Case study: the Costa del Sol property market

The problems of the Costa del Sol’s property market are typical of many other popular coastal areas, and Marbella, as Spain’s flagship holiday resort, is particular important to perceptions of the Spanish property market.

Most estate agents on the Western Costa del Sol (Malaga province, predominantly around Marbella) report that the property market is now dire, having been in the doldrums for several years. Property prices are back to where they were 3 or more years ago, despite government figures showing that property prices in Malaga province increased by 22% in the last 3 years. Property professionals in other areas of Spain also report that prices, especially asking prices, fell  in 2007 by substantially more than the figures mentioned in the prices section would suggest.

According to the Association of Developers and Constructors of the Costa del Sol, sales of holiday homes in the Costa del Sol’s Malaga province fell by 50% in 2007 to 540 million Euros, on top of a 57% fall in 2006. Sales of holiday homes in the province  of Malaga are now at an historic low, and have fallen below all other Spanish Mediterranean provinces.

The causes of the Costa del Sol’s  property market problems are well known: Corruption scandals, illegal building, legal uncertainties, demolition threats, over development, mindless urban planning, dodgy agents and developers, and prices that don’t appear to offer value for money. To a greater or lesser degree, these problems exist up and down the Spanish coast.

“It’s desperate,” says Mark Clifton, head of The International Property Partnership in Marbella. “We are all worn out by the problems, and it’s demoralising seeing so many estate agents go out of business. There are still a lot of potential buyers looking around, a lot of people looking for bargains, but they just don’t want to pay current market prices. Buyers and sellers are on different planets.”

“It’s been a long decline,” says Inez Rix, head of Direct Auctions in Marbella. “It feels like we have been slowly rolling downhill towards the edge of a cliff, and I think we will go over the edge in 2008.”

But if the market in some areas like the Costa del Sol has been depressed for several years, prices haven’t yet collapsed, and bargains have been thin on the ground.

“Bargains have been scarce, and tend to sell fast before auction,” says Rix. “For example in June 2006 I sold a 2-bed, 2-bath, fully furnished ground floor apartment in a 5-star country club setting  in Estepona for 186,000 Euros that cost 240,000 Euros a year earlier. The vendors had to pay the bank 12,000 Euros to clear the mortgage. So there have been some bargains, but nothing like as many as I expected by now.”

This may change in 2008, if the market reaches a tipping point, as Rix expects. There certainly are compelling reasons to think that 2008 will be the worst year yet for the Costa del Sol’s property market.

After falling steadily for several  years, sales appear to have collapsed in the second half of last year, and many agents have not made a single sale in the last couple of months. In transaction terms, it’s been the worst start to the year on record. Estate agents are closing down in droves, and even the once mighty Viva Estates has closed all but one office.

The exchange rate isn’t helping either, with a weak Pound making Spanish property 10 to 15% more expensive in Sterling. British buyers, as the second biggest national group of buyers after the Spaniards, are critical to the market.

Rumour has it that many developers are now in big trouble, caught between falling operating cash flows, and rising financial costs, with no access to new borrowing. We can expect the number of developers going bust to surge this year, creating a negative feedback loop of more bad news.

It also appears that, as a result of the credit crunch, Spanish banks have dramatically curtailed lending since the start of the year, and this alone could be enough to send the market into a tailspin. The credit crunch might turn out to be the final straw for the Costa del Sol’s property market.

There are other concerns too: Unemployment, inflation, and interest rates are way up, consumer confidence is way down, the stock market is plunging, and national elections due in March are giving Spaniards the jitters. The Spanish press is full of stories about Spain’s property ‘crisis’, with the implicit message that prices will fall. Against this gloomy backdrop Spaniards have stopped buying property, especially holiday homes, and who can blame them?

So the market is now facing an unprecedented array of negative factors, and 2008 could turn out to be the perfect storm. If so, bargains are likely to start appearing in significant numbers, as bank repossessions overwhelm the insiders who normally snaffle up bargains before they hit the market. But,  as all seasoned investors know, where there’s trouble, there’s opportunity.

David Irvine, 55, a businessman from Glasgow looking for a semi-permanent home in the Puerto Banus area, on the Costa del Sol, is among bargain-hunters already on the case. “With the market stalled, and interest rates rising, I’m quite clear that 2008 will be a disaster for folk who have to sell,” says Irvine, who has been tracking the market for five years. “My preference is a villa in a prime location with sea views, but basically I’ll go for the best deal.”

But Irvine is convinced that the market hasn’t yet touched the bottom. “Many vendors haven’t yet come to terms with reality, and some asking prices are ludicrous,” Irvine adds. “I’m a cash buyer – a rare beast today – and, if prices don’t meet my expectations, then I just won’t buy. If I come back from this next trip empty-handed, I won’t be disappointed – I’m not in a hurry.”

But once again, it is important to stress that the property market is made up of different segments, even in a small place like Marbella, a price collapse in one segment does not mean that other segments follow suit.

