1. Underlying values to bottom out at current levels
2. The evolution of asking prices to vary depending upon whether they have been set realistically / adjusted sufficiently to account for the significant falls in property values.
3. Future growth in values to be nonexistent in the short term and very limited and restricted to underlying inflation in the medium term i.e., no real growth in the next couple of years. Modest growth over above general inflation levels in the economy to follow thereafter at levels of 1-3%
4. Special properties with “unique” qualities – front line; very good sea views; restrictive planning conditions – rural fincas; high quality developments etc to perform better / out perform the market in the medium / long term.
5. Land values to hold down prices in the medium term as developers take advantage of cheaper land to sell at these new lower levels for the medium term. Long term shortage of supply, save for those in urban areas and for “mid range” apartments, like Palma, Inca nd Manacor, should see values rise
Alongside these conclusions, I set out a few “tips” or recommendations for both owners and potential investors of Mallorca residential property:
1. If you are a lifestyle purchaser or investor with an income return bias start to look at the emerging buying opportunities BUT..
2. “BUYER BEWARE” it is all about value and ensuring that you buy at an appropriate level and don’t over pay on unrealistically priced properties.
3. Look at new build where good discounts are available (but beware of off plan unless your deposit(s) are backed with a bank guarantee)
4. Look at properties with “defensive” qualities, as set out in (4) above, for greater short term security
5. Look at land to hold as a long term investment / to build a home. Particularly rural plots, front line or with very good sea views etc
Market Update March 2010 – October 2010
So what has been the reality of the last 6 months? Have my conclusions been largely borne out or has hindsight led us to see that we should have reached alternative conclusions?
Lets start by reviewing the statistics and data that have emerged since the March 2010 report and what the so called specialists have been saying. But before that let’s enjoy the headline that greeted me this week that none other than the Spanish Prime Minister had just called the bottom of the property market in Spain! While I am immediately cynical when it comes to anything said by a politician, particularly when it is a Foreign PM talking to US investors in a desperate attempt to convince them to buy bundles of government bonds at the lowest possible yield, he did seem to be confirming what I said, namely that we are at the bottom and although it is true that I said it 6 months ago, if prices have largely remained unchanged over that period, then it could be said that it was the bottom then as well as now!
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The problem for me is that Zapatero then proceeded to get over excited, quoting official statistics that appeared to indicate that in many areas of Spain prices were starting to rise ie we had touched bottom and wey hey we are on an upward trajectory again! So let’s look at the emerging data, starting with ZP’s own Housing Ministry.
National Institute of Statistics (INE) According to new figures from the INE, Spanish property prices rose (quarterly) for the first time in 3 years. More specifically these figures claim that average prices at the end of June were 1.6% higher than at the end of March although over 12 months prices are still down but by just 0.9%. For the Balearic Islands / Mallorca the statistics weren’t quite as rosy but still offered “some positive” news for those desperate to call the end of anything called recession / crisis / market crash etc! Here the overall figures put property values unchanged for the last quarter but down 2% for the year. For new build property it appears there is a “rebound” with prices up 1.4% even though for the last 12 months prices remain 2.5% down. Second hand property values were down 1% for the last quarter and 1.6% over 12 months.
Interestingly only Navarra in Northern Spain came out with worse data with a small fall of 0.1% in the last quarter. In other words what the INE is suggesting is that in all regions, bar Navarra and the Balearic Islands / Mallorca, property prices grew in the last quarter!
The trouble is it is very difficult to take seriously figures which tell us that overall Spanish house prices have only fallen 10-12% since their peak in 2007. The fact that the index suggests prices may have started to rise is not in itself that surprising had the index registered price falls of 30% or more. The problem is that we are expected to believe that, having barely fallen since the peak, prices are now rising again (at least on a quarterly basis) while we are still living out the consequences of the worst recession in living memory, a severe credit crunch, 20% plus unemployment, and a glut of 1 million new homes sitting there empty!
