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Posts Tagged ‘Spanish Property’
I´ve had a few clients ask me recently for my views on whether now is a good time to start looking for property bargains in the French or Spanish markets. Below you´ll find a summary of my answers to them.
France
Unfortunately my knowledge regarding the French market is very limited. I can tell you that they didn´t have a large property boom like Spain did and they certainly don´t have an overbuilt coastline. France has always been a stable market – and prices increased quite gradually during the boom times as most buyers were purchasing holiday homes for personal use rather than pure investment.
France is quite a segmented market – you have the big cities, the ski destinations, the famous coastal towns/beaches and the quiet villages. Financing has always been available for foreigners at reasonable rates. Prices have probably fallen 10-20% from peak, depending on the area, and are likely to hold reasonably steady over the next 5-7 years.
While it´s a very safe and stable market, it is outside our area of expertise and I can´t see Torcana ever getting involved in it directly. www.french-property.com is one of the bigger portals and would be a useful starting point for your research.
Spain
I am quite familiar with the Spanish market as I live in Madrid, I keep a close eye how the market is changing and I spent several years targeting Spanish property agents and developers in the early 2000s when I worked for a big property magazine and exhibition company.
My advice here is quite simple – hold off for a few years as I think prices have a long way to fall. I´ve said as much to my own parents who were considering a purchase.
Firstly, rental yields are nonexistent at the moment, especially on the eastern and southern coasts. Secondly, very high closing costs mean that a 10% price increase is necessary just to break even. Thirdly, I can´t see an average coastal property purchased in 2011 being sold at a profit for 6 years and possibly longer.
Just consider Japan - property is cheaper now than it was in the early 1990s. My view is that to buy now instead of a few years time effectively means overpaying by 10s of thousands of euros.
The Spanish property market is due a massive heart attack quite soon, but nobody knows exactly when. While we all wait for it, my advice is to simply spend some time renting luxurious properties in all the hotspots until you find somewhere that feels like home.
Among many other things, Spain still has a great climate, great infrastructure, world class culture, cuisine and history, so there´s plenty to enjoy. I wrote a detailed article on the Spanish market in November, which you can read here:
http://archive.constantcontact.com/fs035/1102520706095/archive/1103980746634.html
Hope this helps. All comments welcome.
Regards
Colin
As a property agent with a reasonably high profile, we receive a lot of requests from developers to promote their products. An increasing number of these have been Spanish developers offering 100% mortgages (including closing costs) for buyers and high commissions (6-10%) for the agents. They´re usually big developments (500 units+) with facilities such as swimming pools, golf courses, sports centres, shopping malls etc.
I´ve always had suspicions about these developments and so I visited one this week (23 Nov 2010) to satisfy my curiosity. I won´t give away too much information about the resort we viewed, but there are lots of them in the Costa del Sol and it´s highly unlikely we will ever promote one.
The development we viewed had more than 1000 units all told, and although construction has completed, most have never been occupied. The developer told me they were 80% sold, but he actually meant that they´ve taken 20% deposits for 80% of the properties pre construction and most of these buyers have no intention of completing, certainly not at 2007 prices.
As sales fell off a cliff in late 2008 and people delayed closing, the developers cashflow dried up and funds have clearly not been available to maintain the resort over the past 18 months. Mould was visible on every property we viewed with cracks on the interior and exterior walls, walkways and ceilings. No heating or lighting fixtures had ever been installed.
The golf course was overgrown, the sports centre was never started, the shelves on the supermarket were bare, and the entire roof of the indoor swimming pool will need to be replaced due to the inadequate air conditioners that were installed.
The developer clearly owes the bank a fortune and the bank is desperate to divide this debt between 100s of buyers rather than one developer (who is probably insolvent).
Hence the 100% mortgages.
The pitch is that the bank provides 80% on their “valuation”, the developer “pays” your 20% deposit plus your closing costs and then you get your free property with exclusive access to their rental pool.
Give me a break.
So you get a 2 bed property for €250,000 without having to spend a penny. You just need to service a €200,000 mortgage over 20 years at a variable interest rate with a net rental income that probably wouldn´t amount to more than €4,000 per year. Setting aside the substantial problems with the existing and non existing facilities, no other bank would give you a valuation of more than €175,000 and they wouldn´t lend you more than 70% of it.
Clients ask me about Spain all the time and I´ve no doubt Torcana would have quite a few takers for Spanish property like this with 100% mortgages, great facilities and easy access to the beaches and airports. We´d mostly sell them to people who would buy sight unseen. We might sell 50 of these over two months if we put our minds to it, and we´d make a tidy commission on them all.
