Property Market Report – Autumn 2018 – 9th January 2019

SECTION I

This is our 20th Quarterly Property Market Report. As requested, we have kept it brief and specifically relevant to the locations where we are aware our readers have interests in properties.

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

The Overall Market for property in Spain – 

Substantial foreign investment in ‘problem’ portfolios; continuing concerns over the quantity and prices of new build; and Brexit coming closer, which will affect all EU economies.

• INDICES

All indices show that the national and regional market prices continue to rise. However, these grouped statistics are made up of many different individual purchases and estimates, portfolios, new property and resale, and so are of little assistance in gauging the current market value of a particular property. Our research for individual valuations still shows that some property values are reducing, whilst others are increasing significantly.

NEW BUILD

New build, off plan values are still consistently above equivalent resale values, which should give the purchasers concern when they have to take occupation, if the resale market values have not increased to make up the difference. The opposite could be happening, with so much demand being taken up by the new build, that resales are reducing their prices in the hope of attracting a buyer.

BANKS SELLING DEBT 

SAREB, the Spanish State’s ‘Bad Bank’ that rescued the private banks by taking over their failing property loans, and the private banks in Spain, are continuing to sell their seized property and non-performing loan portfolios, to large private, mostly foreign, investment buyers. The banks are benefitting from holding the properties, as exampled by the Sabadell portfolio of prime land having been valued up 30% to 1.3Bn euro from its last valuation. This is scheduled to be sold sometime in early 2019.

BUYERS OF BAD DEBT

One of the more active investment buyers, Blackstone, is reported to have become the largest unlisted real estate company in the country with a portfolio worth more than €20 billion, and Spain now accounts for almost 20% of its global investment in property, which is worth almost €105 billion in total. Although this is releasing capital to the banks, much of it is still unavailable to the market due to the requirement by the governing authorities for the banks to have sufficient funds available in the event of another economic downturn.

OVERDEVELOPMENT

Despite all this activity, and the concerns we have, based on reports of potential over development in many popular coastal areas, the Bank of Spain is stating that there are no signs of overvaluation creating a new property bubble in Spain. Statistics are often being stated as being lower than those of the peak before the bubble burst in 2007/8, but it should be remembered that those values were shown to be unrealistic. The country should be using much slower activity and lower values as the measure of a stable, sustainable market. Perhaps the Bank’s comment was in response to the IMF calling on Spain to be more robust in its monitoring the property prices and the availability of credit for property transactions.

LOGIC OF BUYING BAD DEBT

Presumably, the logic behind these purchases, at considerable discounts, by the investment funds, is that the value of the security for the loans is gradually increasing and if they can either persuade the borrower, in the improving economy, to start paying off the loan or enforce the security and acquire and sell the asset, they will see an improvement in value. However, they are likely to have less social responsibility than a bank ultimately controlled by the Bank of Spain, and so could be stronger in their enforcement. In addition, if there should be a ‘hesitation’ in the market, they could be more likely to ‘fire sale’ the properties, thereby speeding the downward spiral in prices as we saw in 2008 and onwards.

EASIER ENFORCEMENT OF SECURITY

Perhaps coincidentally, as this foreign investment is of considerable assistance to the Spanish economy, the national legislation has been changed to allow easier enforcement of non-performing loans. (See Legal Changes below) However, housing foreclosures have dropped substantially in 2018, with the annual rate being 0.05% (presumably of the total number of mortgages)

BREXIT

A number of markets are seeing increasing hesitation from British potential buyers related to Brexit. Should they buy ahead of Brexit or wait to see what the terms are or even if it happens at all. The gradually reducing exchange rate for the £ v € is also making purchases more expensive, whilst encouraging potential sellers to drop their prices for a sale as they will get the same in sterling as expected previously. If, as expected, sterling drops in value, it would be better for owners intending to buy in the UK to wait until that happens, thus having more sterling from their sale. Residents staying and living off UK income have seen their buying power reduced by at least 25% over the last couple of years. In addition, the potential for higher taxes as non-EU citizens and movement restrictions, are also encouraging some UK residents who have not integrated into their local society, to consider selling up and going ‘home’.

BRITISH BUYERS

However, British people continue to purchase more homes in Spain than any other foreign buyers, according to data from the Association of Registrars. 15% of properties bought by foreigners were purchased by British people between the last quarter of 2017 and the first three quarters of 2018. This, however, is almost six percentage points below 2015 figures when Britons accounted for 21.34% of home purchases by non-Spaniards. Perhaps an indication of the slide due to the Brexit vote in 2016.

FOREIGN BUYERS

Foreigners are reported to have bought 16% of all transactions during the last year. A recent report by estate agents in Valencia shows what has happened there and the reasons why – 

Our sales of property in and around Valencia city have risen by around 50% this year. This is largely driven by varying factors. 