The same INE statistics, but this time for land values, paint on the surface of things a similar picture but equally show where future on going price weakness in the market may come from. According to these figures released earlier this month land prices in Spanish cities fell 14.9% over 12 months to the end of June, although the figures for the first quarter of this year indicate a small 3% rise. That said this 15% annualised fall in Q2 was the biggest fall on record since the Ministry of Housing started publishing this data in 2005. This put the average cost of building land in Spanish cities at 210.7 /m2. With land values accounting for 30 – 50% of the final value of a property it is clear that while this trend continues the floor under the market for new build housing will remain weak something which effects the wider market as well. In other words with land values falling developers, when they decide to build again, will be able to do so much more cheaply and thus offer them for sale at much lower prices possibly even lower than what they can today for the existing stock! With the stock of available properties still so high and the prospect that new housing can come on stream profitably at lower levels it is easy to conclude that general growth in the market (ie values starting to rise), as we said in March, is still some way off. Obviously where the supply side is constrained because of the location eg front line properties, or type eg rural fincas where planning laws are getting much tighter, both of which are very relevant factors in Mallorca, then the outlook may be a little brighter.
Tinsa (Property Valuation Company): According to Tinsa average Spanish property prices fell 4.6% over 12 months to the end of August. Furthermore after 9 months of trending towards smaller price declines, this is now the second consecutive month in which the index shows price falls accelerating, from -4% in June, to -4.6% in August. For the Balearic / Mallorca and Canaries Islands the fall was a little larger and stood at minus 5.3% taking the overall fall in the index for the Islands down 16% since 2007 compared to 17% for Spain as a whole and nearly 22% % for the Mediterranean coastal areas. While the differences are what might be expected ie the mainland coastal areas, which bore the brunt of the speculative development boom, have suffered most, all the anecdotal evidence including actual sales prices would suggest that at best the market has fallen by 25%-30% and some what more in the worst effected areas. (important note: many properties were historically over inflated in terms of asking price at the height of the market, and remain so even as we speak today, so here an adjustment might even have to be be as high as 50% to get back to true underlying value. Obviously where a property was appropriately valued at the peak a 25% reduction might be perfectly reasonable to reflect true current value)
It is important to note that Tinsa’s figures are based on subjective valuations and in most cases these are calculated using asking prices of comparable properties in the region. By nature therefore these valuations are likely to lag the market, some say by anything between 12-24 months. In other words we could quite realistically assume that if Tinsa says the market is still falling and that the pace of fall has started to increase again, then in all likelihood this trend in falling values could well continue for a few months yet. Where I might differ is not with where the figures are going but the time it is taking for the likes of Tinsa to reflect what has really happened ie they are indeed probably at least 12 months behind the times. Since they base their valuations on asking prices it is hardly surprising! In other words the Tinsa figures may call the bottom of the market 12 or 24 months after we really have seen values touch bottom.
Idealista (Real Estate Portal): The latest data for the end of the 3rd quarter and released on 1st October, suggested that in Spain as a whole prices had accelerated their fall to a quarterly figure of 2.7% leaving the average value at 2,309 m2. While this negative statistic was reflected in most regions of Spain, the Balearic Islands / Mallorca saw property price rises both generally and in the various towns (but not all) for which the web portal quote statistics. Here the overall figure stood at 2,371 m2 in September 2010 compared to 2,286 m2 at the end of the previous quarter and 2,228 m2 in September 2009 ie an annual rise of 6.4% and last quarter increase of 3.7%.
Specifically they highlight statistics for the following towns / areas (First figure shows average value per m2 at September 2010, 2nd figure the change over last quarter and last the annualised change. Please note statistics are based on average of offer prices in each area and are not the values at which a willing seller and willing buyer might necessarily agree a sale):
- Calvia 3,052 m2; +11%; +12.5%
- Palma de Mallorca 2,446 m2; +4.8%; +10.7%
- Marratxi 2,080 m2; +2.4%; n/a
- Inca 1,580 m2; +2%; -0.5%
- Santa Ponsa 2,568 m2; -3.7%; n/a
- Llucmajor 2,140m2; +9.9%; +8.2%
Looking at these figures you might well assume that things are really beginning to take off and in many respects with a good sample size in each area one can not be fully dismissive of the findings. By way of comparison, although admittedly with a much smaller sample size, the web portal Facilisimo contrasts and quotes a fall in prices within the Baleraic Islands of 5.3% for the year to date.
