October 22, 2005
So what does the future hold for the property market on the Costa del Sol
Over lunch today I started mapping out how I think the next year few years will go in terms of the property market here in Spain. I wanted to share it with you and see what you thought.
As we all know there are a wealth of properties due for completion over the next few years most of which have been bought for speculation. Despite warnings from the IMF, Spain's government seems to be doing very little to curtail the building boom and the level of new construction is ongoing.
This over development will probably depress rental returns so people who have bought to let will not see the investment yielding as they may have expected. Some good is coming as the government is finally tackling its out of date laws and trying to encourage the long term rental market in Spain (they are in the process of drafting a series of new laws that will increase the rights of the landlord and they are setting up a separate court system to handle rental related suits).
So what is there to look forward to? How are real estate companies and developers going to cope with decreasing demand and a more cautious informed buyer? What incentives will there be to buy in this bearish market, and who will be selling and who will be going broke?
Everyone is now talking about either a correction or a soft landing. IMHO I think that there will be a price correction in most holiday home areas of Spain. Why? Because, a second home will be one of the first luxuries that will be axed from the budget by more and more people who won't be able to afford the mortgage payments on their own principal residence (this goes for expats as well as Spanish nationals).
But will there be an opportunity to invest in such a market?
There will be an increasing number of speculators who will be looking to regain the money back they have used as a deposit on a property. Developers will look to sign off a huge amount of property over the coming years. Eventually a certain number of investors will not be able to complete and the developer will take the property back as a forfeit.
These properties will have already been paid for by 30% or more. Not every developer is in a situation or can be bothered to keep a sales office going for a couple of returned resale's or pay the 10% completion charges associated with buying property in Spain (VAT, stamp duty, etc,).
These properties in my mind will represent the biggest threat to the market, but also the greatest opportunity. Developers keen to move the property on will be left with little choice but to offer an impressive discount. I therefore, find it very likely that we will start to see prices that were correct for 200-2003; I also expect to see certain properties on at a cheaper price because they are already paid for in part.
This will obviously have some important ramifications for the local economy. The price drop will encourage stubborn companies and investors to drop in order to follow suit. In certain cases to the point of negative equity in order to compete (for those that really need to sell). The slow down in new build projects will be sharp and sudden, and developers will find themselves having to offer greater quality and value for money to compete with the resale market.
Consumer benefits:
Well given that we have just spent the last 10 years in Spain buying off plan from models and maps and hoping to god that the purchase was a good one and that we will end up with what's promised. We the "consumer" will finally be in a position to guarantee a purchase that is easy to verify. The properties will be complete, the snagging done, the community installed, etc (with the benefit of being able to speak to neighbours your will be able to get a real insight into the benefits and potential negatives of your purchase).
If you are looking to invest or move to Spain you will be able to pick a good development and hopefully a good flat within that development. You should also be picking it up at a price that works for the first time in ages. If you have the money, certain parts of Spain could begin to look very interesting, particularly if you are prepared to put in a bit of research and time to find the right property.
However, human nature is overtly cautious in a crash scenario; hesitation about getting the right deal and the worry that prices will continue to drop further will stop the rush of buyers that would be expected to take advantage of the situation. Funny that the opposite is true in this over inflated stage of the market. The human psyche is a strange one.
If you believe that the market will someday restore (as I do) or you are interested in making Spain your home then this could be the opportunity. Everyone talks about a flight to quality during a recession, IMO it will be the luxurious products that will weather the storm the best.
Finally: Who's winning who's loosing?
Well apart from the FOOL who keeps an eye on the big picture.
The revolution of the internet is dispensing with outdated and expensive forms of marketing. Now more than ever it's easier to research decisions or pull up background information regarding a subject of interest.
Estate agent companies that focus on a virtual office, low cost base and a good honest service stand to weather the coming storm better than the large marketing machines that have been doing so well over the last 10 years. IMO, this tough time will improve the Costas poor image and clean out the crooks that are in it for the fast money.
Timeshare has a lot to blame for the way real estate has been bought and sold in Spain and the days of exhibitions and inspection trips are finally drawing to a close.
Category: The Costa del Sol Property Market.