• • The “Escape from Brexit” buyers from the UK
  • The huge increase in Dutch and Belgian clients this year.
  • Friends of our previous clients having been recommended to buy in Valencia.
  • Local sales as the mortgage market freed up somewhat within Spain. 
  • Returning investing clients buying rent to buy properties.
  • Better and more airline routes into Valencia from other countries

Our clients for Valencia have been from many parts of the World, in fact, this is the most international spread of clients we have ever seen. Dutch clients now top the list of buyers with just over 30% of all sales being to people from Holland. When we add Belgian clients, we get around 38% in total. 15% of clients were from the UK and 15% of clients were from the USA too (This is the first year where we have had as many US clients as UK clients, thank you Mr Trump).

We also had clients from Denmark, Mexico, Iran, Sudan, Spain (of course), Canada, India, Ireland, Hungary, the Ukraine, France and South Africa who bought in Valencia this year. As you can see from the nationalities represented Valencia is becoming much more international in the people who are attracted to live here.  

Compared with 2017 we can see a marked decline in percentage of buyers from the UK, 40% in 2017. There is a combination of factors in this too:

• • Brexit worries for older people
  • The lowered value of the pound against the Euro
  • The slowdown of the market and subsequent difficulty in selling property in the UK for those wanting to move here
  • The increase in other nationalities looking to move here meaning the British are represented in a lower percentage, but not that many fewer sales. 
  • UK investors have less disposable cash due to economic issues in the UK 

INVESTMENT BUYERS INCREASE PRICES

It’s reported that in Málaga, more than half the tourist letting apartments are owned by foreigners. This indicates the high level of investment purchases, which raise the price and reduce the number of long term rentals, all of which work against the individuals and families seeking to live and work in the locations. In these circumstances, it’s clear to see why the authorities are having to place restrictions on short-term property rentals.

SUBSIDENCE

On non-economic matters, geologists have reported an interesting effect in some areas of the Costas. Where there has been substantial new building of apartments, the weight of those, combined with the extraction of water from the aquafers below, has led to the steady lowering of the land. This has affected services and infrastructure, with pipes breaking and cracks opening for, previously, no apparent reason. When that is combined with the rising sea levels due to climate change, it means that beach-front properties need to be looked at more carefully for how they will change in the next 30, 20 or even 10 years.

“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.
  • RENTING OF PROPERTY TARGETED BY REGIONAL AND NATIONAL GOVERNMENTS. 
    • Short-term holiday let’s now have to be licenced and each letting registered with the authorities. In some cities, the issuing of licences has stopped, thus limiting the number of legal letting places.
    • The new national Rent Law has also given communities of owners in buildings the right to control holiday lets within their building or urbanisation, with a 75% vote of owners being required to approve new lettings. The rule only affects the creation of new lettings, with existing let properties not being affected.
    • For long term rentals, the pendulum has swung back in favour of the tenant. The minimum rental period has been returned from 3 years to 5 years, with that increased to 7 years where a property is rented out by a letting business. At the end of that period, if no action is taken to vacate the property, the lease will continue for a further 3 years and not one as before.
    • It is assumed that lesser periods can be agreed between owner and tenant, but the lease must be drawn up in a legally correct manner. There has been a mistaken belief for many years that an 11 month contract avoids these controls. That is not the case.
    • The owner is also required to pay all the agency and legal costs associated with creating the lease and the rent deposit required is restricted to a maximum of 2 months.
    • It is doubtful if these requirements will make more rental properties available or reduce the rents required, which is understood to be the aim of the Government. They are likely to reduce the numbers of properties being bought as an investment, which will perhaps reduce overall purchase demand and restrict the rise in sale prices. They are understood not to affect properties of more than 300 sq m and rents of 4,000+€ euro per month.
  • EASIER FOR MORTGAGE HOLDERS TO ENFORCE ACQUIRING THEIR SECURITY 
    • At the same time as these controls, legislation has been enacted to make it easier for mortgage holders to enforce acquiring their security if the mortgage is not being paid by the borrower. This is likely to force more people into the rental market, thus increasing demand, which, combined with a possible reduction in properties being rented, will certainly lead to an increase in rents being charged. 

Analysis of Prices and Valuations

• 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 our readers 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 sq m for this quarter.

• RANGE – As always, there is a substantial range over the whole area. 
  • The highest valuation 11,343€ euro per sq m for an apartment in Marbella, was closely followed by 10,900€ euro per sq m for a villa near Cancelada in Estepona. Strangely, the lowest was also in Estepona for an apartment at 545€ euro per sq m, nicely illustrating that average rates per sq m in indices don’t relate to individual properties.
• % DIFFERENCE – 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. 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%
    • 3^rd Quarter 2018 – 5.37%
    • 4^th Quarter 2018 – 7.38%
• ANALYSIS – A slight rise from the last quarter, but as the general range of up to say -10% discount for negotiation is to be expected, we are at the state of the market where there should be few surprises with the averages.
• BUYER’S RATIONAL – As stated before, the attitude to price and purchase can also vary significantly. Whilst some buyers will have researched the market intensively, others tend to ignore the price and purchase the property on which they can obtain the best discount.