Bankinter Spanish Real Estate Market Report: interestingly reported in September 2010 that what they expected was the market to bottom out but also future growth to be very limited, much along the lines of my March 2010 report and my continuing view. The bank feel that, taking the market as a whole, prices could still fall marginally further, circa 6%, over the next 9-12 months, with the market staying at that level until end 2013, beginning 2014, when some modest growth could return i.e. we are going to bump along the bottom, or as they put it be “walking through the desert”, for some time yet!
In line with my own opinion they also question the Ministry of Housing figures that tell us that prices have only fallen by 12% since the peak, while in reality the Bank feels this should be 20%+ (as you know I would go further than that in many circumstances!).
It is important to put this report in context as it covers the whole of Spain and thus is clearly dominated by the dynamics of the locally driven market, not by a mixture of local and international, like in Mallorca or many parts of the Mediterranean coast. Clearly in Mallorca if there is, for example, a return of consumer confidence in countries like Germany, the UK, Scandinavia etc this may encourage buyers from those destinations to bring forward buying decisions even if in Mallorca itself the local consumer remains weighed down by the fear of unemployment, the impending loss of mortgage tax breaks and the simple lack of household income / savings to meet the demands for larger deposits as banks reduce their loan to value ratios. Generally if buyers from outside Mallorca see the property markets improving in their own countries they are more likely to consider that the time is right to purchase here or at least that the Mallorca market will quickly follow suit. In many respects they are right. We live in a globalised economy and just like I always maintained in the boom years that Mallorca is “on planet earth” when told repeatedly that “prices don’t drop in Mallorca things are different here”, the flip side now is that when the global economic climate improves so will the situation in Spain and Mallorca even though most of us expect it to lag other parts of Europe. What this means in practice is that buyers, in my opinion, have a little more time to look at the options, do market research, identify good buying opportunities etc before there is any risk of the market running away ahead of them! There is always the risk that a buyer may loose out on that one “perfect” property, because another buyer has come in before hand, but in general buyers can afford to be patient.
Inversion magazine September 2010: If you want to read an article full of caution regarding the Spanish property market as a whole then read this article. Like I was pointing out above, this article emphasis the real underlying weakness of the domestic property market dragged down by huge unemployment number (over 20% and with even the most optimistic predictions setting it at no less than 18% for 2 further years); a financial sector either unwilling or unable to release liquidity into the market and at risk to reductions / removal of the ECB existing liquidity support measures; a mammoth supply over hang (unlike for example the markets in the United States or UK); and a financial sector holding a very large portfolio of repossessed properties which although not currently being flooded on to the market, could be if some smaller entities run into liquidity problems when the ECB cuts the current support measures. All in all the article concludes that not only do they foresee prices continuing to fall they concur that the future upside is a long way off. Patience and market research is their recommendation!
Although regular readers will know I am not a born optimist when it comes to my views on the Mallorca property market I have equally always maintained that it does have some important defensive qualities that should see it suffer less on the downside and recover a little better /quicker when the overall economic environment improves. The supply side is some what better than many other areas of the mainland, having suffered less of a speculative development boom; planning regulations and land zoning are stricter, further restricting the supply side; demand is more widely based (it includes a large number of international buyers in addition to the main local market); and economic improvements in Northern Europe should bolster tourism in the Island and thus put a floor under the unemployment figures. The Mallorca “brand” is also strong amongst the wealthy and there are always new buyers wanting to taste!
Other Press Reports: In the press there have been a steady trickle of agents, developers and industry representatives that are all supporting (understandably!) the thesis that prices have stopped falling and buyer interest is up within the second home market in particular. Interestingly most concur that prices have fallen by 15-35% depending on the area and the type of property, while others talk of prices going back to the levels of 6-7 years ago, in other words back to the levels before the very largest year on year price increases were delivered. If I had to comment I would argue that while they may be correct in relation to asking prices when they quote 15-35% I think they are much nearer the truth when they talk of values returning to 2003-2004 levels which in most cases would need to see falls of 25%- 40%.
