Property Market Quarterly Report – Winter 2019 – Part I

The Overall Property Market – An underlying optimism that things are getting better, with good demand in most areas. Brexit is causing some hesitation, especially by British buyers, but other nationalities are continuing to buy.

• Over the next few months, national and local political changes may have a significant effect on the property market.
  • The recent Andalucían election changed the political governance from ‘Left’ to ‘Right’ for the first time for decades, which will bring a different attitude to all property matters.
  • 

    There is a Spanish national election at the end of April.

  • There are Municipal and European elections at the end of May.
  • Brexit may or may not happen.
• The revision of the National Rent Law is likely to have a significant effect. Details are given below, but although in effect, the law has still to complete all the parliamentary processes and so could be stopped.
  • Leasing is a very politically sensitive matter, with ‘Right’ and ‘Left’ having opposing views on the level of control required by authorities. 
  • If the governance of the country was to change from ‘Left’ to ‘Right’ at the forthcoming election, then the Rent Law is likely to be changed to be less favourable to the Tenant.
  • Similarly, if powers are passed to lower authorities as is stated at present, there may be significant differences to how they are applied from one town to the next.
• We note that banks are continuing to sell their property portfolios, with early Fund buyers now selling some of these on to other funds. There is an increase in the amount of money being invested by these funds in total and many are intending to operate the properties acquired as rental portfolios. 
  • We consider that the banks in Spain are very familiar with the ‘rollercoaster’ history of the Spanish property market and are being prudent is liquidating these assets while the market appears to be high. They are also being encouraged to do so, so that the banks have more funds available as security and also available for lending to businesses.
• There is an increase in the number of non-bank lenders to property developers, long term and for ‘bridging’, perhaps because Spanish banks are reported to still be very cautious.
• There is an increase in property portfolios held by funds being converted to rental properties. However, there is increasing popular and political opposition to rental increases. These have been exacerbated by high short-term holiday rentals, which in popular places are a year-long phenomenon, meaning that owners are only prepared to accept long-term tenants at rents closer to what can be obtained on the short-term market.
• The recent 22% increase of the minimum wage has put pressure on the profits and thus prices of traditional hospitality and low wage businesses, which is likely to have an inflationary effect.
• Realia, a property developer and Investor, has recently informed the Spanish Securities Commission that it will no longer value its assets according to the Bank of Spain valuers’ ECO method, but will change to the RICS standard. Apparently, the board of directors noted that their assets were being significantly undervalued compared to other companies who had adopted the internationally accepted RICS ‘Red Book’ standards.
  • NB. At present, valuation to the ECO method must be applied to mortgages before they can be recorded in the Title registry. RICS valuations are not accepted. Perhaps that situation will change as a result of what is happening in the stock exchange.

 “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 Rental Law changes include
  • That buyers of property must recognise and continue the lease, whether the lease is Registered or informal. This applies equally to security holders obtaining a property from a defaulting owner.
  • The lease can automatically be for up to 7 years when the property is owned by a company.
  • Thereafter, the lease will continue annually for up to 3 years unless the appropriate notice is given by either party.
  • The tenant can give 30 days’ notice to leave without penalty after being there for 6 months.
  • Annual increases in rent are a maximum of the CPI (Retail Price Index)
  • The deposit in addition to the statutory 2 months, is a maximum of a further 2 months.
  • If the tenant dies, the lease can continue if taken up by a close family member or a person with 65% disability, resident in the property.
  • An individual landlord must state at the beginning of the lease if there is a possibility that they or a close relative may require the property as their main residence during the lease period.
  • Property management and formalisation fees and expenses must be borne by the landlord if it is a legal entity.
  • These apply to properties less than 300 sq m or with rent less than 5.5 times the minimum wage (currently 4,950€ euro). Otherwise, the terms of the contract apply.
  • Some matters have been left to the decision of the Autónomos Communities –
    • The possibility of excluding the pre-emptive right of the tenant to purchase the property in the event of it being offered for sale.
    • If a portfolio of properties within one building are being offered for sale, whether the Municipality or Autónomos Community has a pre-emptive right to acquire the portfolio for use as social housing.
    • They have been instructed to prepare, within the next 8 months, tables of appropriate local rent levels. This is a likely indication of the intention to dictate the levels of rent.

• The law relating to Real Estate Credit Contracts enters into force on June 16^th and will apply to existing and future loan agreements.
  • The details are more appropriate for legal comment, but generally there is a higher duty on the lender to inform the borrower of all scenarios.
  • The creditworthiness of the borrower has to be evaluated.
  • Before the day of signing, the Notary has to confirm that the borrower understands the agreement.
  • The lender is responsible for contract and Notary expenses. The borrower is responsible for the property valuation expenses, but can choose their own valuer.
  • The borrower will be in default, in the first half of the loan period, if they have not paid a total of 12 monthly instalments; and in the second half of the loan that rises to 15 months.
  • The borrower is then given one month to make these payments before the lender can request full repayment of the loan.

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 to our clients, 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 although the requests for snagging of new properties are increasing.

Value per sq m for this quarter.

• As always, there is a substantial range over the whole area. 
• The highest valuation was 11,082€ euro per sq m of a house on an exceptionally large country estate on Ibiza, with the next also being on an island, Tenerife, for an apartment where the value was 7,142€ euro per sq m.
• The lowest were 550€ euro and 653€ euro per sq m for two different properties, with very poor condition and planning problems, where we were valuing for a matrimonial court case.
• 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%
    • 1^st Quarter 2015 -18.64%
    • 1^st Quarter 2016 – 11.68%
    • 1^st Quarter 2017 – 6.94%
    • 1^st Quarter 2018 – 7.05%
    • 4^th Quarter 2018 – 7.38%
    • 1^st Quarter 2019 – 7.61%
• Effectively the same as 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. However, there are still occasions when no reduction is given on attractive properties with competing buyers. On the other hand, there are also occasions where defects found in a property, identified in our Building Survey report, have led to a reduction in price of 20% or more.
• 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.
• The discount can also be due to reality striking when a well above asking price has been set by the owner. We sometimes find in our searches that individual properties prices have been dropped substantially, and also in our valuations that some asking prices are well above the market level. To be fair, we also occasionally find some ‘bargains’ being offered at below market price to “just get the place sold”.