The only problem is that our reputation would be destroyed within a year, because these are terrible investments.
That doesn´t sound like a sustainable business plan to me and so it looks like we´ll be sticking to places like Florida until other markets become sufficiently attractive (not to mention safe) to investors.
I´m curious about two things.
Firstly, why are Spanish banks allowed to blatantly inflate the valuations of properties on their books and then offer mortgages on them? Secondly, what sort of property agent would actually encourage their clients to invest in them?
The result of all this is that lots of naive buyers are going to get (forgive me) screwed, but they won´t purchase anything close to the amounts of properties needed to reduce the current oversupply and return some semblance of market normality to the area.
Regards
Colin
I was in the south of Spain earlier this week (22 Nov 2010) with an American friend who wanted to purchase a holiday home. I´m in the area often enough, but I haven´t spent time viewing a variety of properties along the coast and in the hills behind it since the middle of last year.
Apart from helping out a friend, I figured it would be a good time to see what had changed and if there were any great deals out there.
After some intensive online researching, we booked appointments and viewed about 17 properties between the two of us. They were located in Las Mijas, Almuñecar, La Herradura, Lentigi and Granada. If you´re not familiar with Costa del Sol, that´s a pretty decent mixture of small vs large towns and coastal vs mountain properties.
One of the village properties we viewed in the mountains of Granada had extraordinary views and was really well priced at €105,000. Most village properties aren´t like that though, and the owners of them generally wanted 30-50% more than any rational buyer would be willing to pay.
Medium quality - it´s not going to work as an investment strategy
With the exception of one (which I´ve discussed in this post) the coastal properties we saw were of medium quality and prices were generally 10-30% lower than peak rates. Think €190,000 for a two bed and €240,000 for a 3 bed, with either sea views, or walking distance to the beach, or both. The trouble with these units is that there are tens of thousands (and perhaps hundreds of thousands) of them all over the Spanish coast.
They´ll make perfectly nice holiday homes, but supply will exceed demand for another decade or more. That makes it difficult, if not impossible, to foresee even modest capital gains for the owners of them.
As for rental yields, you´d be lucky to get 2-3%.
Regards
Colin
Spain is a very beautiful country and it had one of the biggest real estate booms ever seen. I get asked about it all the time by investors who like the idea of purchasing a great value property there.
I tell them all the exact same thing - if you want a pure holiday home there are some acceptable deals, but if you want to make any money continue waiting because prices have not fallen enough and rental yields are still way too low and unpredictable.
Nobody in Spain (including the Central Bank) trusts official goverment estimates of an 11% decline in property prices over the past two years. The ministry of housing also refuses to release data on actual sales prices rather than the asking prices, which, as you can imagine, would be quite useful to people considering an investment there.
In contrast to the deluded government numbers, privately held property portals like idealista.com publish much more reliable estimates of a peak to trough decline in the real estate market of 24%.
My problem with Spain is that it should be a 60% decline considering the rampant speculation and house building that went on, not 24% and certainly not 11%.
Most importantly, the Spanish banks are still not telling us how many bad loans they have. The Bank of Spain estimates that there are potentially €181 billion in “problematic” real estate loans. In other words, loans worth 10% of GDP could be bad but this isn´t reflected in their accounts and they´d rather not talk about it.
Regards
I received an excellent article on the Spanish market in my inbox today from www.globaledge.co.uk - one of the best providers of property news and opinion in the market. Anybody active in the overseas property industry should subscribe to their newsletters. Please see an extract of this article below.
…………………………..
If you think the market you’re working in is tough, spare a thought for the hard working agents on Spain’s costas.
For most of us, the one positive about a working in a smaller market is that many of our competitors have fallen by the way side and there’s less competition for each potential buyer.
Agents selling overseas property in Spain have no such luxury. Buyer volumes have fallen dramatically, but in many cases competition for business has actually increased, forcing even some of the best run agencies to close their doors.
Once we were friends…
An agent’s main competition on the Spanish coasts is now increasingly the Spanish banks, companies who used to work (more or less) happily in partnership with the industry.
Imagine this scenario: You work hard “closing” a deal. Your buyer agrees and approaches the bank for a mortgage. However the bank deliberately offers tough terms (40%+ deposits) but offers your client 100% finance on another similar property and is also prepared to discount heavily to get the property it owns off its books.