I also caution against taking too seriously comments about asking prices and the need to buy now before prices rise. Many “warn” clients not to sit out waiting for more price falls and owners now prepared to sit out for the right buyer to come along rather than reduce prices further. While I would not disagree that underlying values are at or near the bottom, as I maintained in March, my experience is that few if any buyers are purchasing at asking prices and that many deals are being done well below asking prices. Only recently I asked a reputable agent what he thought various properties would sell for (all had been on the market for some time) and I was given figures between 20% and 35% less than the prices that were being quoted. I am not suggesting this is “proof” of anything in particular but I would say it supports my belief that “buyer beware” is the name of the day and not because you need to buy quickly before the market takes off but because asking prices can be very misleading!
What I am saying is that values are at or near the bottom of the cycle, that pressures for prices to grow are still some way off, with time is on the buyer’s side, but that if you are interested in buying I would definitely be in the market now looking and negotiating. Much better to negotiate now while there are still gloomy economic clouds offering uncertainty yet, sentiment is stabilising, than when everything is looking much rosier in say 12 or 24 months time. It is not that prices will rise during that time but simply that vendors may hold out a little more at or near there asking prices while today most if not all will want to do a deal rather than wait for another buyer that might not come around for many months or more!
At a regional and individual town level in Mallorca here are the views of what one major agent is saying has happened to prices, since the top of the market, along with my own comments:
Palma City / Old Town & Portixol: prime prices down by around -25% (Note: Supply is by nature limited and long term there must therefore be a firm floor under this market. Proposed improvements to the Playa de Palma area, tram infrastructure etc should all help but be patient for anything requiring public investment!)
Palma outskirts and Paseo Maritimo: Apartments down by -25-30% although villas with sea views in Genova, Bonanova etc have seen values fall some what less.
Son Vida: it is claimed that prices have held up and fallen only by 10-15% although they then “admit” deals have been done at levels that are up to 35% down (Note: what does that tell you? Asking prices are unrealistic and out of line with underlying values. The real market is about the value of done deals not asking prices! That said Son Vida will remain a prime address so again there is a floor under the market)
Puigpunyent, Esporlas etc: prices down circa -25%
Santa Ponsa: Prices down by around -15% (Note: With a lot of supply deals are being done some what lower than this figure suggests and with the Port Adriano super Yacht marina development taking shape it is not a bad time to be looking at this area and taking advantage of the weak market to get in to what long term looks an interesting area – luxury marina, 4 golf courses etc)
Andratx, Port Andratx: Prices down by -20%. (Note: This remains a sought after area despite much of the over development allowed by the previous, corrupt, Town Hall administration. Despite the poor quality of some infrastructure and public spaces in the Ports urbanisations demand is likely to remain long term and should be supported by promises, and hopefully the reality, of improvements agreed by the new Administration).
Dei, Valldemossa, Sller & Puerto de Sller: It is claimed that prices have held up here simply because owners have been less willing to negotiate ie there have been few transactions / an illiquid market. (Note: Another area with supply very restricted, a quite spectacular natural environment and a “brand name” with an international reputation all of which support the market and make it a good long term investment. The Jumeirah 7* hotel opening in Puerto Soller next year is the sort of investment to further add to the areas “cache”)
Central Mallorca: Prices are said to be down circa 10-15%. (Note: this is a large area and thus it is difficult to generalise but even in the historically stronger areas, on the Tramontana mountain fringe, eg Alaro, Santa Maria, Binissalem, Campanet, Buger etc deals can be done at up to 25% below asking prices)
Pollensa & Puerto Pollensa: Prices down by up to 30%. (Note: Anecdotally this area was hit as hard as any in terms of the demand tap simply drying up at the height of the crisis while in reality this has always been one of Mallorca’s strongest niche markets. The draw amongst “Pollensa devotees” remains and when demand returns, as it is starting to do, it should return in the long term as a top destination. With this in mind it could well be a place to start looking while prices remain under pressure and “deals” can be done.)
