The spanish wheel will turn

OCTOBER 2007 by Bridget Rosser

ABRSTRACT
Bridget Rosser says the much-publicised downturn in the Spanish property market is simply a result of the ‘overhang of over-production’ seen in recent boom years. In this article she takes a positive stance, saying that now is a period in which real bargains can be snapped up before the next stage of the inevitable cycle she has seen many times before. Confidence will return and demand will escalate rapidly on a scale bigger than ever before, she predicts.


Over the years, the Spanish property market – especially  the ‘investment’ market – has proved to be extremely cyclical, even more than it is in the UK.  Although dips have to occur, just as they do in Britain, the overall market in Spain and on its costas will recover in due course to even greater values, undreamed-of at the height of the previous boom.

This is because, despite the swings in confidence affecting the immediate market, powerful trends ensure that potential demand continues over the longer period. It does so at a faster rate than can ever be matched by adequate supplies.

Supply and demand in the homes market in Spain are themselves the subject of two related – but  different and mis-matched – cycles which make the swings much more extreme.

“The market for property on the Spanish Mediterranean coast is massive and long- term.  Whilst led by the British, increasingly it includes the whole of affluent and ageing northern Europe.  It is under-pinned by the strongly growing national market for second homes from the resurgent and increasingly well-off Spanish population.

This demand has its own extreme cycle, being highly dependent on economic confidence and based on discretionary spending; it is not driven by ‘need’.  Nevertheless, despite the ‘credit crunch’ between banks, there remains an enormous amount of personal wealth which is seeking a home, alongside a growing amount of leisure time and flexibility in the way people work, as well as a spiralling future number of retired people. All this combines with an ever-growing dissatisfaction with northern European lifestyles across the breadth of the market.

When confidence returns, demand escalates rapidly, each time on an enormous scale which is larger than that seen previously.

On the other hand, production from the housebuilding industry along the coast of Spain can only lag behind this demand cycle.  At first it under-builds or even stops altogether while the ‘overhang of over-production’ following the previous boom is soaked up.  This is the phase we have now entered and it is the period when real bargains can be had.

In the second phase, once the surplus has been absorbed and even after prices have begun to rise, lack of building persists because of the ever-increasing amount of time it takes to clear planning, building and legal processes before construction starts.

Despite newsworthy exceptions, the vast majority of development in Spain is carried out with full respect to the law which, in development matters, has evolved further than it hs in the UK, in many ways.  The delay in supply is exacerbated further by the lengthy process of construction itself.

From this point on, in this phase of the cycle, supply is forever playing catch-up while unsatisfied demand from the huge market ramps up prices.

It is worth noting that, despite the startling overall numbers of new properties built annually in Spain – up  from 600,000 up to 800,000 currently – these numbers are, year-in year-out during this phase, absorbed completely by the market. Despite this, prices continue to rise.  This continues right up to the point when, as at present, confidence falls away for whatever combination of reasons.

Some of these reasons involve excesses in the market itself, but many – a recent example being the UK pension scandals – have little or no direct connection with the homes market in Spain itself, and are short-lived in their effect.

It follows that the point of highest production is always at the end of this phase. Because of the lengthy process of construction and supply cannot be turned off instantly, the result is the ‘overhang’ of unsold property.  Currently the size of this is said to be up to 300,000 properties, mostly standard two-bedroom apartments.

Heaven knows where such figures come from; it sounds an awful lot!  Nevertheless, it is at the very most only six months’ supply at average annual rates of actual sales and take-up by the market.

This is where we are at present. The blocks of cheap apartments built en-masse for investment purchasers are the slowest to sell in these circumstances. Normally their construction finance has been provided by individual long-term bank mortgages so they continue to be drip-fed on to the market by their developers. In the worst cases, the banks take them on to their books because they are still reckoned to be good – albeit  longer-term than expected – investments.

Meanwhile, there is still a steady demand for quality properties to be used as real first or second homes, rather than investments.  The demand comes from people reaching the point for real life decisions. Some intend to live and work or retire in Spain. Others plan to make use of a holiday home for themselves and family while they are still young enough to enjoy quality time with their children or grandchildren.

They cannot afford to be fazed by market gyrations; their requirements do not wait or depend on the vagaries of manic depressive hot-money investors.

This ‘real’ underlying demand has to express itself before it is too late in life to be satisfied.  It is more discerning in its requirements than that in the investment market, finding the solution it seeks in newer, unspoilt and relatively under-developed areas where underlying good value and upward potential in prices remains.

Property owners who buy from the few developers active in areas like these, such as the Almanzora Bay Group, are fortunate because they act as both promoter and developer of very long-term projects. Typical are the super luxury Desert Springs resort, Villaricos fishing village and Playa Marques beach projects in the Almeria region of south-east Spain.

Needless to say, it is in the group’s interests to protect the value of properties both for existing owners and for itself in the long term.  That’s why it is careful in its approach to pricing and, although special deals and bargains are available – notably though their Turn Key scheme with furnishings included and All Inclusive Fast Track sales with all fees, legal costs and taxes included – they are handled in a controlled and property specific manner, rather than by wholesale dropping of prices across the board in a way which that undermines the values of other people’s properties.

With easy access from the UK and Republic of Ireland – hundreds of flights of only two-and-a-half hours arrive from many international airports – as well as fantastic weather, a relatively low cost of living, established tourism infrastructure, good rental returns, and stability within the European Union, Spain continues to have more going for it than any other destination within or near Europe, both for second-home buyers and, ultimately, even investors.

The fact is that the extreme cycles of the Spanish second-home market periodically provide extraordinary investment opportunities and truly tremendous and secure rewards.

But the time for investment has never ever been at the height of a boom such as the one which has now passed by; the really wide open opportunity for investment is from now on!


Bridget Rosser is the sales and marketing manager of the Cheltenham-based Almanzora Group, which sells the properties being developed by The Almanzora Bay Group in resort, village and beach locations in the Almeria region of Spain. For more information on the outstanding Desert Springs Golf Resort from the Almanzora Bay Group see theguide to quality new developments.

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About Mark Stücklin

Mark Stücklin is a Barcelona-based property market analyst and consultant, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008). He can be reached by email on ms@spanishpropertyinsight.com.