This is exactly what’s happening in Spain and it is not only putting agents out of business, it’s disrupting the whole middle market as agents who want to make a living only have two choices:
1. Target cash buyers who are in a minority but at least can be closed
2. Sell high-end properties where the competition from banks is less (the majority of bank stock is low to
mid end apartments in sub prime locations)
Tight-fisted bankers
The obvious third option is of course for an agent to work with the banks but the banks seem unwilling to allow agents to make even a meager living from the process. GlobalEdge spoke with a property agent recently who sold 26 below-market value apartments for €110,000, a €90k discount from their peak valuation. The agent was paid $500 a sale which equates to 0.45%. He worked his socks off and made €13,000 in six months.
Desperate and reactive
Although the situation is clearly terrible, it would be wrong to accuse the banks of cutting agents out through a cynical and well-thought out sales and marketing strategy.
According to a number of Globaledge contacts, banking staff have been told to get properties off their books and in many cases seem willing to accept almost any price. This is a conversation one of their contacts had with a bank manager last week:
Bank manager: You seem to like the property. It’s €100,000
Potential buyer: I’ll pay €70,000
Bank manager: [pause] …….OK
Judging by this conversation, some of the properties the banks hold may be totally worthless.
The banking industry needs to act
It is no secret that the banks are hiding huge property losses on their balance sheets. Prices are being kept artificially high (at least officially) because properties are not being put on the market.
The Spanish economy depends disproportionately on construction. The property sector and wider economy will not recover until the real estate market fully corrects.
That correction could be dramatic (if banks start dumping properties onto the market because of a rise in reservation ratios for example) or it could be slower and less painful.
A slower correction is better for everyone and for this to happen, banks and agents must work together. Banks cannot sell properties alone, they don’t have the time or expertise; and their unilateral reactive approach is not in their interests, or the interest of the wider economy.
The manager of one of the banks we deal with called me last week to let me know they’ve launched a new mortgage product specifically for people purchasing distressed properties.
This is an excellent product: loan to value of up to 90% available for anybody resident in an OECD country, low application fees (0.35%), low interest rates (around 3%) and loan terms up to 40 years.
It’s a big deal that a Spanish bank has launched a 90% mortgage product specifically for these properties, as most of them have their heads completely in the sand. For example, myself and my (Spanish) wife can’t even get 90% for a regular property in Madrid!
This is perfect to use with our Granada product, which will achieve net rental yields of up to 8%. If you would like full details, please visit the Torcana website.
Kind Regards
Colin Murphy
Director
There is an enormous glut of properties in Spain at the moment, and I’m very picky regarding the types of developments that are chosen for clients. My top tip for those seeking the perfect mix of investment and vacation is our new 288 unit development in Granada. We have negotiated exclusive discounts jointly with the bank and developer and independent research forecasts net rental yields of 8%. It is a beautiful resort in an unbelievable location with access to beaches (10min), golf courses (15 min), ski slopes (35 min), airport (25 min) and the historic town centre of Granada (20 min). You can find further on our website.
Generally speaking, I would advise buyers to stay clear of large developments (I get nervous when they are bigger than 300 units) and high density developments (more than 3 storeys). You should be purchasing units that are least 30% lower than the previous purchase price and that are at least 65% sold (to avoid risk that community fee system will collapse). And of course, don’t even think about purchasing offplan, with hundreds of thousands of unsold finished properties available all over the country at bargain prices, there’s simply no need to take that risk.
Kind Regards
Colin Murphy
Director
Torcana Ltd
Quite a few people have asked me about Spain recently and whether or not it would be wiser to wait a little longer until prices drop further.
The truth is that the Spanish market has not bottomed out yet, and there are many banks and developers who will shortly be joining the ranks of those who are already very distressed. This increase in supply should cause a drop in median house prices.
However, this doesn’t make it any easier to predict how far the markets might fall or when the “best” time to buy might be. At the moment we have highly distressed stock (in great condition) that is reduced 30-50% from peak levels, and I can’t see average foreclosed properties falling much further to be honest, even though the average regular property price still has a long way to drop.
If you want an extreme example of how much property developers are suffering down there, look no further than a small Belgian developer in Marbella who kidnapped a local bank manager at gunpoint in an attempt to secure a 50,000 euro loan a few weeks ago. Thankfully he was arrested and nobody was harmed after the bank manager used coded language in a phone call to his branch who then alerted the police.
I kid you not folks, it was reported in El Pais.
Feel free to view our Spanish property listings.
Kind Regards
Colin Murphy
Director