Alcudia & Puerto Alcudia: Prices down by circa 25%
North East (Arta, Canyamel, Costa de los Pinos, Cala Bona etc): Prices down circa -10% (Note: While historically a lower price area, due to it’s relative remoteness from Palma, the new motorway from Palma transformed the area just before the recession got to grips with the market and thus the “re-rating” that some, including myself expected, never took place. This explains in part why values have not fallen as much. The market remains weak however, there are deals to be done and this may well be a good time to get into the area before prices move more in line with other areas of the Island. Costa de los Pinos and Canyamel offer a lot for the discerning buyer looking for quality property, sea views and a tranquil environment)
South East: similar to the North East with prices historically lower and thus having less far to fall!
Conclusions and Recommendations
As can be seen we have reports saying prices are falling, reports that they are stable and some that they are rising! That all said, and talking of Mallorca specifically, I remain of the opinion that underlying values have bottomed out and that we are now in the low activity / no price change period prior to growth returning.
In effect my conclusions are fairly similar if not identical to what I said in March! For completeness:
1. Underlying values should continue to bottom out at current levels. There are downside risks but in Mallorca I see these fairly much under control and unlikely to exceed 10%. Buyers should be aware of this at the time of negotiating the final purchase price and in that way can “manage out” some if not all this risk.
2. Whether asking prices continue falling will all depend upon whether they have been set realistically / adjusted sufficiently to account for the significant falls in underlying property values. In other words do research and know whether the property you want to buy is realistically priced or not. In that way you will know whether you are talking about negotiating a “bit” or are looking to take off a “wholesale chunk” to arrive at the final agreed purchase price.
3. Don’t expect a sharp rebound in property prices! Future growth in values is likely to be non existent in the short term and very limited and restricted to underlying inflation in the medium term ie no real growth through 2011 and 2012 at least and only modest growth over above general inflation levels in the economy to follow thereafter at levels of 1-3%. If I was to change my view at all it is that perhaps real growth is some 12 months further off than I suggested in March.
4. Special properties with “unique” qualities – front line; very good sea views; restrictive planning conditions – rural fincas; high quality developments etc to perform better / out perform the market in the medium / long term. I strongly believe there is a floor under this market but equally I do not believe that is the same as saying that the prices of these properties should not have been adjusted downwards, just that the extent of the adjustment may have been less and the downside risk of further falls much less likely. That said all depends on whether they were correctly priced at the outset. Some of these properties were ridiculously priced at the height of the boom so need severe price reductions to account for the initial over pricing and now the falling market. It is all property specific and be aware of over generalizing and then over paying for a property however “prime” and unique it is!
5. Land prices have come down significantly and will stay low in line with the wider market. Land values will hold down prices in the medium term as developers take advantage of cheaper land to sell at these new lower levels. Long term shortage of supply, save for those in urban areas and for “mid range” apartments, like Palma, Inca and Manacor, should see values rise. It could well be a good time to get in now buy a well priced plot and build your dream home rather than search endlessly for the finished article which is never “quite right. And in terms of where I would be looking to buy, and what I would be doing, again not much has changed over the last 6 months but to reiterate I would refer to the following “tips” and recommendations:
1. If I were a buyer I would start to be actively in the market now particularly if you area a lifestyle purchaser or investor with an income return bias. By “in the market” I mean starting to look, getting a feel of what is available, seeing what you like and starting to understand what is available and at what price. Make sure you either do your own research or use a Property Finder / Buyers Representative that can impartially help advise and guide you (don’t expect an estate agent to!) They want a sale of one of their properties while a Property Finder wants a sale but doesn’t mind which one so are impartial at the time of choosing and advising. As I said 6 months ago…
2. “BUYER BEWARE” it is all about value and ensuring that you buy at an appropriate level and don’t over pay on unrealistically priced properties. Understand who is selling, why and how motivated they are. Understand what the property is really worth and whether there can be a “meeting of minds” in this regards. If not walk away and find another property. If the owner is unrealistic all the best valuation advice in the world won’t get you the property at a realistic price!
3. Look at new build where good discounts are available (but beware of off plan unless your deposit(s) are backed with a bank guarantee)
4. Look at the properties with “defensive” qualities, identified in (4) above, for greater short term security and long term capital growth
5. Land could well be a good buy now. Look at it either as a long term investment or to build a home. Particularly rural plots, front line or with very good sea views etc but most good plots are worthy of serious consideration, if of course the price is right.