down when they actually have a real interest.
• Analysis of all the Asking Prices, Buying Price and Valuations, over the period from the start of our record in 2014, has shown a decrease in the differences, but perhaps by not as much as one would expect. It currently indicates the following –
  • The % difference between Asking Prices and actual Buying Prices –
    • 3^rd Quarter 2014 -15.80%
    • 4^th Quarter 2014 -11.41%
    • 1^st Quarter 2015 -18.64%
    • 2^nd Quarter 2015 -10.73%
    • 3^rd Quarter 2015 – 8.72%
    • 4^th Quarter 2015 – 9.38%
    • 1^st Quarter 2016 – 11.68%
    • 2^nd Quarter 2016 – 5.69%
    • 3^rd Quarter 2016 – 11.97%
    • 4^th Quarter 2016 – 13.48%
    • 1^st Quarter 2017 – 6.94%
    • 2^nd Quarter 2017 – 6.76%
    • 3^rd Quarter 2017 – 12.01%
    • 4^th Quarter 2017 – 9.56%
    • 1^st Quarter 2018 – 7.05%
    • 2^nd Quarter 2018 – 9.79%
• Again, where we have valued the same property over time, there is an increase in the average value above the preceding quarter, though at 2.37% it’s less than the 4.95% of the 1^st Quarter. The greatest rise is where the title has been corrected and now includes all the accommodation, whilst the lowest is where there has been vandalism effectively wrecking a property and destroying its value.

Read Section II – Local Reports here