Prices are most likely to slump in the low quality, high density new development segment predominantly comprised of 2-bed apartments in subprime locations. Off-plan investors are heavily exposed to this segment, and over-supply is acute. It is also the biggest market segment, affecting the largest number of buyers and sellers. I estimate that prices for this type of property could fall by 50% or more over the next couple of years if bank repossessions rise significantly.

“People always pile into new developments in booms, and if you don’t mind buying on an unattractive new development, then certainly the advice is to wait for a couple of years.” says Barbara Wood, who runs The Property Finders search agency in  Andalusia. “But in my opinion, much of the talk of doom, gloom and disaster is misleading because it is only true of new developments. Overall, the property market in Andalucía is not facing meltdown.” With 25 years in the business, Wood has seen it all before.

Sara Dodgson, of Hermosa Homes Spain in Marbella, agrees. “Price may collapse in some of the worst developed and least attractive areas, but they won’t collapse across the board. If you want to buy something attractive, then unattractive property is no guide to prices.”

So even if prices fall heavily in the mediocre new development segment, it may be a mistake to expect similar price falls in the quality segment.

“There is very little prime property on the market,” explains Mark Clifton. “If you want to buy a 2-bedroom apartment in the grounds of the Puente Romano, then it will cost you 2 million Euros, and a penthouse 2.5 million Euros. That’s what it would have cost a few years ago, so in a way you are getting a good discount in real terms, but you won’t get it cheaper tomorrow because vendors won’t sell for less. It’s the same story in a sought-after place like Hacienda Playa in Elviria, where there are more potential buyers than potential sellers.”

Wood also sees daily examples of quality property holding its value on the Costa del Sol. “If it is a quality product in a quality location then prices are holding up well,” she says. “I have just agreed terms for Irish clients.  They are buying a top floor apartment, with a huge roof terrace on which they are going to put a private swimming pool, right on the Balcon de Europa in Nerja, absolutely the best address in town, yards from the beach and right on the main square.  The asking price was 600,000 Euros and they so wanted it they told me that they were prepared to pay that.  In the end, an offer of 585,000 Euros, to include all the furniture, has been agreed, so we only got 2.5% off.  Hardly a property market going off a cliff!”

This demonstrates the importance of understanding local market conditions. A place like Marbella, for example, still has a lot of affluent owners, and a lot of desirable property that attracts potential buyers with good budgets from all over Europe. Affluent owners of attractive properties in desirable locations, who are not in any financial distress, are not dropping their prices dramatically just to please bargain-hungry buyers.

The belief that all the Costa del Sol’s property markets are set to fall in equal measure is a source of much misery for real estate agents. They complain of a plague of bargain hunters with low budgets wasting time making lowball offers for properties they can’t afford.

What is true of Marbella and the Costa del Sol, is true of the rest of Spain. Yes, there are plenty of over-priced properties on the market that are not and will not sell, and yes, the subprime new development market will probably crash in 2008 and 2009. But owners of attractive properties, be they beach front villas, the best rural fincas, or properties on the very best developments, will not take a hit unless forced to by financial distress or personal calamity, which is not the case for most vendors. So massive price reductions in the quality segment in 2008 are far from certain.

On the other hand, many (but not all) vendors do realise that they are now in a buyer’s market. “The heat has gone out of the market, and all the signs are that serious sellers in Andalucia are taking substantial reductions on the asking price,” says Wood. “I am already seeing some seriously good property at ‘come and buy me’ prices.  If people leave it for another year I think they will miss the best opportunities.” So prices might not slump as far as some buyers are hoping, but big reductions should be achievable.

So, in the present market, potential buyers who want prime property need to look for value for money, and not confuse cheapness with value. At a time like this, when prices begin to jump all over the place, thorough market research is more important than ever. “There’s no substitute for clear thinking and good research,” Irvine says. “You have to be really clued up on the market, and clued up on values, then drive a hard bargain.” To use an analogy from the stock market, you have to be a stock-picker, rather than buying the index. Buyers who do their home work should be able to buy quality property significantly below last year’s asking prices.

Of course there will also be some fantastic bargains in the quality segment in 2008 , but these are likely to be the exception, not the rule.  They always involve a distressed vendor in financial straits who cannot afford to wait. For example, one British owner in financial difficulties recently had to sell his 1.2 million Euro villa on the Costa del Sol for 550,000 Euros, leaving him 600,000 Euros out of pocket once the mortgage was cleared. Distasteful as it is, one person’s pain is another’s gain.

For most buyers, though, distressed sales are something you hear about but never find. On the whole, the best advice is to target foreign vendors, as they are more likely to accept a good offer if they want to go home. Developers are also worth targeting, as some of them are now prepared to sell at, or below cost price just to get out of a project. Be careful with developers, though, as some will go under. Only buy on a completed development, or from the most reliable developers with sound balance sheets and a reputation for quality. When it comes to new developments, the present market is likely to encourage a flight to quality, which could benefit the very best developments.

© Mark Stucklin (Spanish Property Insight)



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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